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 September 30, 1995 Commission FileNo. 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) (ZipCode)
Registrant's telephone number, including area code: (217)786-4300
Indicate by check mark whether the Registrant (1) has filedall reports
required to be filed by Section 13 or 15(d) of the SecuritiesExchange 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 beensubject to such
filing requirements for the past 90 days.
YES X NO
Indicate the number of shares outstanding of each of theRegistrant's classes
of common stock, as of the latest practicable date.
Shares outstanding at October 31, 1995: 23,967,545
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 - September 30, 1995, and
December 31, 1994 . . . . . . . . . . . . . . . . . . . . 3
Consolidated Statements of Operations for the nine months
and three months ended September 30, 1995 and 1994 . . . 4
Consolidated Statements of Cash Flows for the nine months
ended September 30, 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 . . . . . . . . . . . . . . . . . . . . 22
Signatures. . . . . . . . . . . . . . . . . . . . . . . . 23
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PART 1. FINANCIAL INFORMATION
Item 1. Financial Statements
FIRST COMMONWEALTH CORPORATION
AND SUBSIDIARIES
Consolidated Balance Sheets
September 30, December 31,
ASSETS 1995 1994
Investments:
Fixed maturities at amortized cost
(market $186,986,521 and $172,822,882) $ 186,298,717 $ 183,926,694
Equity securities at market
(cost $1,246,164 and $395,846) 1,877,477 911,012
Mortgage loans on real estate at
amortized cost 14,309,461 15,822,056
Investment real estate, at cost, net of
accumulated depreciation 12,038,779 11,712,847
Real estate acquired in satisfaction of
debt, at cost net of accumulated
depreciation 5,323,762 5,620,101
Policy loans 16,614,178 16,338,632
Short term investments 425,000 350,000
Investments held for sale at market
(cost $3,001,497 and $3,450,273) 2,988,146 3,337,672
239,875,520 238,019,014
Cash and cash equivalents 15,133,692 11,214,850
Investment in parent 350,000 3,812,500
Indebtedness of affiliates, net 222,833 183,916
Accrued investment income 3,926,920 3,447,017
Reinsurance receivables:
Future policy benefits 13,427,627 12,818,658
Unpaid policy claims and benefits 856,683 975,613
Paid policy claims and benefits 158,208 125,355
Other accounts and notes receivable 121,854 408,131
Deferred policy acquisition costs 40,636,388 41,885,887
Value of agency force acquired 6,566,343 6,796,120
Costs in excess of net assets purchased,
less accumulated amortization 10,985,015 11,319,999
Other assets 1,504,909 960,206
Total assets $ 333,765,992 $ 331,967,266
LIABILITIES AND SHAREHOLDERS' EQUITY
Policy liabilities and accruals:
Future policy benefits $ 241,321,111 $ 233,266,922
Policy claims and benefits payable 3,215,497 3,207,014
Other policyholder funds 3,196,966 3,184,731
Dividend and endowment accumulations 11,825,073 10,738,903
Income taxes payable 200,542 237,846
Deferred income taxes 7,055,520 9,000,149
Notes payable 20,624,810 21,529,189
Other liabilities 4,956,512 6,025,463
Total liabilities 292,396,031 287,190,217
Minority interests in consolidated
subsidiaries 1,552,445 1,470,812
SHAREHOLDERS' EQUITY
Common stock - $1 par value per share.
Authorized 25,000,000 shares - 23,967,545
and 24,340,051 shares issued and outstanding
after deducting treasury shares of 372,506
and 0 23,967,545 24,340,051
Additional paid-in capital 28,498,565 31,588,559
Unrealized depreciation of equity securities
and investments held for sale of affiliates (216,136) (423,916)
Accumulated deficit (12,432,458) (12,198,457)
Total shareholders' equity 39,817,516 43,306,237
Total liabilities and shareholders' equity $ 333,765,992 $ 331,967,266
See accompanying notes.
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FIRST COMMONWEALTH CORPORATION
AND SUBSIDIARIES
Consolidated Statements of Operations
Three Months Ended Nine Months Ended
September 30, September 30, September 30, September 30,
1995 1994 1995 1994
Revenue
Premium income $ 8,629,132 $ 8,567,453 $ 27,703,013 $ 28,750,693
Reinsurance premium (1,557,080) (1,347,661) (3,947,584) (4,045,157)
Other considerations 837,140 749,682 2,464,463 2,280,594
Other considerations
paid to reinsurers (40,389) (58,666) (140,063) (176,220)
Net investment income 3,746,400 3,622,195 11,486,395 10,340,152
Realized investment
gains (losses) (64,002) (230,361) (58,706) (35,791)
Other income 3,985 (5,360) 30,782 71,939
11,555,186 11,297,282 37,538,300 37,186,210
Benefits and expenses:
Benefits, claims and
settlement expenses:
Life 6,367,028 8,440,990 22,013,733 24,340,638
Annuity 446,208 510,365 1,386,646 1,184,136
Reinsurance benefits
and claims (843,623) (886,972) (2,498,439) (2,395,100)
Dividends to policy
holders 1,044,457 930,540 3,280,224 2,689,117
Commissions and
amortization of
deferred policy
acquisition costs 1,764,387 1,772,982 6,461,334 5,229,913
Amortization of agency
force 81,364 24,979 229,777 118,167
Operating expenses 2,025,224 2,345,992 7,323,603 5,966,606
Interest expense 476,624 505,228 1,441,321 1,434,544
11,361,669 13,644,104 39,638,199 38,568,021
Income (loss) before
income taxes and
minority interest 193,517 (2,346,822) (2,099,899) (1,381,811)
Credit (provision) for
income taxes 1,034,303 248,761 1,939,899 559,781
Minority interest in
income of consolidated
subsidiaries (41,606) 7,374 (74,001) (73,144)
Net income (loss) $ 1,186,214 $ (2,090,687) $ (234,001) $ (895,174)
Net income (loss)
per common share $ 0.05 $ (0.09) $ (0.01) $ (0.04)
Average common
shares outstanding 24,526,304 24,340,051 24,404,182 24,340,051
See accompanying notes.
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FIRST COMMONWEALTH CORPORATION
AND SUBSIDIARIES
Consolidated Statements of Cash Flows
September 30, September 30,
1995 1994
Increase (decrease) in cash and cash
equivalents
Cash flows from operating activities:
Net loss $ (234,001) $ (895,174)
Adjustments to reconcile net loss to net
cash provided by (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 (7,351,824) (7,363,361)
Change in policy liabilities 3,983,662 12,170,786
Change in reinsurance receivables (522,892) (1,093,940)
Amortization of goodwill, net 334,984 358,507
Minority interest74,001 73,144
Change in accrued investment income (479,903) (882,541)
Depreciation 399,775 492,546
Change in federal income tax liability (1,981,933) (556,937)
Realized (gains) losses 58,706 35,791
Policy acquisition costs deferred (1,862,000) (3,740,663)
Amortization of deferred acquisition
costs 3,111,499 2,599,378
Amortization of value of agency force 229,777 118,167
Change in indebtedness of affiliates, net (38,917) 171,872
Premiums, operating receivables,
commissions, general expenses, and other
assets and liabilities (878,424) 314,689
Net cash provided by (used in) operating
activities (5,157,490) 1,802,264
Cash flows from investing activities:
Proceeds from investments sold and matured:
Investments held for sale matured 101,849 0
Fixed maturities sold 0 0
Fixed maturities matured 9,226,009 20,000,162
Equity securities 104,260 0
Mortgage loans 1,917,743 3,672,114
Real estate 897,183 2,219,794
Collateral loans 0 0
Policy loans 3,269,380 3,103,281
Short term 200,000 963,856
Total proceeds from investments sold and
matured 15,614,575 29,959,207
Cost of investments acquired:
Fixed Maturities (11,994,414) (46,536,690)
Equity Securities (1,000,000) 0
Mortgage Loans (405,148) (5,359,481)
Real Estate (1,065,675) (3,096,136)
Policy Loans (3,572,857) (2,942,617)
Short Term (125,000) (575,000)
Total cost of investments acquired (18,163,094) (58,509,924)
Cash of subsidiary at date of sale 0 (3,134,343)
Cash received in sale of subsidiary 0 3,978,586
Cash of subsidiary at date of acquisition 0 2,965,115
Net cash used in investing activities (2,548,519) (24,741,359)
Cash flows from financing activities:
Policyholder contract deposits 19,273,756 18,403,305
Policyholder contract withdrawals (11,517,370) (16,583,265)
Interest credited to account balances 4,772,844 4,720,485
Payments on principal of notes (904,379) (4,250)
Net cash provided by financing activities 11,624,851 6,536,275
Net increase (decrease) in cash and cash
equivalents 3,918,842 (16,402,820)
Cash and cash equivalents at beginning of
year 11,214,850 30,511,972
Cash and cash equivalents at end of year $ 15,133,692 $ 14,109,152
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 been prepared 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 September 30, 1995, the parent, significant subsidiaries and affiliates of
First Commonwealth Corporation were as depicted on the following
organizational chart.
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United Trust, Inc. ("UTI") is the ultimate controlling company. UTI owns 53%
of United Trust Group ("UTG") and 30% of United Income, Inc. ("UII"). UII
owns 47% of UTG. UTG owns 72% of First Commonwealth Corporation ("FCC"). FCC
owns 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") and APPL owns 100% of Abraham Lincoln
Insurance Company ("ABE").
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2. FIXED MATURITIES AND INVESTMENTS HELD FOR SALE
As of September 30, 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 maturity investments. 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 September 30, 1995,
the carrying value of fixed maturity securities in default as to principal or
interest was immaterial in the context of consolidated assets or shareholders'
equity.
3. MORTGAGE LOANS AND REAL ESTATE
The Company holds approximately $14,309,000 in mortgage loans and $17,363,000
in real estate holdings, including real estate acquired in satisfaction of
debt, which represent 4% and 5% of the total assets of the Company,
respectively. All mortgage loans held by the Company are first position
loans. The Company has $685,000 in mortgage loans net of a $10,000 reserve
allowance, which are in default or in the process of foreclosure representing
approximately 5% of the total portfolio. The Company has 3 loans for
approximately $104,000 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.
MORTGAGE LOANS AMOUNT % OF TOTAL
FHA/VA $ 798,968 6%
Commercial $ 3,421,181 24%
Residential $ 10,089,312 70%
REAL ESTATE AMOUNT % OF TOTAL
Home Office $ 2,807,286 16%
Commercial $ 2,451,462 14%
Residential development $ 6,780,031 39%
Foreclosed real estate $ 5,323,762 31%
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4. LONG-TERM DEBT
At September 30, 1995, the Company has $20,625,000 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 25,000
$ 20,625,000
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 September 30, 1995, there remained approximately $4,728,000
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. Through September 30, 1995, the Company spent an
additional $1,158,000 for the purchase of the policies and legal costs.
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); Ronald L.
Mekkes, Jr. v. Universal Guaranty Life Insurance Company, and James Melville,
(Circuit Court of Kent County, Michigan, 1995, 95-1073-NZ).
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. Ronald L. Mekkes,
Jr., a general agent, filed a suit on March 15, 1995. 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. On August 1, 1995, the Tappan suit was dismissed with
prejudice.
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. In June 1995, summary judgment
was granted to dismiss the case.
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. In June 1995,
the court conditionally certified a class of non-settling insureds.
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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.
6. . Plan of Liquidation and Dissolution of Affiliates
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"). An
affirmative vote of the majority of the outstanding shares of the Affiliates
was received from shareholders at a Special Meeting of Shareholders of the
Affiliates on August 15, 1995. Each affiliate was the indirect owner of FCC's
common stock. The only assets held by the Affiliates prior to dissolution,
was stock in its subsidiary. Each shareholder of the Affiliates now own
directly the same proportionate share of FCC's common stock.
The liquidation and dissolution of the Affiliates significantly streamlined
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. UTG owns approximately 72% of the common stock of FCC.
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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 September 30, 1995. The unpaid principal
of the subordinated indebtedness totalled $9,200,000 at December 31, 1994 and
is unchanged as of September 30, 1995.
FCC's principal source of liquidity consists of management fees and dividends
derived from its affiliates. Through September 30, 1995, FCC had not received
a dividend but had received net management fees of $8,195,000 compared to
$7,924,000 through September 30, 1994.
The payment of cash dividends to shareholders by FCC is not legally
restricted. At September 30, 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 September 1, 1995, the
interest rate on the senior debt had increased to 9 3/4% 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
September 30, 1995, respectively.
Management believes that it will be able to continue to service this debt in
the future.
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"). An
affirmative vote of the majority of the outstanding shares of the Affiliates
was received from shareholders at a Special Meeting of Shareholders of the
Affiliates on August 15, 1995. Each affiliate was the indirect owner of FCC's
common stock. The only assets held by the Affiliates prior to dissolution,
was stock in its subsidiary. Each shareholder of the Affiliates now own
directly the same proportionate share of FCC's common stock.
The liquidation and dissolution of the Affiliates significantly streamlined
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. UTG owns approximately 72% of the common stock of FCC.
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 provided by (used in) operating activities equalled ($5,157,000) during
the first nine months of 1995, compared to $1,802,000 in the same period one
year ago.
The net cash used in investing activities equalled $2,549,000 during the first
nine months of 1995, compared to $24,741,000 as of September 30, 1994. As of
September 30, 1995, the Company has $15,134,000 in cash and cash equivalents,
which represents 5% of total assets.
Other principal sources of liquidity available to the Company are invested
assets. Sources available are $425,000 of short-term investments, $2,988,000
of investments held for sale at market and $1,877,000 of equity securities.
Other sources are maturities of the fixed maturity portfolio. As of September
30, 1995, the Company had $9,226,000 of fixed maturities matured compared to
$20,000,000 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 $11,877,000 as of September 30, 1995,
and $13,282,000
14
<PAGE>
as of September 30, 1994. The Company believes that it maintains adequate
liquidity to pay anticipated benefits and claims to policyholders and
annuitants.
The Company had net cash provided by (used in) operating activities of
($5,157,000) and $1,802,000 as of September 30, 1995 and 1994, respectively.
The net cash provided by (used in) 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
$7,372,000 and $8,343,000 as September 30, 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 the
nine months 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 the first nine months of 1994.
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
Year-to-date 1995 compared to 1994:
(a) Revenues:
Revenues increased slightly during first nine months of 1995 compared to the
same period one year ago. The increase in net investment income contributed
to increase revenues.
Premium income, net of reinsurance, decreased 4% during the first nine months
of 1995 compared to the same period of 1994. The decrease in premium income
was expected by management. In late 1994, the Company discontinued marketing
the traditional and interest sensitive whole life products. The Company is
currently marketing three universal life insurance products. Universal life
insurance products contribute only cost of insurance charges to the premium
income line item.
Other considerations, net of reinsurance, consisting of administrative loads
charged on interest sensitive whole life and universal life products,
increased 10% for the first nine months of 1995 compared to the first nine
months of 1994. The Company is currently marketing three universal life
insurance products. In late 1994, the Company discontinued marketing the
traditional whole life and interest sensitive whole life insurance products.
Net investment income increased 11% during the first nine months of 1995
compared to the same period of 1994. The increase is attributable to the
acquisition of
15
<PAGE>
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 September 30, 1995 and September 30, 1994, are 7.17% and 7.19%,
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 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 $59,000 of investment losses during the first nine months
of 1995 compared to losses of $36,000 in the same period in 1994. In 1995,
the Company was able to recover full face value of three fixed maturities that
were written-off in prior periods. The realized investment gains in 1995 were
offset by realized investment losses that were attributable to securities in
the bond portfolio that were called by the issuer prior to maturity.
(b) Expenses:
Expenses increased 3% during the first nine months of 1995, compared to the
same period in 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 decreased 11% for first nine
months of 1995, compared to the same period in 1994. The Company's mortality
experience decreased $592,000 in the current period compared to the previous
year. Another factor that is contributing to decrease life and annuity
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.
There is one item that contributed to increase life benefits. During the
third quarter of 1994, UG became aware that certain new insurance business was
being solicited by certain agents and issued to individuals considered to be
not insurable by Company standards. These policies had a face amount of
$22,700,000
16
<PAGE>
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
September 30, 1995, there remained policies which represented $4,728,000 of
the original face amount of these policies which the Company has either
determined that the insurer has bad health or the owners have not yet been
contacted by the Company regarding a possible repurchase of the insurance
policy.
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. Through September 30, 1995, the Company paid an
additional $562,000 for the acquisition of these policies and $596,000 in
legal fees that is reported in the general expense line item.
Dividends to policyholders increased 22% for first nine months of 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
24% for first nine months of 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.
Operating expenses increased 23% for the period. There are several factors
that are contributing to the increase in operating expenses. Through
September 30, 1995, the Company paid $596,000 in legal fees for the
acquisition of certain policies and the defense of related legal issues.
Please refer to the notes to the consolidated financial statements and the
analysis of life benefits expense in the management's discussion and analysis
for a detailed explanation.
The other factor contributing to the increase in operating expenses is that
the portfolio of products currently being marketed do not defer as much
acquisition costs for future periods.
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
September 30, 1995, the Company controls four insurance companies.
Interest expense increased slightly 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 September 30, 1995, the interest rate on the senior debt had
increased to
17
<PAGE>
9 3/4% compared to 7% one year ago. The Company has reduced its senior debt
$2,900,000 within the last twelve months.
(c) Net (loss) income:
The Company recorded a net loss of $234,000 during the first nine months of
1995 compared to a net loss of $895,000 for the same period in 1994. The
improvement in results is attributable to the decrease in mortality and the
increase in net investment income.
Third quarter 1995 compared to third quarter 1994:
(a) Revenues:
Revenues increased 2% during the third quarter of 1995 compared to the third
quarter of 1994. Net investment income contributed to increase revenues,
while premium income net of reinsurance premiums declined.
Premium income, net of reinsurance, decreased 2% during the third quarter of
1995 compared to the third quarter of 1994. The decrease in premium income
was expected by management. In late 1994, the Company discontinued marketing
the traditional and interest sensitive products. The Company is currently
marketing three universal life insurance products. Universal life insurance
products contribute only cost of insurance charges to the premium income line
item.
Other considerations, net of reinsurance, consisting of administrative loads
charged on interest sensitive and universal life products, increased 15% for
the third quarter of 1995 compared to the third quarter of 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 3% during the third quarter of 1995 compared
to the third quarter of 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 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 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.
18
<PAGE>
The Company realized $64,000 of investment losses during the third quarter of
1995 compared to realized investment losses of $230,000 in the same period in
1994. The realized losses in both periods were attributable primarily to
securities in the bond portfolio that were called by the issuer prior to
maturity.
(b) Expenses:
Expenses decreased 17% during the third quarter of 1995, compared to third
quarter 1994. The decrease in expenses is due to the decrease in life
benefits.
Life benefits and reinsurance benefits and claims decreased 27% the for third
quarter of 1995, compared to third quarter 1994. The Company's mortality
experience decreased $895,000 in the current period compared to the previous
period. Another 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.
Dividends to policyholders increased 12% for third 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 decreased
slightly for third 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.
Operating expenses decreased 14% for the period. One factor that caused
operating expenses to increase 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
September 30, 1995, the Company controls four insurance companies.
19
<PAGE>
Interest expense decreased slightly 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 September 30, 1995, the interest rate on the senior debt had
increased to 9 3/4% compared to 7% one year ago. The Company has reduced its
senior debt $2,900,000 within the last twelve months.
(c) Net (loss) income:
The Company recorded net income of $1,186,000 during the third quarter of 1995
compared to a net loss of $2,091,000 for the same period in 1994. The
improvement in results is attributable to the decrease in life benefits and
the increase in net investment income.
FINANCIAL CONDITION
(a) Assets:
The Company's financial position at September 30, 1995, reflected an increase
in assets and liabilities compared to December 31, 1994.
As of September 30, 1995 and December 31, 1994, invested assets represented
approximately 72% of consolidated assets. As of September 30, 1995, fixed
maturities and investments held for sale represented 79% of total invested
assets.
Invested assets changed very little through third quarter 1995 compared to
December 31, 1994. The Company acquired $1,000,000 of American General
Capital Corporation's preferred stock. Mortgage loans declined 10% due to
refinancing activity. The Company does not actively solicit new mortgage
loans.
Other accounts and notes receivable decreased $286,000 at September 30, 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 $1,250,000
through the third 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 2% through third quarter of 1995 compared to December
31, 1994. Future policy benefits represented 83% of total liabilities at
September 30, 1995 and 81% at December 31, 1994. Future policy benefits will
increase
20
<PAGE>
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 10% through third 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 $1,945,000. 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 $904,000 through third 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 decreased 8% through third quarter 1995 compared
to December 31, 1994. Accumulated deficit increased 2% through third quarter
1995 compared to December 31, 1994, while unrealized depreciation of equity
securities decreased significantly. Following the dissolution of CIC, (See
Note 6) FCC received 372,506 shares of its own stock for the 2,730 shares of
CIC previously held. The FCC shares have been classified as treasury stock.
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.
21
<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. In June 1995, summary judgment
was granted to dismiss the case.
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. In June 1995,
the court conditionally certified a class of non-settling insureds.
22
<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 November 10, 1995 By /s/ Thomas F. Morrow
Thomas F. Morrow
Chief Operating Officer, Vice
Chairman and Treasurer
Date November 10, 1995 By /s/ James E. Melville
James E. Melville
Senior Executive Vice President
and Chief Financial Officer
23
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 7
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 9-MOS
<FISCAL-YEAR-END> DEC-31-1995 DEC-31-1994
<PERIOD-END> SEP-30-1995 SEP-30-1995
<DEBT-HELD-FOR-SALE> 2,988,146 3,337,672
<DEBT-CARRYING-VALUE> 186,298,717 183,926,694
<DEBT-MARKET-VALUE> 0 0
<EQUITIES> 1,877,477 911,012
<MORTGAGE> 14,309,461 15,822,056
<REAL-ESTATE> 17,362,541 17,332,948
<TOTAL-INVEST> 239,875,520 238,019,014
<CASH> 15,133,692 11,214,850
<RECOVER-REINSURE> 14,442,518 13,919,626
<DEFERRED-ACQUISITION> 40,636,388 41,885,887
<TOTAL-ASSETS> 333,765,992 331,967,266
<POLICY-LOSSES> 0 0
<UNEARNED-PREMIUMS> 0 0
<POLICY-OTHER> 241,321,111 233,266,922
<POLICY-HOLDER-FUNDS> 18,237,536 17,130,648
<NOTES-PAYABLE> 20,624,810 21,529,189
<COMMON> 23,967,545 24,340,051
0 0
0 0
<OTHER-SE> 15,849,971 18,966,186
<TOTAL-LIABILITY-AND-EQUITY> 333,765,992 331,967,266
7,072,052 23,755,429
<INVESTMENT-INCOME> 3,746,400 11,486,395
<INVESTMENT-GAINS> (64,002) (58,706)
<OTHER-INCOME> 800,736 2,355,182
<BENEFITS> 7,014,070 24,182,164
<UNDERWRITING-AMORTIZATION> 1,764,387 6,461,334
<UNDERWRITING-OTHER> 2,583,212 8,994,701
<INCOME-PRETAX> 193,517 (2,099,899)
<INCOME-TAX> (1,034,303) (1,939,899)
<INCOME-CONTINUING> 1,186,214 (234,001)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 1,186,214 (234,001)
<EPS-PRIMARY> .05 (.01)
<EPS-DILUTED> .05 (.01)
<RESERVE-OPEN> 0 0
<PROVISION-CURRENT> 0 0
<PROVISION-PRIOR> 0 0
<PAYMENTS-CURRENT> 0 0
<PAYMENTS-PRIOR> 0 0
<RESERVE-CLOSE> 0 0
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</TABLE>
