SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 AND 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarter Ended March 31, 1995 Commission File No. 0-5392
FIRST COMMONWEALTH CORPORATION
(Exact Name of Registrant as specified in its Charter)
Virginia 54-0832816
(State or other jurisdiction (I.R.S. Employer
incorporation or organization) Identification No.)
P.O. Box 5147, Springfield, Illinois 62705
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (217)786-4300
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 file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
YES X NO
Indicate the number of shares outstanding of each of the Registrant's
classes of common stock, as of the latest practicable date.
Shares outstanding at April 30, 1995: 24,340,051
Class A common, par value $1 per share
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FIRST COMMONWEALTH CORPORATION
(the "Company")
INDEX
Part I: Financial Information
Consolidated Balance Sheets - March 31, 1995, and
December 31, 1994 . . . . . . . . . . . . . . . . . . . . 3
Consolidated Statements of Operations for the three months
ended March 31, 1995 and 1994 . . . . . . . . . . . . . . 4
Consolidated Statements of Cash Flows for the three
months ended March 31, 1995 and 1994. . . . . . . . . . . 5
Notes to Financial Statements . . . . . . . . . . . . . . 6
Management's Discussion and Analysis of
Financial Condition and Results of Operations . . . . . . 13
Part II: Other Information
Legal Proceedings . . . . . . . . . . . . . . . . . . . . 20
Signatures. . . . . . . . . . . . . . . . . . . . . . . . 21
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PART 1. FINANCIAL INFORMATION
Item 1. Financial Statements
FIRST COMMONWEALTH CORPORATION
AND SUBSIDIARIES
Consolidated Balance Sheets
<TABLE>
March 31, December
ASSETS 1995 1994
<C> <C>
Investments:
Fixed maturities at amortized cost
(market $182,589,272 and $172,822,882) $184,446,554 $183,926,694
Equity securities at market
(cost $395,846 and $395,846) 916,421 911,012
Mortgage loans on real estate at amortized cost 15,626,121 15,822,056
Investment real estate, at cost, net of
accumulated depreciation 11,873,232 11,712,847
Real estate acquired in satisfaction of debt,
at cost net of accumulated depreciation 5,334,774 5,620,101
Policy loans 16,149,119 16,338,632
Short term investments 350,000 350,000
Investments held for sale at market
(cost $3,278,277 and $3,450,273) 3,202,598 3,337,672
237,898,819 238,019,014
Cash and cash equivalents 13,240,347 11,214,850
Investment in parent 3,812,500 3,812,500
Indebtedness of affiliates, net 150,270 183,916
Accrued investment income 3,920,332 3,447,017
Reinsurance receivables:
Future policy benefits 12,784,045 12,818,658
Unpaid policy claims and benefits 845,065 975,613
Paid policy claims and benefits 185,485 125,355
Other accounts and notes receivable 165,313 408,131
Deferred policy acquisition costs 41,397,468 41,885,887
Value of agency force acquired 6,721,537 6,796,120
Costs in excess of net assets purchased,
less accumulated amortization 11,208,346 11,319,999
Other assets 1,036,066 960,206
Total assets $333,365,593 $331,967,266
LIABILITIES AND SHAREHOLDERS' EQUITY
Policy liabilities and accruals:
Future policy benefits $235,884,580 $233,266,922
Policy claims and benefits payable 3,430,360 3,207,014
Other policyholder funds 3,218,041 3,184,731
Dividend and endowment accumulations 11,142,629 10,738,903
Income taxes payable 205,846 237,846
Deferred income taxes 8,303,713 9,000,149
Notes payable 20,627,740 21,529,189
Other liabilities 5,607,555 6,025,463
Total liabilities 288,420,464 287,190,217
Minority interests in consolidated subsidiaries 1,477,083 1,470,812
SHAREHOLDERS' EQUITY
Common stock - $1 par value per share. Authorized
25,000,000 shares - 24,340,051 shares issued and
outstanding 24,340,051 24,340,051
Additional paid-in capital 31,588,559 31,588,559
Unrealized depreciation of equity securities
and investments held for sale of affiliates (386,459) (423,916)
Accumulated deficit (12,074,105) (12,198,457)
Total shareholders' equity 43,468,046 43,306,237
Total liabilities and shareholders' equity $333,365,593 $331,967,266
</TABLE>
See accompanying notes.
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FIRST COMMONWEALTH CORPORATION
AND SUBSIDIARIES
Consolidated Statements of Operations
March 31, March 31,
1995 1994
<TABLE>
Revenue <C> <C>
Premium income $ 9,822,688 $ 10,289,905
Reinsurance premium (1,119,356) (1,996,672)
Other considerations 793,656 777,299
Other considerations paid to reinsurers (51,766) (105,570)
Net investment income 3,868,022 3,300,446
Realized investment gains 66,396 364,732
Other income 14,186 51,330
13,393,826 12,681,470
Benefits and expenses:
Benefits, claims and settlement expenses:
Life 6,886,696 7,154,468
Annuity 416,098 777,299
Reinsurance benefits and claims (216,546) (933,573)
Dividends to policyholders 1,141,457 946,616
Commissions and amortization of deferred policy
acquisition costs 2,169,008 1,712,488
Amortization of agency force 74,583 46,595
Operating expenses 3,001,897 2,214,390
Interest expense 491,333 448,601
13,964,526 11,805,408
Income (loss) before income taxes
and minority interest (570,700) 876,062
Credit (provision) for income taxes 696,436 (90,000)
Minority interest in income
of consolidated subsidiaries (1,384) (17,987)
Net income $ 124,352 $ 768,075
Net income per common share $ 0.01 $ 0.03
Average common
shares outstanding 24,340,051 24,340,051
</TABLE>
See accompanying notes.
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FIRST COMMONWEALTH CORPORATION
AND SUBSIDIARIES
Consolidated Statements of Cash Flows
<TABLE>
March 31, March 31,
1995 1994
Increase (decrease) in cash and cash equivalents
Cash flows from operating activities: <C> <C>
Net income $ 124,352 $ 768,075
Adjustments to reconcile net income to net
cash used in operating activities
net of changes in assets and liabilities resulting
from the sales and purchases of subsidiaries:
Charges for mortality and administration of
universal life and annuity products (2,420,614) (2,471,518)
Change in policy liabilities 1,638,728 384,327
Change in reinsurance receivables 105,031 530,020
Amortization of goodwill, net 111,653 135,176
Minority interest 1,384 17,987
Change in accrued investment income (473,315) (441,533)
Depreciation 139,270 165,353
Change in federal income tax liability (728,436) 109,152
Realized (gains) losses (66,396) (364,732)
Policy acquisition costs deferred (762,000) (1,362,000)
Amortization of deferred acquisition costs 1,250,419 1,209,967
Amortization of value of agency force 74,583 46,595
Change in indebtedness of affiliates, net 33,646 (432,983)
Premiums, operating receivables, commissions,
general expenses, and other assets
and liabilities (95,645) 393,229
Net cash used in operating activities (1,067,340) (1,312,885)
Cash flows from investing activities:
Proceeds from investments sold and matured:
Investments held for sale matured 0 0
Fixed maturities sold 0 0
Fixed maturities matured 3,366,123 11,195,289
Equity securities 0 0
Mortgage loans 275,590 1,524,872
Real estate 383,022 578,201
Policy loans 1,292,540 1,115,996
Short term 100,000 400,000
Total proceeds from investments sold and matured 5,417,275 14,814,358
Cost of investments acquired:
Fixed Maturities (3,932,860) (15,508,100)
Equity Securities 0 0
Mortgage Loans (79,655) (2,067,300)
Real Estate (267,376) (1,103,096)
Policy Loans (1,103,024) (824,202)
Short Term (100,000) 0
Total cost of investments acquired (5,482,915) (19,502,698)
Cash of subsidiary at date of sale 0 (3,134,343)
Cash received in sale of subsidiary 0 3,978,586
Net cash used in investing activities (65,640) (3,844,097)
Cash flows from financing activities:
Policyholder contract deposits 6,312,725 6,996,003
Policyholder contract withdrawals (3,948,502) (3,880,212)
Interest credited to account balances 1,695,703 1,516,307
Payments on principal of notes (901,449) (1,406)
Net cash provided by financing activities 3,158,477 4,630,692
Net increase (decrease) in cash and cash equivalents 2,025,497 (526,290)
Cash and cash equivalents at beginning of year 11,214,850 30,511,972
Cash and cash equivalents at end of year 13,240,347 29,985,682
</TABLE>
See accompanying notes
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FIRST COMMONWEALTH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The accompanying consolidated financial statements have beenprepared by First
Commonwealth Corporation and its consolidated subsidiaries(the "Company")
pursuant to the rules and regulations of the Securities and Exchange
Commission. Although the Company believes the disclosures are adequate to
make the information presented not be misleading, it is suggested that these
consolidated financial statements be read in conjunction with the consolidated
financial statements and the notes thereto presented in the Company's Annual
Report on Form 10-K filed with the Securities and Exchange Commission for the
year ended December 31, 1994.
The information furnished reflects, in the opinion of the Company, all
adjustments (which include only normal and recurring accruals) necessary for a
fair presentation of the results of operations for the periods presented.
Operating results for interim periods are not necessarily indicative of
operating results to be expected for the year or of the Company's future
financial condition.
At March 31, 1995, the parent, significant subsidiaries and affiliates of
First Commonwealth Corporation were as depicted on the following organizational
chart:
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The chart presented reflects the ultimate parent company of the group United
Trust, Inc. (UTI). UTI owns 30% of United Income, Inc. (UII) and 53% of United
Trust Group, Inc. (UTG). UII owns (CIC), 18% of Investors Trust, Inc. (ITI),
33% of Universal Guaranty Investment Company (UGIC) and 47% of First
Commonwealth Corporation (FCC). CIC owns 42% of ITI. ITI owns 35% of UGIC.
UGIC owns 50% of FCC. FCC owns *21% of CIC and 100% of Universal Guaranty
Life Insurance Company (UG). UG owns 100% of United Security Assurance
Company (USA). USA owns 84% of Appalachian Life Insurance Company (APPL). APPL
owns 100% of Abraham Lincoln Insurance Company (ABE).
* Represents stock of CIC owned by the Company. This stock is treated as
treasury shares for voting purposes and it cannot be voted. Therefore,
although UTG only owns approximately 69% of the issued stock of CIC,
because 21% of the stock of CIC is owned by the Company and cannot be
voted, UTG has approximately 88% voting control of CIC.
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2. FIXED MATURITIES AND INVESTMENTS HELD FOR SALE
As of March 31, 1995, fixed maturities and investments held for sale
represented 79% of total invested assets. As prescribed by the various state
insurance department statutes and regulations, the insurance companies'
investment portfolio is required to be invested primarily in investment grade
securities to provide ample protection for policyholders. The liabilities of
the insurance companies are predominantly long term in nature and therefore,
the companies invest primarily in long term fixed maturityinvestments. The
Company has analyzed its fixed maturities portfolio and reclassified those
securities expected to be sold prior to maturity as investments held for sale.
The investments held for sale are carried at market. Management has the
intent and ability to hold its fixed maturity portfolio to maturity and as
such carries these securities at amortized cost. As of March 31, 1995, the
carrying value of fixed maturity securities in default as to principal or
interest was immaterial in the context of consolidated assets orshareholders'
equity.
3. MORTGAGE LOANS AND REAL ESTATE
The Company holds approximately $15,626,000 in mortgage loans and $17,208,000
in real estate holdings, including real estate acquired in satisfaction of
debt, which represent 5% and 5% of the total assets of the Company,
respectively. All mortgage loans held by the Company are first position
loans. The Company has $468,000 in mortgage loans net of a $22,000 reserve
allowance, which are in default or in the process of foreclosure representing
approximately 3% of the total portfolio. The Company has 3 loans for
approximately $62,000 which are under a repayment plan. Letters are sent to
each mortgagee when the loan becomes 30 days or more delinquent. Loans 90
days or more delinquent are placed on a non-performing status and classified
as delinquent loans. Reserves for loan losses on delinquent loans are
established based on management's analysis of the loan balances and what is
believed to be the realizable value of the property should foreclosure take
place. Loans are placed on a non-accrual status based on a quarterly case by
case analysis of the likelihood of repayment.
The following tables show the distribution of mortgage loans and real estate
by type.
<TABLE>
Mortgage loans Amount % of Total
<S> <C> <C>
FHA/VA $ 856,243 6%
Commercial $ 4,099,968 26%
Residential $ 10,669,910 68%
Real Estate Amount % of Total
Home Office $ 2,892,619 17%
Commercial $ 2,483,392 14%
Residential development $ 6,497,221 38%
Foreclosed real estate $ 5,334,774 31%
</TABLE>
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4. LONG-TERM DEBT
At March 31, 1995, the Company has $20,628,000 in long term debt outstanding.
The debt is comprised of the following components:
Senior debt $11,400,000
Subordinated 10 yr. notes 5,670,000
Subordinated 20 yr. notes 3,530,000
Encumbrance on real estate 28,000
$20,628,000
The senior debt is comprised of participations of several lenders. Interest
is based on 1% above the lead bank's base rate and is payable quarterly. The
1995 principal payment of $2,900,000 was prepaid $2,000,000 in December 1994
and $900,000 in March 1995. The next scheduled principal payment is not due
until June 1996. Principal reductions are due June 1 of each year.
The subordinated debt was incurred June 16, 1992 as a part of the acquisition
of UTAC and USA. The 10 year notes bear interest at the rate of 7 1/2% per
annum, payable semi-annually beginning December 16, 1992. These notes provide
for principal payments equal to 1/20th of the principal balance due with each
interest installment beginning June 16, 1997, with a final payment due June
16, 2002. The 20 year notes bear interest at the rate of 8 1/2% per annum,
payable semi-annually beginning December 16, 1992, with a lump sum principal
payment due June 16, 2012.
Scheduled principal reductions on the Company's debt for the next five years
are as follows:
Year Amount
1995 $ 0
1996 3,900,000
1997 4,467,000
1998 3,167,000
1999 567,000
5. COMMITMENTS AND CONTINGENCIES
During the third quarter of 1994, the Company became aware that certain new
insurance business was being solicited by certain agents of UG and issued to
individuals considered to be not insurable by Company standards. These
policies had a face amount of $22,700,000 and represent less than 1/2 of 1% of
the insurance in force of the Company. Management's analysis of the business
in force indicates that the expected death claims on the business in force to
be adequately covered by the mortality assumptions inherent in the calculation
of statutory reserves. Nevertheless, management has determined it is in the
best interest of the Company to attempt to acquire as many of the policies as
possible. As of March 1, 1995, there remained approximately 1/3 of the
original face amount which the Company has either determined to have bad
health or not yet contacted by the Company regarding a possible repurchase of
the insurance policy.
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During 1994, the Company authorized $1,250,000 for the acquisition of these
policies. At December 31, 1994, the Company had $227,961 remaining for the
purchase of these policies.
Freeman v. Universal Guaranty Life Insurance Company (U.S.D.C., N.D. Ga, 1994,
1-94-CV-2593-RCF); Tappan v. Universal Guaranty Life Insurance Company and
James Melville (U.S.D.C., M.D. Fla, 1994, 94-1044-CIV-ORL-18); Armstrong v.
Universal Guaranty Life Insurance Company and James Melville (Circuit Court of
Davidson County, Tenn., 1994, 94C3222); Armstrong v. Universal Guaranty Life
Insurance Company and James Melville (Circuit Court of Davidson County, Tenn.,
1994, 94C3720); Ridings v. Universal Guaranty Life Insurance Company and James
Melville (Circuit Court of Davidson County, Tenn., 1994, 94C3221).
Four general agents of UG filed independent suits against UG in the latter
part of September or early October, 1994. Kathy Armstrong (3-94-1085),
another general agent, filed her suit on November 16, 1994. All of the suits
allege that the plaintiff was libeled by statements made in a letter sent by
UG. The letter was sent to persons who had been issued life insurance
policies by UG as the result of policy applications submitted by the five
agents. Mr. Melville is a defendant in some of the suits because he signed
the letter as president of UG. In addition to the defamation count, Mr.
Freeman and Ms. Tappan allege that UG also breached a contract with each of
them by failing to pay them commissions for policies issued. Mr. Freeman
claims unpaid commissions of $104,000 and Ms. Tappan's commission claim is for
an unspecified amount. In the libel claim, Mr. Freeman claims compensatory
damages of over $5,000,000 punitive damages of over $3,000,000, costs, and
litigation expenses. The other plaintiffs request the award of unspecified
compensatory damages and punitive (or special) damages as well as costs and
attorney's fees. UG has filed Answers to all five of these suits asserting
various defenses and, where appropriate, counterclaims. UG believes that it
has no liability to any of the plaintiffs and intends to defend each of the
suits vigorously.
Terl, et al. v. Universal Guaranty Life Insurance Company (U.S.D.C., M.D.
Fla., 1995, 94-1236-CIV-ORL-19).
A lawsuit was filed against UG on November 23, 1994 on behalf of five insureds
and a potential class of other insureds. The plaintiffs allege that UG
violated the Racketeer Influenced and Corrupt Organizations Act. The
plaintiffs contend they were fraudulently induced by misrepresentations on the
part of UG to purchase, and in some instances to surrender, policies of
insurance. The plaintiffs contend that UG knew it would never honor the terms
of the policies and was attempting to achieve short-term profits by willfully
targeting high risk applicants. The plaintiffs seek damages, including treble
damages, in excess of $50,000, exclusive of interest and costs, and other
equitable relief. UG filed an Answer to this class action suit in February,
1995, asserting various defenses and reserving the right to assert
counterclaims. This lawsuit was settled during the first quarter of 1995.
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S.D., et al. v. Universal Guaranty Life Insurance Company. (U.S.D.C., N.D.
Ga., 1995, 195-CV-0454-GET).
A lawsuit was filed against UG in February, 1995 on behalf of four applicants
for insurance and a potential class of other applicants. The plaintiffs
alleged that UG violated Title III of the Americans With Disabilities Act of
1990 (the "ADA") by discriminating against the plaintiffs in connection with
the issuance of insurance policies by requiring the plaintiffs to submit
additional medical evidence not required of others.
The plaintiffs allege that UG's requirement of a blood test violated the ADA
by discriminating against each of the plaintiffs of the basis of a perceived
disability which resulted in the denial of an insurance policy.
In addition to the ADA violation, plaintiffs allege a violation of Georgia
Insurance Regulations with regard to procedures for obtaining information
regarding an applicant's HIV/AIDS status.
The plaintiffs seek relief in the form of requiring UG to reopen the
plaintiffs' insurance applications and process those applications, enjoining
UG from requiring blood tests from the plaintiffs, directing UG to issue life
insurance policies as applied for, and awarding the plaintiffs and other class
members costs, expenses, and reasonable attorneys' fees pursuant to Title III
of the ADA.
UG has filed an Answer to this potential class action. UG believes that it
has no liability to any of the plaintiffs, or other potential class members,
and intends to defend the lawsuit vigorously.
Jeffrey Ploskonka, Keith Bohn and Paul Phinney v. Universal Guaranty Life
Insurance Company (Circuit Court of the Seventh Judicial Circuit Sangamon
County, Illinois Case No.: 95-L-0213)
On March 9, 1995 a lawsuit was filed against Universal Guaranty Life Insurance
on behalf of three insureds and a potential class of other insureds. The
Plaintiffs allege that UG violated the insurance contract in attempting to
cancel life insurance contracts. Additionally, the Plaintiffs assert
violations of Illinois law alleging vexations and unreasonable insurance
practices, breach of duty of good faith and fair dealing, and that Illinois
consumer fraud laws have been violated. The Plaintiffs seek unspecified
compensatory damages, injunctive relief, attorneys' fees, statutory damages in
an amount up to $25,000.00, punitive damages of $1,000,000.00, and other
equitable relief. UG filed an Answer to this lawsuit in May 1995, asserting
various defenses and reserving the right to assert counterclaims. UG has also
filed motions to dismiss certain allegations and claims made in the lawsuit.
UG believes it has no liability to any of the plaintiffs, or other potential
class members, and intends to defend the lawsuit vigorously.
The companies have other litigation pending of the type normal in insurance
business. In the opinion of management, the resolution of the litigation will
not have a material adverse impact on the consolidated financial position of
the Company.
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The Company and its subsidiaries are named as defendants in a number of legal
actions arising primarily from claims made under insurance policies. Those
actions have been considered in establishing the Company's liabilities.
Management and its legal counsel are of the opinion that the settlement of
those actions will not have a material adverse effect on the Company's
financial position or results of operations.
The number of insurance companies that are under regulatory supervision has
increased, and that increase is expected to result in an increase in
assessments by state guarantee funds to cover losses to policyholders of
insolvent or rehabilitated companies. Those mandatory assessments may be
partially recovered through a reduction in future premium taxes in some
states. For all assessment notifications received, the Company has accrued
for those assessments.
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Item 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The purpose of this section is to discuss and analyze the Company's financial
condition, changes in financial condition and results of operations which
reflect the performance of the Company. The information in the consolidated
financial statements and related notes should be read in conjunction with this
section.
LIQUIDITY AND CAPITAL RESOURCES:
HOLDING COMPANY OPERATIONS
FCC's principal need for liquidity consists of its debt service obligations
under its senior indebtedness, subordinated indebtedness and operating
expenses. The unpaid principal of the Senior Loan totalled $12,300,000 at
December 31, 1994 and $11,400,000 at March 31, 1995. The unpaid principal of
the subordinated indebtedness totalled $9,200,000 at December 31, 1994 and is
unchanged as of March 31, 1995.
FCC's principal source of liquidity consists of management fees and dividends
derived from its affiliates. Through March 31, 1995, FCC had not received a
dividend but had received net management fees of $2,443,000 compared to
$3,015,000 through March 31, 1994.
The payment of cash dividends to shareholders by FCC is not legally
restricted. At March 31, 1995 and December 31, 1994, substantially all of
consolidated stockholders' equity of FCC represented net assets of its
subsidiaries. FCC's 100% owned insurance subsidiary is UG. UG's dividend
limitations are described below.
Ohio domiciled insurance companies require five days prior notification to the
insurance commissioner for the payment of an ordinary dividend. Ordinary
dividends are defined as the greater of: a) prior year statutory earnings or
b) 10% of statutory capital and surplus. For the year ended December 31,
1994, UG had a statutory gain from operations of $1,621,000. At December 31,
1994, UG statutory capital and surplus amounted to $7,683,000. Extraordinary
dividends (amounts in excess of ordinary dividend limitations) require prior
approval of the insurance commissioner and are not restricted to a specific
calculation as to amount.
The FCC senior debt bears interest at a variable per annum rate equal to 1%
over the variable per annum rate of interest most recently announced by the
First Bank of Missouri as its "Base Rate". As of March 1, 1995, the interest
rate on the senior debt had increased to 10% compared to 7% one year ago. On
December 2, 1994, FCC prepaid $2,000,000 of the $2,900,000 scheduled principal
payment due June 1, 1995. On March 1, 1995, the Company prepaid the remaining
$900,000 of the June 1, 1995 scheduled principal payment. The next scheduled
principal payment
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is not due until June 1, 1996. The principal amount of the FCC Senior Debt to
outside parties was $11,300,000 and $10,400,000 at December 31, 1994, and March
31, 1995, respectively.
Management believes that it will be able to continue to service this debt in
the future.
INSURANCE OPERATIONS
The primary sources of liquidity for the insurance subsidiaries include their
operating cash flows, financing cash flows, dividends, and short-term
investments, which principally consist of certificates of deposit. The net
cash used in operating activities equalled $1,067,000 during the first three
months of 1995, compared to $1,313,000 in the same period one year ago.
The net cash used in investing activities equalled $66,000 during the first
three months of 1995, compared to $3,844,000 as of March 31, 1994. As of
March 31, 1995, the Company has $13,240,000 in cash and cash equivalents,
which represents 4% of total assets.
Other principal sources of liquidity available to the Company are invested
assets. Sources available are $350,000 of short-term investments, $3,203,00
of investments held for sale at market and $916,000 of equity securities.
Other sources are maturities of the fixed maturity portfolio. As of March 31,
1995, the Company had $3,366,000 of fixed maturities matured compared to
$11,195,000 in the same period one year ago.
The principal requirement for liquidity in connection with the Company's
insurance operations is its contractual obligations to policyholders and
annuitants, including payments of surrender benefits, policyholder dividends,
claims under outstanding insurance policies and annuities, and policy loans.
Policyholder surrender benefits totalled $3,878,000 as of March 31, 1995, and
$4,658,000 as of March 31, 1994. The Company believes that it maintains
adequate liquidity to pay anticipated benefits and claims to policyholders and
annuitants.
The Company had net cash used by operating activities of $1,067,000 and
$1,313,000 as of March 31, 1995 and 1994, respectively. The net cash provided
by operating activities, interest credited to account balances and net
policholder contract deposits of the Company's insurance subsidiaries after
the payment of policyholder withdrawals, equalled $2,993,000 and $3,319,000 as
March 31, 1995 and 1994, respectively. This measurement of cash flow
indicates the performance of the Company's insurance operations as well as the
Company's universal life production. The decrease in 1995 compared to 1994 is
due to a decline in first year premium production.
Policy acquisition costs deferred decreased significantly when comparing first
quarter of 1995 to 1994. The decrease is due to two factors. The decline in
first year production as was discussed in the operating activities of the
Company. The decline is also the result of a change in the commission
structure. The commission structure was changed in reference to the products
that are being marketed currrently compared to first quarter of 1994.
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Management believes that the overall sources of liquidity available to the
Company will continue to be more than sufficient to satisfy its financial
obligations and operating expenses.
RESULTS OF OPERATIONS
First quarter 1995 compared to first quarter 1994:
(a) Revenues:
Revenues increased 6% during first quarter 1995 compared to first quarter
1994. The increase in net investment income contributed significantly to the
increase in revenues.
Premium income, net of reinsurance, increased 5% during the first quarter of
1995 compared to the first quarter of 1994. The increase is attributable to
the acquisition of Investors Trust Assurance Company, ("ITAC"), at July 31,
1994, from an affiliated company. Simultaneous to the acquisition of ITAC,
was the merger of ITAC into ALIC. The decrease in reinsurance premium is
attributable to two factors. The sale of Farmers and Ranchers Life Insurance
Company, ("F&R") at March 31, 1994, to an unaffiliated company and the
discontinuation of a coinsurance agreement as to new premium writings between
USA and Life RE. Coinsurance agreements provide a sharing or 50/50
relationship between the direct company and the reinsurer of the premiums,
benefits and the profitability of the underlying product.
Other considerations, net of reinsurance, consisting of administrative loads
charged on interest sensitive and universal life products, increased 10% for
the first quarter 1995 compared to first quarter 1994. The Company is
currently marketing three universal life products. In late 1994, the Company
discontinued marketing the traditional and interest sensitive products.
Net investment income increased 17% during the first quarter of 1995 compared
to first quarter 1994. The increase is attributable to the acquisition of
ITAC at July 31, 1994 and to the Company investing a significant portion of
its cash and cash equivalents in long term fixed maturities and mortgage loans
during March and April of 1994.
The Company's investments are generally managed to match related insurance and
contract holder liabilities. The overall annualized gross investment yields
as of first quarter 1995 and 1994, are 7.25% and 7.33%, respectively. The
Company in conjunction with the decrease in average yield of the Company's
fixed maturity portfolio has decreased the average crediting rate for the
Company's insurance and investment products. The comparison of investment
return with insurance or investment product crediting rates establishes an
interest spread. Minimum interest spreads between earned and credited rates
are 1% to 1.5%. The Company continually assesses investment yields, and when
necessary takes action to reduce credited interest rates on its insurance
products to preserve targeted spreads. Credited rates are established by the
Board of Directors. Over 60% of the insurance and investment product reserves
are crediting 5% or less in interest and
15
<PAGE>
39% of the insurance and investment product reserves are crediting 5.25% to
6% in interest. It is expected that the monitoring of the interest spreads by
management will provide the necessary margin to adequately provide for
associated costs on insurance policies that the Company has in force and will
write in the future.
The Company realized $66,000 of investment gains during the first quarter of
1995 compared to realized investment gains of $365,000 in the same period in
1994. The realized gains in 1994 is attributable to the sale of F&R at March
31, 1994. The realized gains in 1995 is attributable to three fixed
maturities that were written-off in prior periods but the Company was able to
recover full face value.
(b) Expenses:
Expenses increased 18% during the first quarter of 1995, compared to first
quarter 1994. The increase in expenses is due to the increase in commissions
and amortization of deferred policy acquisition costs and operating expenses.
Life benefits and reinsurance benefits and claims increased 7% the for first
quarter of 1995, compared to first quarter 1994. The primary factor for the
increase was the discontinuation of the coinsurance agreement as to new
premium writings between USA and Life RE. A factor that is contributing to
decrease benefits is that the Company in 1994, lowered the interest rates
credited on its interest sensitive, universal life and annuity products to a
6% interest rate. This has resulted in a lower reserve increase on these
products than was experienced in the prior year as a lower interest rate is
being credited to the policies involved. The life insurance and annuity
products are continuing to credit interest at 6% in 1995. By maintaining the
credited interest rates at 6%, it has enabled the Company to achieve larger
interest spreads.
Annuity benefits increased significantly during the first quarter of 1995
compared to 1994. The increase is related to the 60% increase in annuity
deposits during the first quarter of 1995. The Company does not actively
market annuity products. The increase in annuity deposits was derived from
additional deposits made to existing annuity contracts.
Dividends to policyholders increased 27% for first quarter 1995 compared to
the same period for 1994. USA continued to market participating policies
through most of 1994. Management expects dividends to policyholders will
continue to increase in the future. A portion of the Company's insurance in
force is participating insurance. A significant portion of the participating
business is relatively newer business. The dividend scale for participating
policies increases significantly in the early years. The dividend scale is
subject to approval of the Board of Directors and may be changed at their
discretion. The Company no longer markets any participating policies.
Commissions and amortization of deferred policy acquisition costs increased
28% for first quarter 1995 compared to the same period of 1994. The products
that are currently being marketed are designed differently than the products
offered one year ago. The current products do not defer as much acquisition
costs for future periods.
16
<PAGE>
Operating expenses increased 36% for the period. The increase in operating
expenses is related to increased legal fees incurred regarding the legal
matters discussed in the Notes to the Financial Statements.
Management continues its efforts to reduce operating costs and streamline
operations. The Company was able to streamline its operations by reducing the
number of companies through a series of mergers and the sale of F&R. As of
March 31, 1995, the Company controls four insurance companies.
Interest expense increased 10% for 1995 compared to 1994. The interest rate
on the senior debt is the prime interest rate plus an additional 1% of
interest. As of March 31, 1995, the interest rate on the senior debt had
increased to 10% compared to 7% one year ago.
(c) Net Income:
The Company recorded net income of $124,000 during the first quarter of 1995
compared to $768,000 for the same period in 1994. The decline in results is
attributable to the decreased realized investment gains, increase in
commissions and amortization of deferred policy acquisition costs and
operating expenses.
FINANCIAL CONDITION
(a) Assets:
The Company's financial position at March 31, 1995, reflected an increase in
assets and liabilities compared to December 31, 1994. As of March 31, 1995,
the assets increased slightly compared to December 31, 1994.
As of March 31, 1995, invested assets represented approximately 71% of
consolidated assets compared to 72% as of December 31, 1994. As of March 31,
1995, fixed maturities and investments held for sale represented 79% of total
invested assets.
Invested assets changed very little through first quarter 1995 compared to
December 31, 1994. The most significant occurrence is the improvement in the
market value of the fixed maturities and investments held for sale. Recent
activity in the bond market has seen yields go from 7.8% at December 31, 1994
to 7.2% at March 31, 1995. As of this writing the bond yields continue to
decline and are at 6.6%.
Cash and cash equivalents increased $2,025,000 through first quarter of 1995
compared to December 31, 1994. The increase in cash is a temporary
fluctuation. Another reason for the increase in cash is short term funds held
by APPL. On February 22, 1995, USAC signed a definitive agreement with an
outside third party for the sale of its 84% owned subsidiary, APPL. The
pending sale has caused management to seek short term investments in light of
the pending sale of APPL.
17
<PAGE>
Other accounts and notes receivable decreased $243,000 at March 31, 1995
compared to December 31, 1994. The decrease is due to a change in Company
policy during 1994 as to how the agents are advanced on submitted insurance
applications. The change in Company policy enables the Company to better
control advances made to agents.
Deferred policy acquisition costs ("DPAC") decreased approximately $488,000
through the first quarter of 1995 compared to December 31, 1994. DPAC will
increase due to new business and will decrease due to amortization in relation
to insurance in force. The products that are currently being marketed are
designed differently than the products offered one year ago. The current
products do not defer as much acquisition costs for future periods.
(b) Liabilities:
Liabilities increased slightly through first quarter of 1995 compared to
December 31, 1994. Future policy benefits represented 82% of total
liabilities at March 31, 1995 and 81% at December 31, 1994. Future policy
benefits will increase related to growth in and duration of insurance in force
and decrease from reserves released on deaths and other policy terminations.
Policyholders' dividend accumulations increased 4% through first quarter of
1995 compared to December 31, 1994. The policyholder dividend accumulation
originates from the policy-owner selecting the option to have their dividend
deposited with the insurance company to accumulate with interest. A
significant portion of the participating business is relatively newer
business. The dividend scale for participating policies increases
significantly in the early years. The dividend scale is subject to approval
of the Board of Directors and may be changed at their discretion. The Company
no longer markets any participating policies.
Deferred income taxes decreased approximately $696,000. A deferred tax
liability is recognized for the estimated future tax effects attributable to
temporary differences and carryforwards. The measurement of this liability is
based on provisions of the enacted tax law. Primary items affecting deferred
taxes of the Company are deferred policy acquisition costs and future policy
benefits.
Notes payable decreased $901,000 through first quarter of 1995 compared to
December 31, 1994. On March 1, 1995, the Company prepaid the remaining
$900,000 of the June 1, 1995 scheduled principal payment. No payments are due
on Company debt until June 1996.
(c) Shareholders' Equity:
Overall shareholders' equity increased $61,000 through first quarter 1995
compared to December 31, 1994. Accumulated deficit decreased $24,000 through
first quarter 1995 compared to December 31, 1994, while unrealized
depreciation of equity securities decreased $37,000.
18
<PAGE>
FUTURE OUTLOOK
Factors expected to influence life insurance industry growth include: 1)
competitive pressure among the large number of existing firms; 2)
competition from financial service companies, as they seek to expand into
insurance products; 3) customers' changing needs for new types of insurance
products; 4) customers' lack of confidence in the entire industry as a
result of the recent highly visible failures; and 5) uncertainty concerning
the future regulation of the industry. Growth in demand for insurance
products will depend on demographic variables such as income growth, wealth
accumulation, populations and workforce changes.
The Board of Directors of CIC, ITI and UGIC ("the Affiliates"), by resolution
adopted at their meetings of the Board of Directors on June 7, 1994,
unanimously approved a Plan of Liquidation and Dissolution ("the Plan"). The
affirmative vote of the majority of the outstanding shares of the Affiliates
will be required for adoption of the Plan. Subject to proxy requirements, the
matter will be brought before the Affiliate's shareholders at a Special
Meeting of Shareholders of the Affiliates planned in mid 1995. Each affiliate
is currently the indirect owner of FCC's common stock. The only assets held
by the Affiliates is stock in its subsidiary (see Organizational Chart) and
enough cash to cover costs associated with the liquidation. If the Plan is
adopted, each shareholder of the Affiliates will own directly the same
proportionate share of FCC's common stock.
The liquidation and dissolution of the Affiliates will significantly
streamline the organization of the UTI holding company system by eliminating
three holding companies from the system. The elimination of the Affiliates
will reduce filing fees and administrative expenses of the holding company
system associated with the continued existence of such companies, including
fees and expenses in connection with the filing of annual, quarterly and
periodic reports with the Securities and Exchange Commission and mailings to
public shareholders. If the Plan is adopted, UTG would own approximately 72%
of the common stock of FCC. The following is the organizational chart for the
UTI holding company system subsequent to the Proposed Plan of Liquidation and
Dissolution of the Affiliates.
19
<PAGE>
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
S.D., et al. v. Universal Guaranty Life Insurance Company. (U.S.D.C., N.D.
Ga., 1995, 195-CV-0454-GET).
A lawsuit was filed against UG in February, 1995 on behalf of four applicants
for insurance and a potential class of other applicants. The plaintiffs
alleged that UG violated Title III of the Americans With Disabilities Act of
1990 (the "ADA") by discriminating against the plaintiffs in connection with
the issuance of insurance policies by requiring the plaintiffs to submit
additional medical evidence not required of others.
The plaintiffs allege that UG's requirement of a blood test violated the ADA
by discriminating against each of the plaintiffs of the basis of a perceived
disability which resulted in the denial of an insurance policy.
In addition to the ADA violation, plaintiffs allege a violation of Georgia
Insurance Regulations with regard to procedures for obtaining information
regarding an applicant's HIV/AIDS status.
The plaintiffs seek relief in the form of requiring UG to reopen the
plaintiffs' insurance applications and process those applications, enjoining
UG from requiring blood tests from the plaintiffs, directing UG to issue life
insurance policies as applied for, and awarding the plaintiffs and other class
members costs, expenses, and reasonable attorneys' fees pursuant to Title III
of the ADA.
UG has filed an Answer to this potential class action. UG believes that it
has no liability to any of the plaintiffs, or other potential class members,
and intends to defend the lawsuit vigorously.
Jeffrey Ploskonka, Keith Bohn and Paul Phinney v. Universal Guaranty Life
Insurance Company (Circuit Court of the Seventh Judicial Circuit Sangamon
County, Illinois Case No.: 95-L-0213)
On March 9, 1995 a lawsuit was filed against Universal Guaranty Life Insurance
on behalf of three insureds and a potential class of other insureds. The
Plaintiffs allege that UG violated the insurance contract in attempting to
cancel life insurance contracts. Additionally, the Plaintiffs assert
violations of Illinois law alleging vexations and unreasonable insurance
practices, breach of duty of good faith and fair dealing, and that Illinois
consumer fraud laws have been violated. The Plaintiffs seek unspecified
compensatory damages, injunctive relief, attorneys' fees, statutory damages in
an amount up to $25,000.00, punitive damages of $1,000,000.00, and other
equitable relief. UG filed an Answer to this lawsuit in May 1995, asserting
various defenses and reserving the right to assert counterclaims. UG has also
filed motions to dismiss certain allegations and claims made in the lawsuit.
UG believes it has no liability to any of the plaintiffs, or other potential
class members, and intends to defend the lawsuit vigorously.
20
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
FIRST COMMONWEALTH CORPORATION
(Registrant)
Date May 12, 1995 By /s/ Thomas F. Morrow
Thomas F. Morrow
Chief Operating Officer, Vice
Chairman and Treasurer
Date May 12, 1995 By /s/ James E. Melville
James E. Melville
Senior Executive Vice President
and Chief Financial Officer
21
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
the undersigned thereunto duly authorized.
FIRST COMMONWEALTH CORPORATION
(Registrant)
Date May 12, 1995 By Thomas F. Morrow
Thomas F. Morrow
Chief Operating Officer, Vice
Chairman and Treasurer
Date May 12, 1995 By James E. Melville
James E. Melville
Senior Executive Vice President,
Chief Financial Officer
and Director
[ARTICLE] 7
<TABLE>
<S> <C> <C>
[PERIOD-TYPE] 3-MOS 3-MOS
[FISCAL-YEAR-END] DEC-31-1995 DEC-31-1994
[PERIOD-END] MAR-03-1995 MAR-03-1994
[DEBT-HELD-FOR-SALE] 3,202,598 3,337,672
[DEBT-CARRYING-VALUE] 184,446,554 183,926,694
[DEBT-MARKET-VALUE] 0 0
[EQUITIES] 916,421 911,012
[MORTGAGE] 15,626,121 15,822,056
[REAL-ESTATE] 17,208,006 17,332,948
[TOTAL-INVEST] 237,898,819 238,019,014
[CASH] 13,240,347 11,214,850
[RECOVER-REINSURE] 13,814,595 13,919,626
[DEFERRED-ACQUISITION] 41,397,468 41,885,887
[TOTAL-ASSETS] 333,365,593 331,967,266
[POLICY-LOSSES] 0 0
[UNEARNED-PREMIUMS] 0 0
[POLICY-OTHER] 235,884,580 233,266,922
[POLICY-HOLDER-FUNDS] 17,791,030 17,130,648
[NOTES-PAYABLE] 20,627,740 21,529,189
[COMMON] 24,340,051 24,340,051
[PREFERRED-MANDATORY] 0 0
[PREFERRED] 0 0
[OTHER-SE] 19,127,995 18,966,186
[TOTAL-LIABILITY-AND-EQUITY] 333,365,593 331,967,266
[PREMIUMS] 8,703,332 8,293,233
[INVESTMENT-INCOME] 3,868,022 3,300,446
[INVESTMENT-GAINS] 66,396 364,732
[OTHER-INCOME] 756,076 723,059
[BENEFITS] 8,227,705 7,383,334
[UNDERWRITING-AMORTIZATION] 2,243,591 1,759,083
[UNDERWRITING-OTHER] 3,493,230 2,662,991
[INCOME-PRETAX] (570,700) 876,062
[INCOME-TAX] (696,436) 90,000
[INCOME-CONTINUING] 124,352 768,075
[DISCONTINUED] 0 0
[EXTRAORDINARY] 0 0
[CHANGES] 0 0
[NET-INCOME] 124,352 768,075
[EPS-PRIMARY] .01 .03
[EPS-DILUTED] .01 .03
[RESERVE-OPEN] 0 0
[PROVISION-CURRENT] 0 0
[PROVISION-PRIOR] 0 0
[PAYMENTS-CURRENT] 0 0
[PAYMENTS-PRIOR] 0 0
[RESERVE-CLOSE] 0 0
[CUMULATIVE-DEFICIENCY] 0 0
</TABLE>
