SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1995 Commission File. 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.)
5250 South Sixth Street Road, P.O. Box 5147, Springfield, Il. 62705
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (217) 786-4300
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange
Title of each class on which registered
None None
Securities registered pursuant to Section 12(g) of the Act:
Title of each class
Common Stock, par value $1 per share
Registrant 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, and has
been subject to such filing requirements for the past 90 days.
The aggregate market value of the Common Stock held by non-affiliates of the
Registrant as of March 1, 1996 was $818,549 based on the bid price for the
Common Stock in the over-the-counter market on such date.
At March 1, 1996, the Registrant had outstanding 23,967,545 shares of Common
Stock, par value $1 per share.
DOCUMENTS INCORPORATED BY REFERENCE
None
Page 1 of 76
<PAGE>
PART I
ITEM 1. BUSINESS
First Commonwealth Corporation (the "Registrant") was incorporated in 1967,
under the laws of the State of Virginia to serve as an insurance holding
company. At December 31, 1995, the parent, significant majority-owned
subsidiaries and affiliates of the Registrant were as depicted on the
following organizational chart:
ORGANIZATIONAL CHART
AS OF DECEMBER 31, 1995
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").
<PAGE>
(a) GENERAL
The Registrant and its subsidiaries (the "Company") operate principally in the
individual life insurance business. The primary business of the Company has
been the servicing of existing insurance business in force, the solicitation
of new insurance business, and the acquisition of other companies in similar
lines of business.
In September 1989, APPL acquired Farmers and Ranchers Life Insurance Company
("F&R"). This company was purchased primarily as a marketing opportunity. It
had very few policies in force and limited assets. However, it is loosely
affiliated with the Oklahoma Farmers Union which has over 300,000 members.
The Company planned for F&R to market to these members.
On December 11, 1989, FCC acquired UG and Alliance Life Insurance Company
("ALLI"). At the time of this acquisition the Company effectively doubled in
size to $230 million in assets. These companies also had marketing forces
that had successfully written new business for the last few years prior to the
acquisition.
(b) CHANGE IN CONTROL
On June 16, 1992, certain shareholders of CIC sold their CIC Shares to UTG in
exchange for cash and promissory notes of UTG (the "UTG Notes") in the
aggregate amount of $15,478,570.15. At the closing of the CIC Stock Purchase
Agreement on June 16, 1992, UTG became the owner of 6,771 shares
(approximately 77%) of CIC common stock and options to purchase 1,300 shares
of CIC common stock. UTG exercised the options and became the holder of 8,071
shares (80%) of the outstanding stock of CIC. CIC then issued 315 shares of
CIC common stock to UGIC and 2,730 shares of CIC common stock to FCC to
extinguish debt, which reduced the percentage of CIC common stock held by UTG
to 62%.
In a separate transaction, on June 16, 1992, UTG also purchased 729 shares
(7%) of the issued and outstanding shares of common stock of CIC from James E.
Melville for a purchase price of $1,946.28 per share. The total purchase
price for the shares was $1,418,840 evidenced by UTG's twenty year 8 1/2%
promissory note in that amount. At the closing of this sale, UTG became the
owner of approximately 67% of the outstanding shares of common stock of CIC.
CIC owned approximately 58% of the outstanding common stock of ITI, which, in
turn, owned 100% of the outstanding common stock of ITAC. ITAC owned
approximately 65% of the outstanding common stock of UGIC, which in turn owned
approximately 93% of the outstanding common stock of FCC prior to the closing.
At the closing, control of CIC changed from John K. Cantrell and Mildred G.
Cantrell to UTG. Because of its stock ownership of CIC, UTG may be deemed,
under the beneficial ownership rules of the Securities and Exchange
Commission, to be the beneficial owner of the stock owned by CIC, ITI, ITAC,
and UGIC. Therefore, at the date of the closing of the CIC Stock Purchase
Agreement, the control of FCC also changed to UTG.
Also on June 16, 1992, pursuant to the terms of an FCC-UTG Stock Purchase
Agreement, UTG contributed $6,000,000 of FCC Senior Debt for retirement and
all of the outstanding capital stock of United Trust Assurance Company
("UTAC") and USA to FCC in exchange for the FCC Notes, $3,300,000 in cash and
11,134,000 shares of FCC common stock (the "FCC Shares"). Upon the issuance
of the FCC Shares, in addition to the outstanding shares of FCC common stock
which may be deemed to be beneficially owned by UTG, UTG will also have a
direct ownership interest in the FCC Shares which represented approximately
45.74% of the issued and outstanding common stock of FCC.
<PAGE>
(c) RESTRUCTURING OF AFFILIATES
The Company has taken several steps to streamline and simplify the corporate
structure following the acquisitions.
On December 28, 1992, UG was the surviving company to a merger with Roosevelt
National Life Insurance Company ("RNLIC"), United Trust Assurance Company
("UTAC") and Cimarron Life Insurance Company ("CIM"). On June 30, 1993,
Alliance Life Insurance Company ("ALLI"), a subsidiary of UG, was merged into
UG.
On March 30, 1994, Farmers and Ranchers Life Insurance Company ("F&R") was
sold to an unrelated third party. F&R was a small life insurance company
which did not significantly contribute to the operations of the group. F&R
primarily represented a marketing opportunity. The Company determined it
would not be able to allocate the time and resources necessary to properly
develop the opportunity, due to continued focus and emphasis on certain other
agency forces of the Company.
The transactions described below, which transpired during 1994, were necessary
to position Universal Guaranty Investment Company ("UGIC"), Investors Trust,
Inc. ("ITI") and Commonwealth Industries Corporation ("CIC") for liquidation
and dissolution.
Pursuant to an Agreement of Merger dated July 7, 1994 between Investors Trust
Assurance Company, an Illinois life insurance company ("ITAC"), and ALIC, on
July 31, 1994, ITAC merged with and into ALIC and ALIC was the surviving
company. On the effective date of the merger, ALIC succeeded to all the
rights and property of ITAC and assumed all of the liabilities and obligations
and became subject to all of the debts of ITAC in the same manner as if ALIC
had itself incurred them. The merger was approved by the Illinois Director of
Insurance.
Prior to the merger of ITAC with and into ALIC, ITAC was a wholly owned
subsidiary of ITI. ITAC owned 1,549,549 (approximately 66%) of the issued and
outstanding common stock of UGIC. Prior to July 31, 1994, ITI was the
indirect beneficial owner of the shares of UGIC common stock directly owned by
ITAC. On July 31, immediately prior to the effectiveness of the merger of
ITAC with and into ALIC, ITI purchased 758,946 shares of the UGIC common stock
owned by ITAC. The total purchase price was $2,276,793. On July 31, 1994,
ITAC also transferred to ITI at no cost 790,603 shares of the common stock of
the Company. On such date, ITI became the direct beneficial owner of all
1,549,549 shares of the common stock of UGIC. In order to purchase the
758,946 shares of UGIC common stock, ITI received a loan from UTI and UII in
the aggregate principal amount of $2,164,293. ITI transferred 721,431 shares
of the common stock of UGIC that it purchased from ITAC to UTI and UII in
payment of the loan. These shares were then contributed by UTI and UII to
their subsidiary, UTG.
The balance sheet of Commonwealth Industries Corporation for the period ended
July 31, 1994, included liabilities in the aggregate amount of $402,861
comprised of a future liability under a consulting agreement, escheat funds
and an account payable. On July 31, 1994, these liabilities were assumed by
UTG in exchange for 1,558,318 shares of the common stock of ITI.
The balance sheet of UGIC for the period ended July 31, 1994, included
liabilities in the aggregate amount of $461,102. On July 31, 1994, these
liabilities were assumed by UTG in exchange for 106,392 shares of the common
stock of FCC and 315 shares of the common stock of CIC. The FCC shares
transferred reduced UGIC's percentage ownership of FCC from 50.396% to
49.959%.
Prior to these transactions, UGIC, ITI and CIC each had liabilities in excess
of assets excluding the stock holdings of their respective subsidiary. The
1994 transactions enabled the companies to extinguish their liabilities.
4
<PAGE>
On August 15, 1995, the shareholders of CIC, ITI, and UGIC voted to
voluntarily liquidate each of the companies and distribute the assets to the
shareholders (consisting solely of common stock of their respective
subsidiary). As a result of the liquidations, the shareholders of each
company became shareholders of FCC, following the liquidations, UTG holds 72%
of the common stock of FCC.
PRODUCTS
The Company's portfolio consists of three universal life insurance products.
The primary universal life insurance product is referred to as the "Century
2000". This product was introduced to the marketing force in 1993 and has
become the cornerstone of current marketing. This product has a minimum face
amount of $25,000. The product currently credits 6% interest with a
guaranteed rate of 4.5% in the first 20 years and 3% in years 21 and greater.
The policy values are subject to a $4.50 monthly policy fee, an administrative
load and a premium load of 6.5% in all years. The administrative load and
surrender charge are based on the issue age, sex and rating class of the
policy. A surrender charge is effective for the first 14 policy years. In
general, the surrender charge is very high in the first couple of years and
then declines to zero at the end of 14 years. Policy loans are available at
7% interest in advance. The policy's accumulated fund will be credited the
guaranteed interest rate in relation to the amount of the policy loan.
The second product, referred to as the "Eagle USL 400" has a minimum face
amount of $50,000 with a 3% load on all premiums and a policy fee of $4.75 per
month. This product is sold at issue ages of 0-18. The Eagle USL 400
currently credits 6% interest and 4% guaranteed interest rate. Partial
withdrawals are allowed after the first policy duration. Partial withdrawals
are allowed once a year subject to a $25 fee. Partial withdrawals are subject
to a minimum of $500 cash surrender value remaining. Policy loans are charged
8% interest in arrears with the loaned value receiving the 4% guaranteed rate.
Surrender charges are based on a percentage of target premium starting at 150%
for years 1-5 and decreasing 10% each year thereafter until year 15 when it
becomes zero.
The third universal life product was designed in 1990 and introduced for sale
in the fourth quarter of that year. This product, referred to as the "UL90A",
has a minimum face amount of $25,000. The administrative load is based on the
issue age, sex and rating class of the policy. Policy fees vary from $1 per
month in the first year to $4 per month in the second and third years and $3
per month each year thereafter. The UL90A currently credits 6% interest and
4.5% guaranteed interest rate. Partial withdrawals are allowed after the
first duration. Partial withdrawals are allowed once a year subject a $25
fee. A partial withdrawal is subject to a minimum of $500 cash surrender
value remaining. Policy loans are available at 7% interest in advance. The
policy's accumulated fund will be credited the guaranteed interest rate in
relation to the amount of the policy loan. Surrender charges are based on a
percentage of target premium starting at 120% for years 1-5 then grading
downward to zero in year 15. This policy contains a guaranteed interest
credit bonus for the long term policyholder. From years 10 through 20,
additional interest bonuses are earned with a total in the twentieth year of
1.375%. The bonus is calculated from the policy issue date and is
contractually guaranteed.
The Company markets other products, none of which is significant to the
operations of the Company. In late 1994, the Company discontinued marketing
interest sensitive whole life insurance and traditional participating whole
life insurance policies. The Company has a variety of policies in force
different from those which are currently being marketed. Approximately 34% of
the insurance in force is participating business. The Company's average
persistency rate for all policies in force for 1995 and 1994 has been
approximately 87.5% and 86.3%, respectively. The Company does not anticipate
any material fluctuations in these
5
<PAGE>
rates in the future that may result from competition.
The Company's experience for earned interest, persistency and mortality vary
from the assumptions applied to pricing and determining premiums.
Accordingly, differences between the Company's experience and those
assumptions applied may impact the profitability of the Company. The minimum
interest spread between earned and credited rates is 1% on the "Century 2000"
universal life insurance product, the Company's primary product. The Company
monitors investment yields, and when necessary takes action to reduce credited
interest rates on its insurance products to preserve targeted interest
spreads. Credited rates are reviewed and established by the Board of
Directors.
The premium rates are competitive with other insurers doing business in the
states in which the Company is marketing its products.
MARKETING
The Company markets its products through separate and distinct agency forces.
The Company has approximately 100 independent agents who actively write new
business. No individual sales agent accounted for over 10% of the Company's
premium volume in 1995. The Company's sales agents do not have the power to
bind the Company.
The change in marketing strategy from traditional life insurance products to
universal life insurance products had a significant impact on new business
production. As a result of the change in marketing strategy the agency force
went through a restructure and retraining process. Marketing is based on a
referral network of community leaders and shareholders of UII and UTI.
Recruiting of new agents is also based on the same referral network.
New sales are marketed by UG and USA through their agency forces using
contemporary sales approaches with personal computer illustrations. Current
marketing efforts are primarily focused on the Midwest region.
Recruiting agents is based on obtaining people with little or no experience in
the life insurance business. These recruits go through an extensive internal
training program.
USA is licensed in Illinois, Indiana and Ohio. During 1995, Ohio accounted
for 99% of USA's direct premiums collected.
ALIC is licensed in Alabama, Arizona, Illinois, Indiana, Louisiana and
Missouri. During 1995, Illinois and Indiana accounted for 47% and 33%,
respectively of ALIC's direct premiums collected.
APPL is licensed in Alabama, Arizona, Colorado, Georgia, Illinois, Indiana,
Kansas, Kentucky, Louisiana, Missouri, Montana, Nebraska, Ohio, Oklahoma,
Tennessee, Utah, Virginia, West Virginia and Wyoming. During 1995, West
Virginia accounted for 95% of APPL's direct premiums collected.
UG is licensed in Alabama, Arizona, Arkansas, Colorado, Delaware, Florida,
Georgia, Idaho, Illinois, Indiana, Iowa, Kansas, Kentucky, Louisiana,
Massachusetts, Michigan, Minnesota, Mississippi, Missouri, Montana, Nebraska,
Nevada, New Mexico, North Carolina, North Dakota, Ohio, Oklahoma, Oregon,
Pennsylvania, Rhode Island, South Carolina, South Dakota, Tennessee, Texas,
Utah, Virginia, Washington, West Virginia and Wisconsin. During 1995,
Illinois and Ohio accounted for 32% and 16%, respectively, of UG's direct
premiums collected. No other states account for more than 6% of UG's direct
premiums collected.
6
<PAGE>
UNDERWRITING
Policies are issued by the Company based upon underwriting practices
established for each market in which the Company operates. Most policies are
individually underwritten. Applications for insurance are reviewed to
determine additional information required to make an underwriting decision,
which depends on the amount of insurance applied for and the applicant's age
and medical history. Additional information may include medical examinations,
statements from doctors who have treated the applicant in the past and, where
indicated, special medical tests. After reviewing the information collected,
the Company either issues the policy as applied for or rejects the
application.
RESERVES AND REINSURANCE
The Company establishes reserves for future policy benefits, unearned
premiums, reported claims and claims incurred but not reported. Such reserves
are based on regulatory accounting requirements and generally accepted
accounting principles.
The Company reinsures its insurance products with other insurance companies
under agreements of reinsurance. Reinsurance agreements are intended to limit
the Company's maximum loss and provide other financial benefits. The ceding
of reinsurance does not discharge the Company's primary liability to the
insured, however it is the practice of insurers to reduce their financial
statement liabilities to the extent that they have been reinsured with other
insurance companies.
In selecting a reinsurance company, the Company examines many factors
including:
1) Whether the reinsurer is licensed in the states in which reinsurance
coverage is being sought;
2) the solvency and stability of the company. One source utilized is the
rating given the reinsurer by the A.M. Best Company, an insurance industry
rating company. Another source is the statutory annual statement of the
reinsurer;
3) the history and reputation of the Company;
4) competitive pricing of reinsurance coverage. The Company generally seeks
quotes from several reinsurers when considering a new treaty.
On existing reinsurance treaties, the Company monitors reinsurers through
sources such as, the ratings provided by the A.M. Best Company, reinsurer
financial statements and industry publications and literature.
In December 1991, UG entered into a 50% coinsurance arrangement with Republic
Vanguard Life Insurance Company to enable the Company to maintain increased
production levels while containing first year statutory costs. The ceding of
new business under this treaty was terminated December 31, 1993. Republic
Vanguard holds an "A" (Excellent) rating from A. M. Best, an industry rating
company. The coinsurance arrangement, which was effective January 1, 1991,
allowed UG to cede to Republic Vanguard a 50% quota share of all new universal
life policies issued after the effective date through date of termination. UG
receives a commission allowance of 11% of excess premium and renewal premium.
Monies pertaining to the coinsurance arrangement are settled monthly. The
agreement contains a provision whereby risks in excess of UG's retention
($125,000 maximum) are transferred to the reinsurer. Risks are transferred
under an automatic ceding arrangement up to $1,000,000 and a facultative
arrangement for amounts in excess of $1,000,000.
7
<PAGE>
In December 1993, UG entered into reinsurance agreements with Business Men's
Assurance Company, ("BMA") and Life Reassurance Corporation, ("LIFE RE"). BMA
and LIFE RE each hold an "A+" (Superior) rating from A.M. Best, an industry
rating company. The reinsurance arrangement was effective December 1, 1993,
and covered all new business of the Company. The agreements are a yearly
renewable term ("YRT") treaty where the Company cedes amounts above its
retention limit of $100,000 with a minimum cession of $25,000.
During 1993, USA entered into a coinsurance agreement with LIFE RE. The
coinsurance arrangement allows USA to cede to LIFE RE a 50% quota share of the
traditional participating policies issued by USA after the effective date of
July 1, 1992. USA entered into the arrangement to enable the Company to
maintain increased production levels while containing first year statutory
costs. USA receives commission allowances of 150% of first year premium, 27%
of second year premium, 32% of third year premium and 37% of fourth year and
beyond. Monies pertaining to the coinsurance arrangement are settled monthly.
The Company does not have any short-duration reinsurance contracts. The
effect of the Company's long duration reinsurance contracts on premiums earned
in 1995, 1994 and 1993 was as follows:
Shown in thousands
1995 1994 1993
Premiums Premiums Premiums
Earned Earned Earned
Assumed 0 0 0
Ceded (5,203) (5,627) (8,630)
Net premiums $ 29,998 $ 32,284 $ 30,727
As a result of amounts ceded to under reinsurance treaties, total life
insurance in force was reduced by approximately $1.088 billion and $1.217
billion at December 31, 1995 and 1994, respectively. Ceded reinsurance
premiums as a percentage of gross premium revenues were 15%, 15% and 22% in
1995, 1994 and 1993, respectively.
INVESTMENTS
Effective December 1992, the Investment Committee of the Board of Directors
retained Alpha Advisors, Inc., of Chicago, Illinois, a registered investment
advisor, to assist the Company in managing its investment portfolio. The
Company may modify its present investment strategy at any time, provided its
strategy continues to be in compliance with the limitations of state insurance
department regulations.
Investment income represents a significant portion of the Company's total
income. Investments are subject to applicable state insurance laws and
regulations which limit the concentration of investments in any one category
or class and further limit the investment in any one issuer. Generally, these
limitations are imposed as a percentage of statutory assets or percentage of
statutory capital and surplus of each company.
8
<PAGE>
The following table reflects net investment income by type of investment.
December 31,
1995 1994 1993
Fixed maturities and fixed
maturities held for sale $ 13,292,552 $ 12,174,226 $ 10,759,045
Equity securities 52,445 3,999 228,762
Mortgage loans 1,257,189 1,408,558 1,708,842
Real estate 975,080 990,857 968,620
Policy loans 1,041,900 978,555 954,609
Short term investments 498,496 412,135 1,068,313
Collateral loans 0 0 5,121
Other 143,527 135,051 175,873
Total consolidated
investment income 17,261,189 16,103,381 15,869,185
Investment expense (1,761,438) (1,914,920) (1,781,476)
Consolidated net
investment income $ 15,499,751 $ 14,188,461 $ 14,087,709
At December 31, 1995, the Company had a total of $7,703,000 of investments
which did not produce income during 1995. The investments were comprised of
$6,894,000 in real estate including its home office property and $809,000 in
equity securities.
The following table summarizes the Company's fixed maturities distribution at
December 31, 1995 and 1994 by ratings category as issued by Standard and
Poor's, a leading ratings
analyst.
Fixed Maturities
Rating % of Portfolio
1995 1994
Investment grade
AAA 27% 23%
AA 14% 9%
A 48% 58%
BBB 11% 10%
Below investment grade 0% 0%
100% 100%
The following table summarizes the Company's fixed maturity holdings and fixed
maturities held for sale by major classifications.
Carrying Value
1995 1994
U.S. government and
government agencies $ 29,209,267 $ 22,736,183
States, municipalities and
political subdivisions 7,597,203 8,021,951
Collateralized mortgage obligations 15,428,596 19,114,044
Public utilities 59,219,088 57,587,697
Corporate 82,330,372 79,804,491
$ 193,784,526 $187,264,366
9
<PAGE>
The following table shows the composition and average maturity of the
Company's investment portfolio at December 31, 1995.
Carrying Average Average
Investments Value Maturity Yield
Fixed maturities and fixed
maturities held for sale. . . . . $193,784,526 5 years 6.98%
Equity securities. . . . . . . . . 1,946,481 not applicable 3.67%
Mortgage loans . . . . . . . . . . 13,891,762 11 years 8.46%
Investment real estate . . . . . . 17,015,988 not applicable 5.63%
Policy loans . . . . . . . . . . . 16,941,359 not applicable 6.26%
Short term investments . . . . . . 425,000 190 days 5.01%
Total Investments . . . . . . . . $244,005,116 7.10%
At December 31, 1995, fixed maturities and fixed maturities held for sale have
a market value of $202,179,000. Fixed maturities are carried at amortized
cost. It is management's intent to hold these securities until maturity.
Fixed maturities held for sale are carried at market.
The Company holds approximately $425,000 in short term investments. Other
investments include fixed maturities and mortgage loans of $10,753,000 and
$523,000 respectively, maturing in one year and $89,405,000 and $2,420,000,
respectively, maturing in two to five years, which in the opinion of
management is sufficient to meet the Company's cash requirements.
The Company holds approximately $13,892,000 in mortgage loans which represents
4% of the total assets. All mortgage loans are first position loans. Before
a new loan is issued, the applicant is subject to certain criteria set forth
by Company management to ensure quality control. These criteria include, but
are not limited to, personal financial information such as outstanding debt,
sources of income, and personal equity. A credit report is also obtained.
Loans issued are limited to no more than 80% of the appraised value of the
property, and the loan must have first position against the collateral.
The Company has $618,000 of mortgage loans, net of a $10,000 reserve
allowance, which are in default or in the process of foreclosure. These loans
represent approximately 4% of the total portfolio. The Company has three
loans that total approximately $102,000 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 are
established based on management's analysis of the loan balances compared to
the expected realizable value should foreclosure take place. Loans are placed
on a non-accrual status based on a quarterly analysis of the likelihood of
repayment. All delinquent and troubled loans held by the Company were loans
held in portfolios by acquired companies at the time of acquisition.
Management believes the internal controls surrounding, the mortgage loan
selection process have provided a quality portfolio with minimal risk of
foreclosure and/or negative financial impact.
The Company has in place a monitoring system to provide management with
information regarding potential troubled loans. Management is provided with a
monthly listing of loans that are 30 days or more past due along with a brief
description of what steps are being taken to resolve the delinquency.
Quarterly, coinciding with external financial reporting, the Company
determines how each delinquent loan should be classified. All loans 90 days
or more
10
<PAGE>
past due are classified as delinquent. Each delinquent loan is
reviewed to determine the classification and status the loan should be given.
Interest accruals are analyzed based on the likelihood of repayment. In no
event will interest continue to accrue when accrued interest along with the
outstanding principal exceeds the net realizable value of the property. The
Company does not utilize a specified number of days delinquent to cause an
automatic non-accrual status.
The mortgage loan reserve is established and adjusted based on management's
quarterly analysis of the portfolio and any deterioration in value of the
underlying property which would reduce the net realizable value of the
property below its current carrying value.
In addition, the Company also monitors that the insurance on the property is
being maintained. The Company requires proof of insurance on each loan and
further requires to be shown as a lienholder on the policy so that any change
in coverage status is reported to the Company. Proof of payment of real
estate taxes is another monitoring technique utilized by the Company.
Management believes a change in insurance status or non-payment of real estate
taxes are indicators that a loan is potentially troubled. Correspondence with
the mortgagee is performed to determine the reasons for either of these events
occurring.
The following table shows a distribution of mortgage loans by type.
Mortgage Loans Amount % of Total
FHA/VA $ 785,973 6%
Commercial $ 3,329,884 24%
Residential $ 9,775,905 70%
The following table shows the geographic distribution of the mortgage loan
portfolio and real estate held.
Mortgage Real
Loans Estate
Colorado 2% 0%
Illinois 20% 54%
Kansas 12% 0%
Louisiana 13% 10%
Mississippi 0% 21%
Missouri 2% 1%
North Carolina 5% 6%
Oklahoma 6% 1%
Virginia 4% 3%
West Virginia 32% 3%
Other 4% 1%
Total 100% 100%
11
<PAGE>
The following table summarizes delinquent mortgage loan holdings.
Delinquent
31 Days or More 1995 1994 1993
Non-accrual status $ 0 $ 0 $ 0
Other 628,000 911,000 1,011,000
Reserve on delinquent loans (10,000) (26,000) (300,000)
Total Delinquent $ 618,000 $ 885,000 $ 711,000
Interest income foregone
(Delinquent loans) $ 16,000 $ 4,000 $ 33,700
In Process of
Restructuring $ 0 $ 0 $ 0
Restructuring on other
than market terms 0 0 0
Other potential problem loans 0 0 0
Total Problem Loans $ 0 $ 0 $ 0
Interest income foregone
(Restructured loans) $ 0 $ 0 $ 0
See Item 2, Properties, for description of real estate holdings.
COMPETITION
The insurance business is highly competitive and there are a number of other
companies, both stock and mutual, doing business in areas where the Company
operates. Many of these competing insurers are larger, have more diversified
lines of insurance coverage, have substantially greater financial resources
and have a greater number of agents. Other significant competitive factors
include policy holder benefits, service to policyholders, and premium rates.
The products offered (see Products) are similar to those offered by other
major companies. The product features are regulated by the states and are
subject to extensive competition among major insurance organizations. The
Company believes a strong service commitment to policy holders, efficiency and
flexibility of operations, timely service to the agency force and the
expertise of its key executives help minimize the competitive pressures of the
insurance industry.
GOVERNMENT REGULATION
In common with all domestic insurance companies, the Company is subject to
regulation and supervision in the jurisdictions in which it does business
under statutes which typically delegate regulatory, supervisory and
administrative powers to state insurance commissions. USA, UG, APPL and ALIC
are domiciled in the states of Ohio, Ohio, West Virginia and Illinois,
respectively. The method of regulation varies, but generally, regulation
relates to the
12
<PAGE>
licensing of insurers and their agents, nature of and limitations on
investments, approval of policy forms, reserve requirements, standards of
solvency, deposits of securities for the benefit of policyholders, periodic
examination of insurers, and trade practices.
Most states also have insurance holding company statutes which require
registration and periodic reporting by insurance companies controlled by other
corporations licensed to transact business within their respective
jurisdictions. The insurance subsidiaries are subject to such legislation and
are registered as controlled insurers in those jurisdictions in which such
registration is required. Statutes vary from state to state but typically
require periodic disclosure concerning the corporation that controls the
registered insurers and all subsidiaries of such corporation. In addition,
prior notice to, or approval by, the state insurance commission of material
intercorporate transfers of assets, reinsurance agreements, management
agreements (see Note 9 to Notes to Financial Statements), and payment of
dividends (see Note 2 to Notes to Financial Statements) in excess of specified
amounts by the insurance subsidiary within the holding company system are
required.
The National Association of Insurance Commissioners (NAIC) is an association
whose membership consists of the insurance commissioners or their designees of
the various states. The NAIC has no direct regulatory authority over
insurance companies. The primary purpose of the NAIC is to provide a more
consistent method of regulation and reporting from state to state. This is
accomplished through the issuance of model regulations, which can be adopted
by the individual state as presented, modified to meet the state's own needs
or requirements, or dismissed entirely.
Each year the NAIC prepares financial ratio results (commonly referred to as
IRIS ratios) for each company. These ratios compare various financial
information pertaining to the statutory balance sheet and income statement.
The results are then compared to pre-established normal ranges determined by
the NAIC. Results outside the range typically require explanation to the
domiciliary insurance department.
At year end 1995, UG had two ratios outside the norm. The first ratio
compared investment in affiliates to total capital and surplus. At December
31, 1995, UG had an investment in affiliate (USA) slightly greater than
capital and surplus. It is believed that this ratio will be outside the
normal range in future periods, but is not considered by management to be an
issue as both companies are under common control.
The second ratio related to the decrease in premium. The ratio fell outside
the norm due to the significant reduction in first year business compared to
the prior year. Management does not believe that this ratio will be outside
the normal range in future periods.
The NAIC has adopted Risk Based Capital ("RBC") rules, which became effective
December 31, 1993, to evaluate the adequacy of statutory capital and surplus
in relation to a company's investment and insurance risks. The RBC formula
reflects the level of risk of invested assets and the types of insurance
products. The formula classifies company risks into four categories:
1) Asset risk - the risk of loss of principal due to default through
creditor bankruptcy or decline in market value for assets reported
at market.
2) Pricing inadequacy - the risk of adverse mortality, morbidity, and
expense experience in relation to pricing assumptions.
3) Asset and liability mismatch - the risk of having to reinvest
funds when market yields fall below levels guaranteed to contract
holders, and the risk of having to sell assets when market yields
are above the levels at which the assets were purchased.
13
<PAGE>
4) General risk - the risk of fraud, mismanagement, and other
business risks.
The RBC formula will be used by the states as an early warning tool to
identify weakly capitalized companies for the purpose of initiating regulatory
action. Generally, the RBC requirements provide for four different levels of
regulatory attention depending upon the ratio of a company's total adjusted
capital (defined as the total of its statutory capital, surplus and asset
valuation reserve) to its RBC. The "Company Action Level" is triggered if a
company's total adjusted capital is less than 100% but greater than or equal
to 75% of its Company Action Level RBC. At The Company Action Level, the
company must submit a comprehensive plan to the regulatory authority which
discusses proposed corrective actions to improve its capital position. The
"Regulatory Action Level" is triggered if a company's total adjusted capital
is less than 75% but greater than or equal to 50% of its Company Action Level
RBC. At the Regulatory Action Level, the regulatory authority will perform a
special examination if the company's total adjusted capital is less than 50%
but greater than or equal to 35% of its Company Action Level RBC, and the
regulatory authority may take any action it deems necessary, including placing
the company under regulatory control. The "Mandatory Control Level" is
triggered if a company's total adjusted capital is less than 35% of its
Company Action Level RBC, and the regulatory authority mandates that the
company be placed under its control. At December 31, 1995, each of the
Company's insurance subsidiaries has a Ratio in excess of 250% of the
authorized control level; accordingly the subsidiaries meet the RBC
requirements.
The NAIC has proposed a new Model Investment Law that may affect the statutory
carrying values of certain investments; however, the final outcome of that
proposal is not certain, nor is it possible to predict what impact the
proposal will have or whether the proposal will be adopted in the foreseeable
future.
The current statutory accounting treatment of DAC taxes results in an
understatement of companies' surplus. These taxes result from a law that
approximates acquisition expenses and then spreads the corresponding
deductions over a period of years. The result is a DAC tax which is collected
immediately and subsequently returned through deductions in later years.
EMPLOYEES
There are approximately 110 persons who are employed by the Company and its
affiliates.
ITEM 2. PROPERTIES
The following table shows the distribution of real estate by type.
Real Estate Amount % of Total
Home Office $ 2,759,115 16%
Commercial $ 2,680,318 16%
Residential development $ 6,244,142 37%
Foreclosed real estate $ 5,332,413 31%
Real estate holdings, net of accumulated depreciation of $3,254,000 and
$3,007,000 at December 31, 1995 and 1994, respectively, represent
approximately 5% of the total assets. The Company owns an office complex in
Springfield, Illinois, which houses the primary insurance operations. The
office buildings contain 57,000 square feet of office and warehouse space.
During 1991, the Company completed construction on a new 20,000 square foot
office building adjacent to its existing buildings to house part of the
Company's operations.
14
<PAGE.
The building cost $1,764,000. The properties are carried at approximately
$2,543,000. In addition, an insurance subsidiary owns a home office building
in Huntington, West Virginia. The building has 15,000 square feet and is
carried at $216,000. The facilities occupied by the Company are adequate
relative to the Company's present operations.
Commercial property consists primarily of former home office buildings of
acquired companies no longer used in the operations of the Company. These
properties are leased to various unaffiliated companies and organizations.
Residential development property is primarily located in Springfield,
Illinois, and entails several developments, each targeted for a different
segment of the population. These targets include a development primarily for
the first time home buyer, an upscale development for existing homeowners
looking for a larger home, and duplex condominiums for those who desire
maintenance free exteriors and surroundings. The Company's primary focus is
on the development and sale of lots, with an occasional home construction to
help stimulate interest.
Springfield is the State Capital of Illinois. The City's economy is service
oriented with the main employers being the State of Illinois, two major area
hospitals and two large insurance companies. This provides for a very stable
economy not as dramatically affected by economic conditions in other parts of
the United States.
Foreclosed property is carried at the unpaid loan principal balance plus
accrued interest on the loan and other costs associated with the foreclosure
process. The carrying value of foreclosed property does not exceed
management's estimate of net realizable value. Management's estimate of net
realizable value is based on significant internal real estate experience,
local market experience, independent appraisals and evaluation of existing
comparable property sales.
ITEM 3. LEGAL PROCEEDINGS
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 and represent 1/2 of 1% of the insurance in force.
Management's analysis 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 repurchase as many of the policies
as possible. As of December 31, 1995, there remained approximately $5,738,000
of the original face amount which have not been settled. The Company will
continue its efforts to repurchase as many of the policies as possible and
regularly apprise the Ohio Department of Insurance regarding the status of
this situation. Through December 31, 1995, the Company spent a total of
$2,886,000 for the repurchase of these policies and for the legal defense of
related litigation.
The Company is currently involved in the following litigation: Freeman v.
Universal Guaranty Life Insurance Company (U.S.D.C.,N.D.Ga, 1994, 1-94-CV-
2593-RCF); 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. In February 1996, the Ronald L.
Mekkes, Jr. suit was dismissed with prejudice. Kathy Armstrong (3-94-1085),
another general agent, filed her suit on November
15
<PAGE>
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 alleges that UG breached a
contract by failing to pay his commissions for policies issued. Mr. Freeman
claims unpaid commissions of $104,000. 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 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. The Freeman suit is scheduled for trial April 8,
1996.
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
Company 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, punitive damages of $1,000,000, 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.
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.
ITEM 4. SUBMISSION OF MATTERS OF A VOTE OF SECURITY HOLDERS
None
16
<PAGE>
PART II
ITEM 5. MARKET FOR COMPANY'S COMMON STOCK AND RELATED SECURITY HOLDERS
MATTERS
FCC STOCK INFORMATION
The Company's common stock is traded in the over-the-counter market. The
following table shows the high and low bid quotations for each quarterly
period during the past two years as reported by Dean Witter Reynolds, Inc., a
market maker in such stock. Such quotations represent inter-dealer quotations
and do not include retail markup or markdown or commission nor do they
represent actual sales. Trading in this stock is very limited.
PERIOD LOW HIGH
1995
First quarter 1/16 1/8
Second quarter 1/8 1/8
Third quarter 1/8 1/8
Fourth quarter 1/16 1/8
PERIOD LOW HIGH
1994
First quarter 1/16 3/16
Second quarter 1/16 3/16
Third quarter 1/16 1/8
Fourth quarter 1/16 1/8
The Company did not pay any dividends during 1995 or 1994. Limitations on
shareholders dividends are described in Note 2 of the Notes to Financial
Statements.
Number of Common Shareholders as of March 6, 1996
16,632
17
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
FINANCIAL HIGHLIGHTS
(000's omitted, except per share data)
1995 1994 1993 1992 1991
Premium income net
of reinsurance $ 29,998 $ 32,284 $ 30,727 $ 21,614 $ 18,628
Net investment income $ 15,500 $ 14,188 $ 14,088 $14,580 $ 14,313
Net income (loss) $ (1,452) $ (1,775) $ (3,343) $(4,020) $ (448)
Earnings (loss) per share on:
Net income (loss) $ (0.06) $ (0.07) $ (0.14) $ (0.21) $ (0.03)
Total assets $334,220 $331,410 $326,390 $319,628 $232,978
Total long term debt $ 20,623 $ 21,529 $ 23,535 $ 26,240 $ 23,046
Dividends paid per share NONE NONE NONE NONE NONE
18
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
LIQUIDITY AND CAPITAL RESOURCES
The Company and its consolidated subsidiaries have three principal needs for
cash - the insurance company's contractual obligations to policyholders, the
payment of operating expenses and servicing of its long-term debt. Cash and
cash equivalents as a percentage of total assets were 4% and 3% as of December
31, 1995, and 1994, respectively. Fixed maturities as a percentage of total
invested assets were 78% and 77% as of December 31, 1995 and 1994,
respectively. Fixed maturities increased 4% in 1995 compared to 1994.
Investing cash and cash equivalents in fixed maturities allowed the Company to
increase investment yield on these monies by extending time to maturity while
maintaining cash balances at an adequate level to meet the Company's short
term obligations.
The Company holds approximately $425,000 in short term investments with other
investments maturing at varying times including bonds and mortgage loans of
$10,753,000 and $523,000, respectively, maturing in one year and $89,405,000
and $2,420,000, respectively, maturing in two to five years, which in the
opinion of management is sufficient to meet the Company's cash requirements.
Consolidated operating activities of the Company produced negative cash flows
of ($5,957,000), ($4,593,000) and ($6,517,000) in 1995, 1994 and 1993,
respectively. The net cash provided by operating activities plus interest
credited to account balances and net policyholder contract deposits after the
payment of policyholder withdrawals, equalled $9,701,000 in 1995, $9,555,000
in 1994, and $10,810,000 in 1993. Management believes this measurement of
cash flows more accurately indicates the performance of the Company's
insurance operations, since reporting regulations require cash inflows and
outflows from universal life insurance products to be shown as financing
activities.
Cash used in investing activities was ($8,030,000), ($26,847,000) and
($23,913,000), for 1995, 1994 and 1993, respectively. The most significant
aspect of investing activities is the fixed maturity transactions. Fixed
maturities account for 76%, 78% and 88% of the total cost of investments
acquired in 1995, 1994 and 1993, respectively. The Company has not directed
its investable funds to so-called "junk bonds" or derivative investments. The
cash used by investing activities in the last three years was provided by
investing excess cash and cash equivalents and financing activities.
Net cash provided by financing activities was $14,752,000, $12,142,000 and
$14,621,000 for 1995, 1994 and 1993, respectively. Policyholder contract
deposits increased 8% in 1995 compared to 1994, and decreased 4% in 1994 when
compared to 1993. The increase between 1995 and 1994 is due to the change in
marketing focus of the Company. All of the Company's agency forces is
marketing universal life insurance products. The change between 1994 and 1993
is a normal fluctuation in marketing of the Company's universal life products.
Policyholder contract withdrawals has increased 7% in 1995 compared to 1994,
and increased 10% in 1994 compared to 1993. The increase in 1995 and 1994 is
not attributable to any one significant event. Factors that may be causing
the increase are the fluctuation of interest rates, competition and other
economic factors. The Company's current marketing strategy and portfolio is
directly structured to conserve the existing customer base and at the same
time increase the customer base through new policy production.
19
<PAGE>
Interest credited to account balances increased 12% in 1995 compared to 1994,
and decreased 14% when comparing 1994 to 1993. The increase in 1995 is due to
the increase in policyholder contract deposits. The decrease in 1994 is due
to a reduction in credited interest rates on the Company's insurance products
in January 1994. It takes approximately one year to fully realize a change in
credited rates, as such a change becomes effective on each policy's next
anniversary. Insurance products that the Company is issuing are crediting 6%
interest. The Company does not have any immediate plans to change product
interest rates.
The payment of cash dividends to shareholders is not legally restricted. At
December 31, 1995, substantially all of the consolidated shareholders equity
represents net assets of its subsidiaries. FCC'S primary needs for cash are
for payments related to its servicing of its long-term debt. FCC is able to
meet these cash needs through monies received from its life insurance
subsidiaries from management and cost sharing arrangements and through
dividends. Insurance company dividend payments are regulated by the state
insurance department where the company is domiciled. 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,
1995, UG had a statutory gain from operations of $3,197,000. At December 31,
1995, UG's statutory capital and surplus amounted to $7,274,000.
Extraordinary dividends (amounts in excess of ordinary dividend limitations)
require prior approval of the insurance commissioner and are not restricted to
a specific calculation.
The Company's Senior Debt bears interest equal to 1% over the variable per
annum rate most recently announced by the First Bank of Missouri as its "Base
Rate". As of March 1, 1996, the "Base Rate" was 8.25%. The principal balance
of the Company's Senior Debt is payable in installments on June 1st of each
year. On December 2, 1994, the Company 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. On January 31, 1996, the Company prepaid $1,500,000 of the
$3,900,000 scheduled principal payment due June 1, 1996.
Management believes the overall sources of liquidity available will be
sufficient to satisfy its financial obligations.
RESULTS OF OPERATIONS
1995 COMPARED TO 1994
(a) REVENUES
Total revenue decreased 2% when comparing 1995 to 1994.
Premium income, net of reinsurance premium, decreased 7% when comparing 1995
to 1994. The decrease is primarily attributable to the decrease in new
business production and the change in products marketed. In 1995, the Company
has streamlined the product portfolio, as well as restructured the marketing
force. The decrease in first year premium production is directly related to
the Company's change in distribution systems. The Company has changed its
focus from primarily a broker agency distribution system to a captive agent
system. Business written by the broker agency force in recent years did not
meet Company expectations. With the change in focus of distribution systems,
most of the broker agents were terminated.
20
<PAGE>
The change in marketing strategy from traditional life insurance products to
universal life insurance products had a significant impact on new business
production. As a result of the change in marketing strategy the agency force
went through a restructure and retraining process. Cash collected from the
universal life and interest sensitive products contribute only the risk charge
to premium income, however traditional insurance products contribute monies
received to premium income. One factor that has had a positive impact on
premium income is the improvement of persistency. Persistency is a measure of
insurance in force retained in relation to the previous year. Overall,
persistency improved to 87.5% in 1995 compared to 86.3% in 1994.
Other considerations net of reinsurance increased 13% compared to one year
ago. Other considerations consists of administrative charges on universal
life and interest sensitive life insurance products. The insurance in force
relating to these types of products continues to increase as marketing efforts
are focused on universal life insurance products.
Net investment income increased 9% when comparing 1995 to 1994. The change
reflected an increase in the amount of invested assets, which was partially
offset by a lower effective yield on investments made during 1995. The
overall investment yields for 1995, 1994 and 1993, are 7.10%, 7.19% and 7.40%,
respectively. The Company has been able to increase its investment portfolio
through financing cash flows, generated by cash received through sales of
universal life insurance products. Although the Company sold no fixed
maturities during the last few years, it did experience a significant turnover
in the portfolio. Many companies with bond issues outstanding took advantage
of the lower interest rates and retired older debt which carried higher rates.
This was accomplished through early calls and accelerated pay-downs of fixed
maturity investments.
The Company's investments are generally managed to match related insurance and
policy holder liabilities. 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. The minimum interest spread
between earned and credited rates is 1% on the "Century 2000" universal life
insurance product, the Company's primary product. The Company monitors
investment yields, and when necessary takes action to adjust credited interest
rates on its insurance products to preserve targeted spreads. 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.
Realized investment losses were $349,000 and $146,000 in 1995 and 1994,
respectively. Fixed maturities and equity securities realized net investment
losses of $169,000 and real estate realized net investment losses 180,000 in
1995. The net realized investment losses for fixed maturities in 1995 is not
attributable to any one specific transaction. The Company experienced
moderate turnover in its fixed maturities portfolio during 1995. This was the
result of many companies taking advantage of lower interest rates and
refinancing higher coupon rate bonds with new securities at current lower
rates. This was accomplished through early calls and accelerated pay downs
that generated the net investment losses of fixed maturities. The realized
investment losses for real estate is primarily attributable to one property.
The property was re-evaluated during the year in relation to property values
in the surrounding area of the property owned by the Company. In 1994, the
Company realized net investment losses from equity securities and real estate
of $119,000 and $513,000, respectively and realized an investment gain of
$467,000 due to the sale of an insignificant subsidiary. The realized
investment losses from real estate in 1994, was due to permanent impairment of
the value of property located in Louisiana. The permanent impairment was due
21
<PAGE>
to recent appraisals and marketing analysis. The Company had other gains and
losses during the period that compromised the remaining amount reported but
were routine or immaterial in nature to disclose on an individual basis.
(b) EXPENSES
Total expenses decreased 3% when comparing 1995 to 1994.
Life benefits net of reinsurance benefits and claims decreased 16% compared to
1994. The decrease is related to the decrease in first year premium
production. Another factor that has caused life benefits to decrease is that
during 1994, the Company lowered its crediting rates on interest sensitive
products in response to financial market conditions. This action will
facilitate the appropriate spreads between investment returns and credited
interest rates. It takes approximately one year to fully realize a change in
credited rates since a change becomes effective on each policy's next
anniversary. Please refer to discussion of net investment income for analysis
of interest spreads.
The Company experienced an increase of 6% in mortality during 1995 compared to
1994. The increase in mortality is due primarily to settlement expenses
discussed in the following paragraph:
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 and represent 1/2 of 1% of the insurance in force.
Management's analysis 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 repurchase as many of the policies
as possible. As of December 31, 1995, there remained approximately $5,738,000
of the original face amount which have not been settled. The Company will
continue its efforts to repurchase as many of the policies as possible and
regularly apprise the Ohio Department of Insurance regarding the status of
this situation. Through December 31, 1995, the Company spent a total of
$2,886,000 for the repurchase of these policies and for the legal defense of
related litigation. In relation to the repurchase of insurance policies the
Company incurred life benefits of $720,000 and $1,250,000 in 1995 and 1994,
respectively. The Company incurred legal costs of $687,000 and $229,000 in
1995 and 1994, respectively.
Dividends to policyholders increased approximately 26% when comparing 1995 to
1994. USA continued to market participating policies through most of 1994.
Management expects dividends to policyholders will continue to increase in the
future. A significant portion of the insurance in force is participating
insurance. A significant portion of the participating business is relatively
newer business, and the dividend scale for participating policies increases in
the early durations. The dividend scale is subject to approval of the Board
of Directors and may be changed at their discretion. The Company has
discontinued its marketing of participating policies.
Commissions and amortization of deferred policy acquisition costs increased
10% in 1995 compared to 1994. The increase is directly attributed to the
amortization of a larger asset. The increase is also caused by the reduction
in first year premium production. To a lesser extent the increase in
amortization of deferred policy acquisition costs is directly related to the
change in products that is currently marketed. The Company revised its
portfolio of products as previously discussed in premium income. These new
products pay lower first year commissions than the products sold in prior
periods. The asset increased due to first year premium production by the
agency force. The Company did benefit from improved persistency.
22
<PAGE>
Operating expenses increased 19% in 1995 compared to 1994. The increase was
caused by several factors. The primary factor for the increase in operating
expenses is due to the decrease in production. The decrease in production was
discussed in the analysis of premium income. As such, the Company was
positioned to handle significantly more first year production than was
produced. First year operating expenses that were deferred and capitalized as
a deferred policy acquisition costs asset was $532,000 in 1995 compared to
$1,757,000 in 1994. The difference between the policy acquisition costs
deferred in 1995 compared to 1994, effected the increase in operating
expenses. The increase in operating expenses was offset, to a lesser extent,
from a 12% reduction in staff in 1995 compared to 1994. The reduction in
staff was achieved by attrition.
Another factor that caused the increase in operating expenses is directly
related to increased legal costs. 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 and represent 1/2
of 1% of the insurance in force of the Company. As of December 31, 1995,
there remained approximately $5,738,000 of the original face amount which have
not been settled. The Company will continue its efforts to repurchase as many
of the policies as possible and regularly apprise the Ohio Department of
Insurance regarding the status of this situation. The Company incurred legal
costs of $687,000 and $229,000 in 1995 and 1994, respectively, for the legal
defense of related litigation.
Interest expense decreased slightly in 1995 compared to 1994. The decrease
was due to the decrease in the outstanding principal balance. The interest
rate increased to 10% on March 1, 1995 compared to 7% on March 1, 1994. The
Company was able to minimize the effect of the higher interest rate in 1995 by
early payments of principal. The Company paid $600,000 in principal payments
in 1995. The interest rate on the senior debt has decreased to 9.25% as of
March 1, 1996.
(c) NET LOSS
The Company had a net loss of $1,452,000 in 1995 compared to a net loss of
$1,775,000 in 1994. The moderate improvement in 1995 is primarily
attributable to the increase in net investment income and the decrease in life
benefits.
1994 COMPARED TO 1993
(a) REVENUES
Total revenue increased 4% when comparing 1994 to 1993. The termination of
the Company's coinsurance agreement with Republic Vanguard contributed
significantly to the increase in revenues.
Premium income, net of reinsurance premium, increased 5% when comparing 1994
to 1993. The termination of the coinsurance agreement with Republic Vanguard
contributed significantly to the increase in premium, net of reinsurance
premium. UG terminated the coinsurance agreement with Republic Vanguard on
December 31, 1993. In UG, first year reinsurance premium was 21% of direct
first year premium in 1993 compared to 3% in 1994. 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. Management believes that terminating the agreement was the best
alternative for long term benefit of the Company.
23
<PAGE>
In 1994, the Company has been very active in streamlining the product
portfolio, as well as restructuring the marketing force. The Company is
currently marketing three universal life products. In late 1994, the Company
discontinued marketing the traditional or interest sensitive products. The
current universal life products feature lower first year costs compared to the
discontinued products. The marketing force is made up of three distinct
groups. Business produced by the broker agency force did not meet the Company
standards. Therefore, most of the agents associated with that group were
terminated. The other two agency forces continued to grow in 1994. First year
direct premium decreased 3% in 1994 compared to 1993. The small decrease is
perceived as a positive result when considering the changes to the portfolio
and marketing force.
Net investment income increased slightly when comparing 1994 to 1993. The
Company's average yield on its investments declined slightly in 1994 compared
to 1993. The Company has been able to increase its investment portfolio
through financing cash flows and reducing its cash and short term positions.
Although the Company sold no fixed maturities during 1994 or 1993, it did
experience a significant turnover in the portfolio. Many companies with bond
issues outstanding took advantage of the lower interest rates in the market
during 1993 and early 1994 and retired older debt which carried higher rates.
This was accomplished through early calls and accelerated pay-downs of fixed
maturity investments. In late 1994 and early 1995, there has been a slight
upward movement in general interest rates.
The Company's investments are generally managed to match related insurance and
policyholder liabilities. The overall investment yields for 1994, 1993 and
1992, are 7.19%, 7.40% and 7.69%, 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.
Realized investment losses were $146,000 and $194,000 in 1994 and 1993,
respectively. The Company realized losses of $513,000 and $423,000 due to
permanent impairment of the value of the property located in Louisiana, in
1994 and 1993, respectively. The Company is actively pursuing a buyer for the
property. The permanent impairment was due to recent appraisals and marketing
analysis. The Company realized a gain of $467,000 due to the sale of an
insignificant subsidiary in 1994. The Company realized a loss of $119,000 due
to the sale of common stock, which was acquired through the reorganization of
a fixed maturity security of Savin Corporation. The Company had other gains
and losses during the period that compromised the remaining amount reported
but were routine or immaterial in nature to disclose on an individual basis.
(b) EXPENSES
Total expenses increased 3% when comparing 1994 to 1993. Life and annuity
benefits, net of reinsurance, contributed significantly to the increase in
expenses. Commissions and amortization of deferred policy acquisition costs
and operating expenses decreased during 1994 compared to 1993.
24
<PAGE>
Life benefits and reinsurance benefits and claims increased 17% compared to
1993. Reinsurance benefits and claims changed significantly due to the
termination of the coinsurance treaty with Republic Vanguard. 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. Management believes that terminating the agreement was
the best alternative for the long term benefit of the Company.
Mortality remained at the same level in 1994 compared to 1993. Changes in
mortality can have a significant impact to 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 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.
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. The $1,250,000 has been charged to life benefits,
claims and settlement expenses.
During 1993, and early 1994, the Company lowered its crediting rates on
interest sensitive products in response to financial market conditions. This
action will facilitate the appropriate spreads between investment returns and
credited interest rates. The result is a reduction to the life benefits line
item as the increase in policy values through credited interest is lower. The
overall investment yields for 1994, 1993 and 1992, are 7.19%, 7.40% and 7.69%,
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. Management anticipates that the lowering of credited
interest rates will benefit future periods.
Dividends to policyholders increased approximately 14% when comparing 1994 to
1993. 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.
25
<PAGE>
Commissions and amortization of deferred policy acquisition costs and
amortization of agency force decreased 22% in 1994 compared to 1993. Two
factors contributed to the decrease. The Company's persistency improved and
commissions paid to agents was reduced. Persistency is the measurement of
policies that the Company was able to retain in a given period of time. The
Company's average persistency rate for all policies in force for 1994 and 1993
has been approximately 86% and 85%, respectively. The overall improvement
appears small but has a significant impact on the amortization of deferred
policy acquisition costs. There was significant improvement in persistency on
certain blocks of insurance that are sensitive to fluctuations in persistency
and directly affect the amortization of deferred policy acquisition costs.
The Company revised its portfolio of products as previously discussed in
premium income. These new products pay lower commissions than the previous
products sold in prior periods.
Operating expenses decreased 15% in 1994 compared to 1993. The decrease is
not attributable to one particular event but to the overall savings produced
from the recent streamlining efforts. A reduction of operating expenses is
being realized from operating fewer insurance subsidiaries. In 1992, the
Company was operating eleven insurance companies, but through mergers and the
sale of one insignificant subsidiary, the Company is now operating four
insurance companies. The Company also completed conversion of an insurance
subsidiary's computer system to its Life 70 system. The Company had a 11%
reduction in staff in 1994 compared to 1993. This was achieved mostly by
attrition. The Company feels that this reduction was necessary and could be
achieved through continued improvement in efficiency and automation. The
Company expects that further savings will be realized in the future.
Interest expense increased 3% in 1994 compared to 1993. The increase was due
to an increase in the interest rate on the Company's senior debt, which is
tied to the prime rate of the lead bank. The Company was able to minimize the
effect of the increase in interest rate by early payments of principal. The
Company paid $2,000,000 in principal payments in 1994. The Company believes
that interest rates will not change dramatically in 1995, and therefore will
not significantly impact interest expense.
(c) NET LOSS
The Company had a loss of $1,775,000 in 1994 compared to a loss of $3,343,000
in 1993. The establishment of a reserve of $1,250,000 liability through life
benefits, claims and settlement expenses to cover cash payments to acquire the
policies of certain individuals considered to be not insurable contributed
significantly to the 1994 loss. The improvement in 1994 was the result of an
increase in the credit provided by deferred income taxes. Deferred income
taxes are affected by changes in timing differences between the financial
statements and reportable for federal income tax purposes. Also, an
improvement in operating expenses and commissions and amortization of deferred
policy acquisition costs contributed to reducing the loss in 1994. Management
anticipates that the lowering of credited interest rates on the Company's
insurance and investment products will benefit future periods.
FINANCIAL CONDITION
(a) ASSETS
The Company's financial position at December 31, 1995, reflected an increase
in assets and an increase in liabilities compared to the preceding year end.
As of December 31, 1995 and 1994, cash and invested assets represented
approximately 77% and 75% of consolidated assets, respectively. Cash and cash
equivalents increased 7% when comparing 1995 to 1994. As of December 31, 1995
and 1994, fixed maturities represented 74% of total invested assets and cash.
26
<PAGE>
By insurance statute, the majority of the Company's investment portfolio is
required to be invested in investment grade securities to provide ample
protection for policyholders. The liabilities are predominantly long term in
nature and therefore, the Company invests in long term fixed maturity
investments which are reported in the financial statements at their amortized
cost. The Company has the ability and intent to hold these investments to
maturity; consequently, the Company does not expect to realize any significant
loss from these investments. The Company does not own any derivative
investments or "junk bonds". As of December 31, 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. The
Company has identified securities it may sell and classified them as
"investments held for sale". Investments held for sale are carried at market.
The Company's fixed maturity securities include mortgage-backed bonds of
$21,415,000 and $22,444,000 at December 31, 1995 and 1994, respectively. The
mortgage-backed bonds are subject to risks associated with variable
prepayments of the underlying mortgage loans. Prepayments cause those
securities to have different actual maturities than that expected at the time
of purchase. Prepayment of mortgage backed securities with an amortized cost
greater than par will incur a reduction in yield or loss. Those securities
that have an amortized cost less than par will generate an increase in yield
or gain. The degree to which a security is susceptible to either gains or
losses is influenced by the difference between its amortized cost and par, the
relative interest rate sensitivity of the underlying mortgages backing the
assets and the repayment priority of the securities in the overall
securitization structure.
The Company limits its credit risk by purchasing securities backed by stable
collateral and by concentrating on securities with enhanced priority in their
trust structure. Such securities with reduced risk typically have a lower
yield (but higher liquidity) than higher-risk mortgage-backed bonds (i.e.,
mortgage-backed bonds structured to share in residual cash flows or which
cover only interest payments). At December 31, 1995, the Company does not
have a significant amount of higher-risk mortgage-backed bonds. There are
negligible default risks in the Company's mortgage-backed bond portfolio as a
whole. The vast majority of the assets are either guaranteed by U.S.
government-sponsored entities or are supported in the securitization structure
by junior securities enabling the assets to achieve high investment grade
status.
The Company experienced moderate turnover in its fixed maturities portfolio
during 1995. As previously discussed, this was the result of many companies
taking advantage of lower interest rates and refinancing higher coupon rate
bonds with new securities at current lower rates. This was accomplished
through early calls and accelerated pay downs. During the year, the Company
reinvested its funds and invested new monies from operations and from cash and
short term investments primarily in investment grade corporate bonds.
Mortgage loans decreased 12% in 1995 as compared to 1994. The Company is not
actively seeking new mortgage loans, and the decrease is due to early pay-offs
from mortgagee's seeking refinancing at lower interest rates. All mortgage
loans held by the Company are first position loans. The Company has $618,000
in mortgage loans, net of a $10,000 reserve allowance, which are in default or
in the process of foreclosure, this represents approximately 4% of the total
portfolio.
Investment real estate and real estate acquired in satisfaction of debt
decreased slightly in 1995 compared to 1994. The decrease is primarily the
net result of improvements made and sales of homes and lots from the
residential development. Total real estate is separated into four categories:
Home Office 16%, Commercial 16%, Residential Development 37% and Foreclosed
Properties 31%.
27
<PAGE>
Policy loans increased 4% in 1995 compared to 1994. There is no single event
that caused policy loans to increase. Industry experience for policy loans
indicates that very few policy loans are repaid by the policy holder other
than through termination of the policy. Policy loans are systematically
reviewed to verify that no individual policy loan exceeds the underlying cash
value of the policy. Policy loans will generally increase due to new loans
and interest compounding on existing policy loans.
Value of agency force and cost in excess of net assets purchased decreased 6%
in 1995 compared to 1994. The decrease is directly attributable to normal
amortization during the period. The Company did not recognize any impairments
during the period.
Deferred policy acquisition costs increased 8% in 1995 compared to 1994. The
Company had $2,370,000 in policy acquisition costs deferred, $338,000 in
interest accretion and $1,905,000 in amortization. The Company anticipates
similar activity in the future due to continued marketing efforts by the
Company's agency force. The Company did not recognize any impairments during
the period.
(b) LIABILITIES
Total liabilities increased approximately 3% in 1995 compared to 1994. Future
policy benefits increased 4% in 1995 and represented 83% of total liabilities
at December 31, 1995. Management expects future policy benefits to increase
in the future due to the aging of the volume of insurance in force and
continued production by the Company's sales force.
Policy claims and benefits payable decreased 3% in 1995 compared to 1994.
There is no single event that caused this item to decrease. Policy claims
vary from year to year and therefore, fluctuations in this liability are to be
expected and are not considered unusual by management.
Other policyholder funds decreased 4% in 1995 compared to 1994. The decrease
can be attributed to a decrease in premium deposit funds. Premium deposit
funds are funds deposited by the policyholder with the insurance company to
accumulate interest and pay future policy premiums. The change in marketing
from traditional insurance products to universal life insurance products is
the primary reason for the decrease. Universal life insurance products do not
have premium deposit funds. All premiums received from the policyholder are
credited to the life insurance policy and are reflected in future policy
benefits.
Dividend and endowment accumulations increased 15% in 1995 compared to 1994.
The increase is attributed to the significant amount of participating business
the Company has in force. There are generally four options a policyholder can
select to pay policy dividends. Over 47% of all dividends paid were put on
deposit to accumulate with interest. Accordingly, management expects this
liability to increase in the future.
Income taxes payable and deferred income taxes payable decreased 15% in 1995
compared to 1994. The change in deferred and current income taxes payable is
attributable to temporary differences between Generally Accepted Accounting
Principles ("GAAP") and tax basis. Federal income taxes are fully disclosed
in Note 3 of the Notes to the Financial Statements.
Notes payable decreased $906,000 in 1995 compared to 1994. On January 31,
1996, the Company, prepaid $1,500,000 of the $3,900,000 principal payment due
on June 1, 1996. The Company's long term debt is discussed in more detail in
Note 9 of the Notes to the Financial Statements.
28
<PAGE>
(c) SHAREHOLDERS' EQUITY
Total shareholders' equity decreased 11% in 1995 compared to 1994. The
decrease in shareholders' equity is primarily due to the net loss of
$1,452,000 in 1995. The Company experienced $293,000 in unrealized
appreciation of equity securities and investments held for sale in 1995.
REGULATORY ENVIRONMENT
The Company is highly regulated by state insurance authorities in the states
its affiliates are domiciled. Such regulations, among other things, limit the
amount of dividends, tax sharing payments, other payments that can be made by
affiliates without prior regulatory approval and impose restrictions on the
amount and type of investments the Company may own. The Company also is
regulated in various states as an insurance holding company system. Because
the Company is an insurance holding company, an investment in the Company
which could result in a change in control must be passed on by certain state
departments of insurance.
There is currently increased scrutiny placed upon the insurance regulatory
framework. As a result, certain state legislatures have considered or enacted
laws that alter, and in many cases increase, state authority to regulate
insurance companies and insurance holding company systems. In light of recent
legislative developments, the National Association of Insurance Commissioners
("NAIC") and state insurance regulators have begun examining existing laws and
regulations, specifically focusing on insurance company investments, solvency
issues, risk-adjusted capital guidelines, interpretations of existing laws,
the development of new laws, the implementation of nonstatutory guidelines,
and the circumstances under which dividends may be paid. The Company cannot
predict with certainty the effect that any NAIC recommendations, proposed or
future legislation, may have on the financial condition or operations.
The Company receives funds from its insurance subsidiaries in the form of
management and cost sharing arrangements (See Note 9) and through dividends.
Annual dividends in excess of maximum amounts prescribed by state statutes
("extraordinary dividends") may not be paid without the approval of the
insurance commissioner in which an insurance subsidiary is domiciled. The
National Association of Insurance Commissioners ("NAIC") has proposed, and
certain states have adopted, legislation that lowers the threshold amount for
determining what constitutes an extraordinary dividend. Such legislative
changes could make it more difficult for insurance subsidiaries to pay
dividends to their parents.
The NAIC has adopted Risk-Based Capital ("RBC") requirements for life/health
insurance companies to evaluate the adequacy of statutory capital and surplus
in relation to investment and insurance risks such as asset quality, mortality
and morbidity, asset and liability matching and other business factors. The
RBC formula will be used by state insurance regulators as an early warning
tool to identify, for the purpose of initiating regulatory action, insurance
companies that potentially are inadequately capitalized. In addition, the
formula defines new minimum capital standards that will supplement the current
system of low fixed minimum capital and surplus requirements on a state-by-
state basis. Regulatory compliance is determined by a ratio of the insurance
company's regulatory total adjusted capital, as defined by the NAIC, to its
authorized control level RBC, as defined by the NAIC. Insurance company's
below specific trigger points or ratios are classified within certain levels,
each of which requires specific corrective action.
29
<PAGE>
The levels and ratios are as follows:
Ratio of Total Adjusted Capital to
Authorized Control Level RBC
Regulatory Event (Less Than or Equal to)
Company action level 2*
Regulatory action level 1.5
Authorized control level 1
Mandatory control level 0.7
* Or, 2.5 with negative trend.
At December 31, 1995, each of the Company's insurance subsidiaries has a Ratio
that is in excess of 250% of the authorized control level; accordingly the
Company's subsidiaries meet the RBC requirements.
The NAIC has proposed a new Model Investment Law that may affect the statutory
carrying values of certain investments; however, the final outcome of that
proposal is not certain, nor is it possible to predict what impact the
proposal will have on the Company or whether the proposal will be adopted in
the foreseeable future.
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
marketing; 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 upon demographic variables such as income growth, wealth accumulation,
population and work force changes.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
NEW ACCOUNTING STANDARDS
The Financial Accounting Standards Board (FASB) has issued Statement of
Financial Accounting Standards No. 114 entitled "Accounting by Creditors for
Impairment of a Loan" and Statement of Financial Accounting Standards No. 118,
an amendment of Statement No. 114. The Statement amends FASB Statement No. 5
"Accounting for Contingencies" and FASB Statement No. 15 "Accounting by
Debtors and Creditors for Troubled Debt Restructuring". This Statement, which
became effective for financial statements for fiscal years beginning after
December 15, 1994, applies to all troubled debt restructuring involving a
modification of terms.
A loan is impaired when, based on current information and events, it is
probable that a creditor will be unable to collect all amounts due according
to the contractual terms of the loan agreement. As used in this Statement and
in Statement 5, as amended, all amounts due according to the contractual terms
means that both the contractual interest payments and the contractual
principal payments of a loan will be collected as scheduled in the loan
agreement. This Statement does not specify how a creditor should determine
that it is probable that it will be unable to collect all amounts due
according to the contractual terms
31
<PAGE>
of a loan. A creditor should apply its normal loan review procedures in making
that judgment. An insignificant delay or insignificant shortfall in amount of
payments does not require application of this Statement. A loan is not
impaired during a period of delay in payment if the creditor expects to collect
all amounts due including interest accrued at the contractual interest rate for
the period of delay. Thus, a demand loan or other loan with no stated maturity
is not impaired if the creditor expects to collect all amounts due including
interest accrued at the contractual interest rate during the period the loan is
outstanding.
This statement was adopted for the 1995 Financial Statements. The adoption
did not have any impact on the Company's financial statement.
The Financial Accounting Standards Board (FASB) has issued Statement of
Financial Accounting Standards No. 121 entitled "Accounting for the Impairment
of Long-Lived Assets and for Long-Lived Assets to be Disposed of". This
Statement, becomes effective for financial statements for fiscal years
beginning after December 31, 1995, with early adoption encouraged.
An entity shall review long-lived assets and certain identifiable intangibles
for impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. If certain events or
changes in circumstances indicate that the carrying amount of an asset may not
be recoverable, the entity shall estimate the future cash flows expected to
result from the use of the asset and its eventual disposition. Future cash
flows are the future cash inflows expected to be generated by an asset less
the future cash outflows expected to be necessary to obtain those inflows. If
the sum of the expected future cash flows (undiscounted and without interest
charges) is less than the carrying amount of the asset, the entity shall
recognize an impairment loss in accordance with this Statement. Otherwise, an
impairment loss shall not be recognized; however, a review of depreciation
policies may be appropriate.
This statement was adopted for the 1995 financial statements. The adoption
did not have any impact on the Company's financial statements.
31
<PAGE>
Listed below are the financial statements included in this Part of the Annual
Report on SEC Form 10-K:
Page No.
FIRST COMMONWEALTH CORPORATION AND CONSOLIDATED SUBSIDIARIES
Independent Auditors' Report for the
Years ended December 31, 1995, 1994, 1993 . . . . . . . . . . . . 33
Consolidated Balance Sheets . . . . . . . . . . . . . . . . . . . 34
Consolidated Statements of Operations . . . . . . . . . . . . . . 35
Consolidated Statements of Shareholders' Equity . . . . . . . . . 36
Consolidated Statements of Cash Flows . . . . . . . . . . . . . . 37
Notes to Financial Statements . . . . . . . . . . . . . . . . . . 38-59
ITEM 9. DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None
32
<PAGE>
Independent Auditors' Report
Board of Directors and Shareholders
First Commonwealth Corporation
We have audited the accompanying consolidated balance sheets of First
Commonwealth Corporation (a Virginia corporation) and subsidiaries as of
December 31, 1995 and 1994, and the related consolidated statements of
operations, shareholders' equity, and cash flows for each of the three years
in the period ended December 31, 1995. These financial statements are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the consolidated financial position of First
Commonwealth Corporation and subsidiaries as of December 31, 1995 and 1994,
and the consolidated results of their operations and their consolidated cash
flows for each of the three years in the period ended December 31, 1995, in
conformity with generally accepted accounting principles.
We have also audited Schedule I as of December 31, 1995, and Schedules
II, IV and V as of December 31, 1995 and 1994, of First Commonwealth
Corporation and subsidiaries and Schedules II, IV and V for each of the three
years in the period then ended. In our opinion, these schedules present
fairly, in all material respects, the information required to be set forth
therein.
KERBER, ECK & BRAECKEL LLP
Springfield, Illinois
March 26, 1996
33
<PAGE>
<TABLE>
FIRST COMMONWEALTH CORPORATION
CONSOLIDATED BALANCE SHEETS
As of December 31, 1995 and 1994
ASSETS
1995 1994
<S> <C> <C>
Investments:
Fixed maturities at amortized cost
(market $197,006,257 and $171,935,030) $190,558,351 $183,038,842
Investments held for sale:
Fixed maturities, at market
(cost $3,224,039 and $3,450,273) 3,226,175 3,337,672
Equity securities, at market
(cost $2,086,159 and $1,235,840) 1,946,481 911,012
Mortgage loans on real estate at
amortized cost 13,891,762 15,822,056
Investment real estate, at cost,
net of accumulated depreciation 11,683,575 11,712,847
Real estate acquired in satisfaction
of debt, at cost, net of accumulated
depreciation 5,332,413 5,620,101
Policy loans 16,941,359 16,338,632
Short term investments 425,000 350,000
244,005,116 237,131,162
Cash and cash equivalents 11,979,637 11,214,850
Investment in parent 350,000 3,812,500
Indebtedness of affiliates, net 162,388 183,916
Accrued investment income 3,620,367 3,447,017
Reinsurance receivables:
Future policy benefits 13,540,364 12,818,658
Unpaid policy claims and benefits 733,524 975,613
Paid policy claims and benefits 127,964 125,355
Other accounts and notes receivable 963,468 1,295,983
Deferred policy acquisition costs 40,520,728 41,885,887
Value of agency force acquired 6,485,733 6,796,120
Cost in excess of net assets purchased,
net of accumulated amortization 10,071,170 10,762,477
Other assets 1,659,714 960,206
Total assets $334,220,173 $331,409,744
LIABILITIES AND SHAREHOLDERS' EQUITY
Policy liabilities and accruals:
Future policy benefits $242,763,581 $233,266,922
Policy claims and benefits payable 3,110,378 3,207,014
Other policyholder funds 3,053,411 3,184,731
Dividend and endowment accumulations 12,324,949 10,738,903
Income taxes payable:
Current 211,979 237,846
Deferred 7,865,853 9,300,353
Notes payable 20,623,328 21,529,189
Other liabilities 4,051,080 5,167,737
Total liabilities 294,004,559 286,632,695
Minority interests in consolidated subsidiaries 1,530,814 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 after deducting
treasury shares of 372,506 and 0 23,967,545 24,340,051
Additional paid-in capital l28,498,565 31,588,559
Unrealized depreciation of investments
held for sale (131,215) (423,916)
Accumulated deficit (13,650,095) (12,198,457)
Total shareholders' equity 38,684,800 43,306,237
Total liabilities and shareholders' equity $334,220,173 $331,409,744
</TABLE>
See accompanying notes.
34
<PAGE>
<TABLE>
FIRST COMMONWEALTH CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
Three Years Ended December 31, 1995
1995 1994 1993
<S> <C> <C> <C>
Revenues:
Premium income $35,200,815 $37,910,813 $39,357,434
Reinsurance premium (5,202,690) (5,626,582) (8,630,397)
Other considerations 3,280,823 2,969,131 2,898,103
Other considerations paid to
reinsurers (180,412) (229,093) (528,495)
Net investment income 15,499,751 14,188,461 14,087,709
Realized investment gains
and (losses) (348,582) (145,697) (193,542)
Other income 115,469 194,338 193,909
48,365,174 49,261,371 47,184,721
Benefits and other expenses:
Benefits, claims and settlement expenses:
Life 28,094,061 33,373,186 31,900,954
Reinsurance benefits
and claims (2,849,806) (2,807,763) (5,823,003)
Annuity 1,762,584 1,526,492 1,263,103
Dividends to policyholders 4,217,176 3,339,992 2,926,532
Commissions and amortization
of deferred policy
acquisition costs 7,075,064 6,426,863 8,135,348
Amortization of agency force 310,387 192,397 319,167
Operating expenses 10,672,996 8,975,985 10,600,723
Interest expense 1,917,360 1,941,565 1,885,927
51,199,822 52,968,717 51,208,751
Loss before income taxes
and minority interest (2,834,648) (3,707,346) (4,024,030)
Credit for income taxes 1,435,824 1,996,284 751,187
Minority interest in gain
of consolidated subsidiaries (52,814) (63,782) (69,841)
Net loss $(1,451,638) $(1,774,844) $(3,342,684)
Net loss per common share $ (0.06) $ (0.07) $ (0.14)
Average common
shares outstanding 24,198,193 24,340,051 24,340,051
</TABLE>
See accompanying notes
35
<PAGE>
<TABLE>
FIRST COMMONWEALTH CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Three Years Ended December 31, 1995
1995 1994 1993
<S> <C> <C> <C>
Common stock
Balance, beginning of year $ 24,340,051 $ 24,340,051 $ 24,340,051
Treasury stock acquired through
liquidation of Commonwealth
Industries Corporation (372,506) 0 0
Issued during year 0 0 0
Balance, end of year $ 23,967,545 $ 24,340,051 $ 24,340,051
Additional paid-in capital
Balance, beginning of year $ 31,588,559 $ 31,588,559 $ 31,588,559
Treasury stock acquired through
liquidation of Commonwealth
Industries Corporation (3,089,994) 0 0
Issued during year 0 0 0
Balance, end of year $ 28,498,565 $ 31,588,559 $ 31,588,559
Unrealized appreciation (depreciation)
of investments held for sale
Balance, beginning of year $ (423,916) $ (178,621) $ (672,206)
Change during year 292,701 (245,295) 493,585
Balance, end of year $ (131,215) $ (423,916) $ (178,621)
Accumulated deficit
Balance, beginning of year $(12,198,457) $(10,423,613) $ (7,080,929)
Net loss (1,451,638) (1,774,844) (3,342,684)
Balance, end of year $(13,650,095) $(12,198,457) $(10,423,613)
Total shareholders' equity,
end of year $ 38,684,800 $ 43,306,237 $ 45,326,376
</TABLE>
See accompanying notes.
36
<PAGE>
<TABLE>
FIRST COMMONWEALTH CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
Three Years Ended December 31, 1995
1995 1994 1993
<S> <C> <C> <C>
Increase (decrease) in cash
and cash equivalents
Cash flows from operating activities:
Net loss $(1,451,638) $(1,774,844) $(3,342,684)
Adjustments to reconcile net loss
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 (9,757,354) (9,178,363) (9,161,188)
Change in policy liabilities
and accruals 4,954,300 9,990,664 3,437,187
Change in reinsurance receivables (482,226) (1,012,799) (768,414)
Change in indebtedness of
affiliates, net 21,528 205,977 421,376
Minority interest 52,814 63,782 69,841
Change in accrued investment income (173,350) (583,950) 465,382
Depreciation 531,364 657,533 646,779
Change in income taxes payable (1,460,367) (1,996,474) (1,176,257)
Realized investment (gains)losses 348,582 145,697 193,542
Policy acquisition costs deferred (2,370,000) (4,939,000) (6,231,000)
Amortization of deferred policy
acquisition costs 3,735,000 3,517,654 6,414,399
Amortization of value of
agency force 310,387 192,397 319,167
Amortization of costs in excess
of net assets purchased 691,307 450,669 659,267
Change in other assets and
liabilities, net (907,564) (331,652) 1,535,381
Net cash used in operating
activities (5,957,217) (4,592,709) (6,517,222)
Cash flows from investing activities:
Proceeds from investments sold and matured:
Fixed maturities held for
sale matured 619,612 250,000 0
Fixed maturities sold 0 0 0
Fixed maturities matured 16,265,140 23,601,817 45,733,337
Equity securities 104,260 49,557 6,674,571
Mortgage loans 2,252,423 4,006,557 9,004,925
Real estate 1,768,254 2,640,025 3,001,728
Collateral loans 0 0 600,341
Policy loans 4,110,744 3,974,404 4,000,010
Short term 25,000 1,038,856 3,043,072
Total proceeds from investments
sold and matured 25,145,433 35,561,216 72,057,984
Cost of investments acquired:
Fixed maturities held for sale 0 (839,375) 0
Fixed maturities (25,112,358) (51,929,105) (84,128,451)
Equity securities (1,000,000) (249,925) (542,300)
Mortgage loans (322,129) (5,669,888) (3,278,798)
Real estate (1,927,413) (3,321,599) (2,315,362)
Policy loans (4,713,471) (3,557,237) (3,703,050)
Short term (100,000) (650,000) (2,002,712)
Total cost of investments
acquired (33,175,371) (66,217,129) (95,970,673)
Cash of subsidiary at date of sale 0 (3,134,343) 0
Cash received in sale of subsidiary 0 3,978,586 0
Cash of subsidiaries at
acquisition date 0 2,965,115 0
Net cash used in investing
activities (8,029,938) (26,846,555) (23,912,689)
Cash flows from financing activities:
Policyholder contract deposits 25,021,983 23,110,031 23,958,756
Policyholder contract deposit
withdrawals (16,008,462) (14,893,221) (13,519,830)
Interest credited to account
balances 6,644,282 5,931,019 6,888,067
Payments of principal on notes
payable (905,861) (2,005,687) (2,705,519)
Net cash provided by financing
activities 14,751,942 12,142,142 14,621,474
Net increase (decrease) in cash
and cash equivalents 764,787 (19,297,122) (15,808,437)
Cash and cash equivalents at
beginning of year 11,214,850 30,511,972 46,320,409
Cash and cash equivalents at
end of year $11,979,637 $11,214,850 $30,511,972
</TABLE>
See accompanying notes.
37
<PAGE>
FIRST COMMONWEALTH CORPORATION
NOTES TO FINANCIAL STATEMENTS
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A. ORGANIZATION - At December 31, 1995, the parent, significant
majority-owned subsidiaries and affiliates of First Commonwealth
Corporation were as depicted on the following organizational
chart.
ORGANIZATIONAL CHART
AS OF DECEMBER 31, 1995
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").
38
<PAGE>
A summary of the Company's significant accounting policies consistently
applied in the preparation of the accompanying financial statements
follows.
B. NATURE OF OPERATIONS - First Commonwealth Corporation is an insurance
holding company that, through its insurance subsidiaries sells
individual life insurance products. The Company's principal market is
the midwestern United States. The primary focus of the Company has been
the servicing of existing insurance business in force, the solicitation
of new life insurance products and the acquisition of other companies in
similar lines of business.
C. PRINCIPLES OF CONSOLIDATION - The consolidated financial statements
include the accounts of the Company and its majority-owned subsidiaries.
Other investments in affiliates are carried at cost. All significant
intercompany accounts and transactions have been eliminated.
D. BASIS OF PRESENTATION - The financial statements of First Commonwealth
Corporation's life insurance subsidiaries have been prepared in
accordance with generally accepted accounting principles which differ
from statutory accounting practices permitted by insurance regulatory
authorities.
E. USE OF ESTIMATES - In preparing financial statements in conformity with
generally accepted accounting principles, management is required to make
estimates and assumptions that affect the reported amounts of assets and
liabilities, the disclosure of contingent assets and liabilities at the
date of the financial statements, and the reported amounts of revenues
and expenses during the reporting period. Actual results could differ
from those estimates.
F. INVESTMENTS - Investments are shown on the following bases:
Fixed maturities -- at cost, adjusted for amortization of premium or
discount and other-than-temporary market value declines. The amortized
cost of such investments differs from their market values; however, the
Company has the ability and intent to hold these investments to
maturity, at which time the full face value is expected to be realized.
Investments held for sale -- at current market value, unrealized
appreciation or depreciation is charged directly to shareholders'
equity.
Mortgage loans on real estate -- at unpaid balances, adjusted for
amortization of premium or discount, less allowance for possible losses.
Real estate -- at cost, less allowances for depreciation and any
impairment which would result in a carrying value below net realizable
value. Foreclosed real estate is adjusted for any impairment at the
foreclosure date.
Policy loans -- at unpaid balances including accumulated interest but
not in excess of the cash surrender value.
Short term investments -- at cost, which approximates market value.
Realized gains and losses on sales of investments are recognized in net
income on the specific identification basis.
39
<PAGE>
G. RECOGNITION OF REVENUES AND RELATED EXPENSES - Premiums for traditional
life insurance products, which include those products with fixed and
guaranteed premiums and benefits, consist principally of whole life
insurance policies, limited-payment life insurance policies, and certain
annuities with life contingencies are recognized as revenues when due.
Accident and health insurance premiums are recognized as revenue pro
rata over the terms of the policies. Benefits and related expenses
associated with the premiums earned are charged to expense
proportionately over the lives of the policies through a provision for
future policy benefit liabilities and through deferral and amortization
of deferred policy acquisition costs. For universal life and investment
products, generally there is no requirement for payment of premium other
than to maintain account values at a level sufficient to pay mortality
and expense charges. Consequently, premiums for universal life policies
and investment products are not reported as revenue, but as deposits.
Policy fee revenue for universal life policies and investment products
consists of charges for the cost of insurance, policy administration,
and surrenders assessed during the period. Expenses include interest
credited to policy account balances and benefit claims incurred in
excess of policy account balances.
H. DEFERRED POLICY ACQUISITION COSTS - Commissions and other costs of
acquiring life insurance products have been deferred. Traditional life
insurance and accident and health insurance acquisition costs are being
amortized over the premium-paying period of the related policies using
assumptions consistent with those used in computing policy benefit
reserves.
For universal life insurance and interest sensitive life insurance
products, acquisition costs are being amortized generally in proportion
to the present value of expected gross profits from surrender charges
and investment, mortality, and expense margins. This amortization is
adjusted retrospectively when estimates of current or future gross
profits to be realized from a group of products are revised.
Deferred policy acquisition costs established at the time a company is
acquired are amortized with interest in relation to expected future
profits, including direct charge-offs for any excess of the unamortized
asset over the projected future profits.
40
<PAGE>
The following table summarizes deferred policy acquisition costs and
related data for the years shown.
1995 1994 1993
Deferred, beginning of year $41,886,000 $41,357,000 $41,540,000
Acquisition costs deferred:
Commissions, net of reinsurance
of $0, $1,837,000
and $2,871,000 1,838,000 3,182,000 4,399,000
Marketing, salaries and
other expenses 532,000 1,757,000 1,832,000
Total 2,370,000 4,939,000 6,231,000
Interest accretion 2,626,000 2,603,000 2,674,000
Amortization charged
to income (6,361,000) (6,121,000) (9,088,000)
Net amortization (3,735,000) (3,518,000) (6,414,000)
Deferred acquisition costs
disposed of at date of
sale of subsidiary 0 (892,000) 0
Change for the year (1,365,000) 529,000 (183,000)
Deferred, end of year $40,521,000 $41,886,000 $41,357,000
The following table reflects the components of the income statement for
the line item Commissions and amortization of deferred policy
acquisition costs.
1995 1994 1993
Net amortization of deferred
policy acquisition costs $ 3,735,000 $ 3,518,000 $ 6,414,000
Commissions 3,340,000 2,909,000 1,721,000
Total $ 7,075,000 $ 6,427,000 $ 8,135,000
Estimated net amortization expense of deferred policy acquisition costs
for the next five years is as follows:
Interest Net
Accretion Amortization Amortization
1996 2,600,000 5,600,000 3,000,000
1997 2,400,000 5,200,000 2,800,000
1998 2,300,000 4,700,000 2,400,000
1999 2,200,000 4,400,000 2,200,000
2000 2,000,000 4,100,000 2,100,000
41
<PAGE>
I. COST IN EXCESS OF NET ASSETS PURCHASED - Cost in excess of net assets
purchased are amortized over periods not exceeding forty years using the
straight-line method. Management reviews the valuation and amortization
of goodwill on an annual basis. As part of this review, the Company
estimates the value of and the estimated undiscounted future cash flows
expected to be generated by the related subsidiaries to determine that
no impairment has occurred.
J. FUTURE POLICY BENEFITS AND EXPENSES - The liabilities for traditional
life insurance and accident and health insurance policy benefits are
computed using a net level method. These liabilities include
assumptions as to investment yields, mortality, withdrawals, and other
assumptions based on the life insurance subsidiaries' experience
adjusted to reflect anticipated trends and to include provisions for
possible unfavorable deviations. Reserve interest assumptions are
graded and range from 6% to 2%. Such liabilities, for certain plans,
are graded to equal statutory values or cash values prior to maturity.
Benefit reserves for traditional life insurance policies include certain
deferred profits on limited-payment policies that are being recognized
in income over the policy term. Policy benefit claims are charged to
expense in the period that the claims are incurred. Current mortality
rate assumptions are based on 1975-80 select and ultimate tables.
Withdrawal rate assumptions are based upon Linton B or Linton C.
Benefit reserves for universal life insurance and interest sensitive
life insurance products are computed under a retrospective deposit
method and represent policy account balances before applicable surrender
charges. Policy benefits and claims that are charged to expense include
benefit claims in excess of related policy account balances. Interest
crediting rates for universal life and interest sensitive products range
from 5.0% to 6.0% in 1995, 5.0% to 6.0% in 1994 and 5.0% to 7.5% in
1993.
K. POLICY AND CONTRACT CLAIMS - Policy and contract claims include
provisions for reported claims in process of settlement, valued in
accordance with the terms of the policies and contracts, as well as
provisions for claims incurred and unreported based on prior experience
of the Company.
L. PARTICIPATING INSURANCE - Participating business represents 34% and 31%
of the ordinary life insurance in force at December 31, 1995 and 1994,
respectively. Premium income from participating business represents
55%, 53%, and 51% of total premiums for the years ended December 31,
1995, 1994 and 1993, respectively. The amount of dividends to be paid
is determined annually by the Board of Directors. Earnings allocable to
participating policyholders are based on legal requirements which vary
by state.
M. INCOME TAXES - Income taxes are reported under Statement of Financial
Accounting Standards Number 109. Deferred income taxes are recorded to
reflect the tax consequences on future periods of differences between
the tax bases of assets and liabilities and their financial reporting
amounts at the end of each such period.
N. BUSINESS SEGMENTS - The companies operate principally in the individual
life insurance business.
O. EARNINGS PER SHARE - Earnings per share are based on the weighted
average number of common shares outstanding during the respective
period.
42
<PAGE>
P. CASH EQUIVALENTS - The Company considers certificates of deposit and
other short term instruments with an original purchased maturity of
three months or less cash equivalents.
Q. RECLASSIFICATIONS - Certain prior year amounts have been reclassified to
conform with the 1995 presentation.
R. REINSURANCE - In the normal course of business, the Company seeks to
limit its exposure to loss on any single insured and to recover a
portion of benefits paid by ceding reinsurance to other insurance
enterprises or reinsurers under excess coverage and coinsurance
contracts. The Company retains a maximum of $125,000 of coverage per
individual life.
Amounts paid or deemed to have been paid for reinsurance contracts are
recorded as reinsurance receivables. Reinsurance premiums, commissions,
expense reimbursements, and reserves on reinsured business are accounted
for on a basis consistent with those used in accounting for the original
policies issued and the terms of the reinsurance contracts. Expense
reimbursements received in connection with reinsurance ceded have been
accounted for as a reduction of the related policy acquisition costs or,
to the extent such reimbursements exceed the related acquisition costs,
as revenue.
Reinsurance contracts do not relieve the Company from its obligations to
policyholders. Failure of reinsurers to honor their obligations could
result in losses to the Company; consequently, allowances are
established for amounts deemed uncollectible. The Company evaluates the
financial condition of its reinsurers and monitors concentrations of
credit risk arising from similar geographic regions, activities, or
economic characteristics of the reinsurers to minimize its exposure to
significant losses from reinsurer insolvencies.
2. SHAREHOLDER DIVIDEND RESTRICTION
At December 31, 1995, substantially all of consolidated shareholders' equity
represents net assets of FCC's subsidiaries. The payment of cash dividends to
shareholders by FCC is not legally restricted. 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,
1995, UG had a statutory gain from operations of $3,197,000. At December 31,
1995, UG's statutory capital and surplus amounted to $7,274,000.
Extraordinary dividends (amounts in excess of ordinary dividend limitations)
require prior approval of the insurance commissioner and are not restricted to
a specific calculation.
3. FEDERAL INCOME TAXES
Until 1984, the insurance companies were taxed under the provisions of the
Life Insurance Company Income Tax Act of 1959 as amended by the Tax Equity and
Fiscal Responsibility Act of 1982. These laws were superseded by the Deficit
Reduction Act of 1984. All of these laws are based primarily upon statutory
results with certain special deductions and other items available only to life
insurance companies. If certain of the life companies pay shareholder
dividends in excess of "shareholders' surplus" they will be required to pay
taxes on income not taxed under the pre-1984 acts.
43
<PAGE>
The following table summarizes the companies with this situation and the
maximum amount of income which has not been taxed in each.
Shareholders Untaxed
Company Surplus Balance
ABE $ 5,327,000 $ 1,150,000
APPL 4,128,000 1,525,000
UG 22,195,000 4,364,000
USA 1,101,000 0
The payment of taxes on this income is not anticipated; and, accordingly, no
deferred taxes have been established.
The life insurance company subsidiaries file a consolidated federal income tax
return. The holding companies of the group file separate returns.
Life insurance company taxation is based primarily upon statutory results with
certain special deductions and other items available only to life insurance
companies. Income tax expense consists of the following components:
1995 1994 1993
Current tax expense (credit) $ (1,000) $ 35,000 $ (108,000)
Deferred tax expense(credit) (1,435,000) (2,031,000) (643,000)
$(1,436,000) $(1,996,000) $ (751,000)
The Companies have net operating loss carryforwards for federal income tax
purposes expiring as follows:
FCC UG
2001 0 117,000
2003 0 57,000
2006 0 4,388,000
2007 46,000 783,000
2008 0 940,000
2010 0 2,540,000
TOTAL $ 46,000 $ 8,825,000
The Company has established a deferred tax asset of $3,105,000 for its
operating loss carryforwards and has established an allowance of $3,105,000.
The provision or (credit) for income taxes shown in the statements of
operations does not bear the normal relationship to pre-tax income as a result
of certain permanent differences.
44
<PAGE>
The sources and effects of such differences are summarized in the following
table:
1995 1994 1993
Tax computed at standard
corporate rate $ (992,000) $(1,298,000) $(1,408,000)
Changes in taxes due to:
Companies incurring losses
without tax benefit 0 0 427,000
Goodwill 154,000 158,000 230,000
Benefit of prior losses (599,000) (696,000)
Other 1,000 (160,000) 0
Income tax expense (credit) $ (1,436,000) $(1,996,000) $ (751,000)
The following table summarizes the major components which comprise the
deferred tax liability as reflected in the balance sheets:
1995 1994
Investments $ (332,722) $ (254,075)
Value of agency force 2,270,007 2,378,642
Deferred policy acquisition
costs 14,182,255 14,660,060
Agents balances (71,625) (77,310)
Furniture and equipment (34,104) (53,454)
Due premiums (1,285,212) (1,378,163)
Discount of notes 1,003,038 987,932
Future policy benefits (3,656,260) (2,920,295)
Other liabilities (1,346,525) (1,456,827)
Federal tax DAC (2,862,999) (2,586,157)
Deferred tax liability $ 7,865,853 $ 9,300,353
4. ANALYSIS OF INVESTMENTS, INVESTMENT INCOME AND INVESTMENT GAIN
A. NET INVESTMENT INCOME - The following table reflects net investment
income by type of investment:
1995 1994 1993
Fixed maturities and fixed
maturities held for sale $13,292,552 $12,174,226 $10,759,045
Equity securities 52,445 3,999 228,762
Mortgage loans 1,257,189 1,408,558 1,708,842
Real estate 975,080 990,857 968,620
Policy loans 1,041,900 978,555 954,609
Short term investments 498,496 412,135 1,068,313
Collateral loans 0 0 5,121
Other 143,527 135,051 175,873
Total investment income 17,261,189 16,103,381 15,869,185
Investment expense (1,761,438) (1,914,920) (1,781,476)
Net investment income $15,499,751 $14,188,461 $14,087,709
45
<PAGE>
At December 31, 1995, the companies had a total of $7,703,000 of
investments, comprised of $6,894,000 in real estate including its home
office property and $809,000 in equity securities, which did not produce
income during 1995.
The following table summarizes the Company's fixed maturity holdings and
investments held for sale by major classifications.
Carrying Value
1995 1994
Investments held for sale:
Fixed maturities $ 3,226,175 $ 3,337,672
Equity securities 1,946,481 911,012
Fixed maturities:
U.S. Government and
government agencies 27,205,449 20,874,683
State, municipalities and
political subdivisions 6,774,185 7,092,424
Collateralized mortgage
obligations 15,395,913 18,567,399
Public utilities 59,101,260 57,587,697
Corporate 82,081,544 78,916,639
$195,731,007 $187,287,526
By insurance statute, the majority of the Company's investment portfolio
is required to be invested in investment grade securities to provide
ample protection for policyholders. The Company does not invest in so-
called "junk bonds" or derivative investments.
Below investment grade debt securities generally provide higher yields
and involve greater risks than investment grade debt securities because
their issuers typically are more highly leveraged and more vulnerable to
adverse economic conditions than investment grade issuers. In addition,
the trading market for these securities is usually more limited than for
investment grade debt securities. Debt securities classified as below-
investment grade are those that receive a Standard & Poor's rating of BB
or below.
The following table summarizes by category securities held that are
below investment grade at amortized cost:
Below Investment
Grade Investments 1995 1994 1993
State, Municipalities and
Political Subdivisions $ 0 $ 32,370 $ 1,750
Public Utilities 119,379 168,869 138,159
Corporate 833,142 848,033 330,335
Total $ 952,521 $ 1,049,272 $ 470,244
46
<PAGE>
B. INVESTMENT SECURITIES
The amortized cost and estimated market values of investments in
securities including investments held for sale are as follows:
Cost or Gross Gross Estimated
Amortized Unrealized Unrealized Market
1995 Cost Gains Losses Value
Investments Held for Sale:
U.S. Government and govt.
agencies and authorities $ 2,001,860 $ 2,579 $ 621 $ 2,003,818
States, municipalities and
political subdivisions 812,454 14,313 3,749 823,018
Collateralized mortgage
obligations 32,177 506 0 32,683
Public utilities 119,379 572 2,123 117,828
All other corporate bonds 258,169 337 9,678 248,828
3,224,039 18,307 16,171 3,226,175
Equity securities 2,086,159 80,721 220,399 1,946,481
Total $ 5,310,198 $ 99,028 $ 236,570 $5,172,656
Held to Maturity Securities:
U.S. Government and govt.
agencies and authorities $27,205,449 $ 1,075,742 $ 27,634 $ 28,253,557
States,municipalities and
political subdivisions 6,774,185 312,253 6,804 7,079,634
Collateralized mortgage
obligations 15,395,913 295,344 67,472 15,623,785
Public utilities 59,101,260 2,307,613 126,760 61,282,113
All other corporate bonds 82,081,544 2,974,554 288,930 84,767,168
Total $190,558,351 $ 6,965,506 $ 517,600 $197,006,257
47
<PAGE>
Cost or Gross Gross Estimated
Amortized Unrealized Unrealized Market
1994 Cost Gains Losses Value
Investments Held for Sale:
U.S. Government and govt.
agencies and authorities $ 1,993,503 $ 0 $ 132,003 $ 1,861,500
States, municipalities and
political subdivisions 914,902 23,496 8,871 929,527
Collateralized mortgage
obligations 541,868 4,777 0 546,645
Public utilities 0 0 0 0
All other corporate bonds 0 0 0 0
3,450,273 28,273 140,874 3,337,672
Equity securities 1,235,840 1,800 326,628 911,012
Total $ 4,686,113 $ 30,073 $ 467,502 $ 4,248,684
Held to Maturity Securities:
U.S. Government and govt.
agencies and authorities $ 20,328,039 $ 155,347 $ 374,992 $ 20,108,393
States, municipalities and
political subdivisions 7,092,424 75,052 302,152 6,865,324
Collateralized mortgage
obligations 19,114,044 55,736 991,431 18,178,349
Public utilities 57,587,697 27,200 4,793,518 52,821,379
All other corporate bonds 78,916,638 165,497 5,120,550 73,961,585
Total $183,038,842 $ 478,832 $ 11,582,643 $171,935,030
The amortized cost of debt securities at December 31, 1995, by
contractual maturity, are shown below. Expected maturities will differ
from contractual maturities because borrowers may have the right to call
or prepay obligations with or without call or prepayment penalties.
Fixed Maturities Held to Maturity Amortized
December 31, 1995 Cost
Due in one year or less $ 10,752,755
Due after one year through five years 89,247,186
Due after five years through ten years 80,406,194
Due after ten years 10,152,216
$190,558,351
48
<PAGE>
Fixed Maturities Held for Sale Amortized
December 31, 1995 Cost
Due in one year or less $ 0
Due after one year through five years 2,249,473
Due after five years through ten years 682,573
Due after ten years 291,993
$ 3,224,039
Proceeds from sales, calls, and maturities of investments in debt securities
during 1995 were $16,885,000. Gross gains of $107,000 and gross losses of
$228,000 were realized on those sales, calls and maturities.
Proceeds from sales, calls, and maturities of investments in debt securities
during 1994 were $23,852,000. Gross gains of $168,000 and gross losses of
$272,000 were realized on those sales, calls and maturities.
Proceeds from sales, calls, and maturities of investments in debt securities
during 1993 were $45,733,000. Gross gains of $539,000 and gross losses of
$437,000 were realized on those sales, calls and maturities.
C. INVESTMENTS ON DEPOSIT - At December 31, 1995, investments carried at
approximately $46,957,000 were on deposit with various state insurance
departments.
5. DISCLOSURES ABOUT FAIR VALUES OF FINANCIAL INSTRUMENTS
The financial statements include various estimated fair value information at
December 31, 1995 and 1994, as required by Statement of Financial Accounting
Standards 107, Disclosure about Fair Value of Financial Instruments ("SFAS
107"). Such information, which pertains to the Company's financial
instruments, is based on the requirements set forth in that Statement and does
not purport to represent the aggregate net fair value of the Company.
The following methods and assumptions were used to estimate the fair value of
each class of financial instrument required to be valued by SFAS 107 for which
it is practicable to estimate that value:
(a) Cash and Cash equivalents
The carrying amount in the financial statements approximates fair value
because of the relatively short period of time between the origination of the
instruments and their expected realization.
(b) Fixed maturities and investments held for sale
Quoted market prices, if available, are used to determine the fair value. If
quoted market prices are not available, management estimates the fair value
based on the quoted market price of a financial instrument with similar
characteristics.
49
<PAGE>
(c) Mortgage loans on real estate
An estimate of fair value is based on management's review of the portfolio in
relation to market prices of similar loans with similar credit ratings,
interest rates, and maturity dates. Management conservatively estimates fair
value of the portfolio is equal to the carrying value.
(d) Investment real estate and real estate acquired in satisfaction of debt
An estimate of fair value is based on management's review of the individual
real estate holdings. Management utilizes sales of surrounding properties,
current market conditions and geographic considerations. Management
conservatively estimates the fair value of the portfolio is equal to the
carrying value.
(e) Policy loans
It is not practicable to estimate the fair value of policy loans as they have
no stated maturity and their rates are set at a fixed spread to related policy
liability rates. Policy loans are carried at the aggregate unpaid principal
balances in the consolidated balance sheets, and earn interest at rates
ranging from 4% to 8%. Individual policy liabilities in all cases equal or
exceed outstanding policy loan balances.
(f) Short term investments
For short term instruments, the carrying amount is a reasonable estimate of
fair value.
All short term instruments represent certificates of deposit with various
banks and all are protected under FDIC.
(g) Notes and accounts receivable and uncollected premiums
The Company holds a $840,000 note receivable for which the determination of
fair value is estimated by discounting the future cash flows using the current
rates at which similar loans would be made to borrowers with similar credit
ratings and for the same remaining maturities. Accounts receivable and
uncollected premiums are primarily insurance contract related receivables
which are determined based upon the underlying insurance liabilities and added
reinsurance amounts, and thus are excluded for the purpose of fair value
disclosure by paragraph 8(c) of SFAS 107.
(h) Notes payable
For borrowings under the senior loan agreement, which is subject to floating
rates of interest, carrying value is a reasonable estimate of fair value. For
subordinated borrowings fair value was determined based on the borrowing rates
currently available to the Company for loans with similar terms and average
maturities.
50
<PAGE>
The estimated fair values of the Company's financial instruments required to
be valued by SFAS 107 are as follows as of December 31:
1995 1994
Estimated Estimated
Carrying Fair Carrying Fair
Assets Amount Value Amount Value
Fixed maturities $190,558,351 $197,006,257 $183,038,842 $171,935,030
Fixed maturities
held for sale 3,226,175 3,226,175 3,337,672 3,337,672
Equity securities 1,946,481 1,946,481 911,012 911,012
Mortgage loans on
real estate 13,891,762 13,891,762 15,822,056 15,822,056
Policy loans 16,941,359 16,941,359 16,338,632 16,338,632
Short term
investments 425,000 425,000 350,000 350,000
Investment real
estate 11,683,575 11,683,575 11,712,847 11,712,847
Real estate
acquired in
satisfaction
of debt 5,332,413 5,332,413 5,620,101 5,620,101
Notes receivable 840,066 775,399 840,066 768,094
Liabilities
Notes payable 20,623,328 19,987,666 21,529,189 20,842,111
6. STATUTORY EQUITY AND GAIN FROM OPERATIONS
The Company's insurance subsidiaries are domiciled in Ohio, Illinois and West
Virginia and prepare their statutory-based financial statements in accordance
with accounting practices prescribed or permitted by the respective insurance
department. These principles differ significantly from generally accepted
accounting principles. "Prescribed" statutory accounting practices include
state laws, regulations, and general administrative rules, as well as a
variety of publications of the National Association of Insurance Commissioners
("NAIC"). "Permitted" statutory accounting practices encompass all accounting
practices that are not prescribed; such practices may differ from state to
state, may differ from company to company within a state, and may change in
the future. The NAIC currently is in the process of codifying statutory
accounting practices, the result of which is expected to constitute the only
source of "prescribed" statutory accounting practices. Accordingly, that
project, which is expected to be completed in 1996, will likely change
prescribed statutory accounting practices, and may result in changes to the
accounting practices that insurance enterprises use to prepare their statutory
financial statements. UG's total statutory shareholders' equity was
$7,274,000 and $7,683,000 at December 31, 1995 and 1994, respectively. The
combined statutory gain from operations (exclusive of intercompany dividends)
was $3,633,000, $3,074,000 and $1,581,000 for 1995, 1994 and 1993,
respectively.
51
<PAGE>
7. REINSURANCE
In December 1991, UG entered into a 50% coinsurance arrangement with Republic
Vanguard Life Insurance Company to enable the Company to maintain increased
production levels while containing first year statutory costs. The ceding of
new business under this treaty was terminated December 31, 1993. Republic
Vanguard holds an "A" (Excellent) rating from A. M. Best, an industry rating
company. The coinsurance arrangement, which was effective January 1, 1991,
allowed UG to cede to Republic Vanguard a 50% quota share of all new universal
life policies issued after the effective date through date of termination. UG
receives a commission allowance of 11% of excess premium and renewal premium.
Monies pertaining to the coinsurance arrangement are settled monthly. The
agreement contains a provision whereby risks in excess of UG's retention
($125,000 maximum) are transferred to the reinsurer. Risks are transferred
under an automatic ceding arrangement up to $1,000,000 and a facultative
arrangement for amounts in excess of $1,000,000.
In December 1993, UG entered into reinsurance agreements with Business Men's
Assurance Company, ("BMA") and Life Reassurance Corporation, ("LIFE RE"). BMA
and LIFE RE each hold an "A+" (Superior) rating from A.M. Best, an industry
rating company. The reinsurance arrangement was effective December 1, 1993,
and covered all new business of the Company. The agreements are a yearly
renewable term ("YRT") treaty where the Company cedes amounts above its
retention limit of $100,000 with a minimum cession of $25,000.
During 1993, USA entered into a coinsurance agreement with LIFE RE. The
coinsurance arrangement allows USA to cede to LIFE RE a 50% quota share of the
traditional participating policies issued by USA after the effective date of
July 1, 1992. USA entered into the arrangement to enable the Company to
maintain increased production levels while containing first year statutory
costs. USA receives commission allowances of 150% of first year premium, 27%
of second year premium, 32% of third year premium and 37% of fourth year and
beyond. Monies pertaining to the coinsurance arrangement are settled monthly.
The Company does not have any short-duration reinsurance contracts. The
effect of the Company's long duration reinsurance contracts on premiums earned
in 1994, 1993 and 1992 was as follows:
Shown in thousands
1995 1994 1993
Premiums Premiums Premiums
Earned Earned Earned
Direct $ 35,201 $ 37,911 $ 39,357
Assumed 0 0 0
Ceded (5,203) (5,627) (8,630)
Net premiums $ 29,998 $ 32,284 $ 30,727
Reinsurance receivables for future policy benefits were $13,540,000 and
$12,819,000 at December 31, 1995 and 1994, respectively, for estimated
recoveries under reinsurance treaties.
52
<PAGE>
8. COMMITMENTS AND CONTINGENCIES
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 and represent 1/2 of 1% of the insurance in force.
Management's analysis 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 repurchase as many of the policies
as possible. As of December 31, 1995, there remained approximately $5,738,000
of the original face amount which have not been settled. The Company will
continue its efforts to repurchase as many of the policies as possible and
regularly apprise the Ohio Department of Insurance regarding the status of
this situation. Through December 31, 1995, the Company spent a total of
$2,886,000 for the repurchase of these policies and for the defense of related
litigation.
The Company is currently involved in the following litigation: Freeman v.
Universal Guaranty Life Insurance Company (U.S.D.C.,N.D.Ga, 1994, 1-94-CV-
2593-RCF); 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 alleges that UG also breached
a contract by failing to pay his commissions for policies issued. Mr. Freeman
claims unpaid commissions of $104,000. 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 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. The Freeman suit is scheduled for trial April 8,
1996.
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
53
<PAGE>
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.
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.
9. RELATED PARTY TRANSACTIONS
The employees of the Company have extensive experience and expertise in
acquiring, managing and operating corporations and other business entities
engaged in the general life insurance business as well as other financial and
investment companies. None of the Company's subsidiaries has employees of
their own. On January 1, 1993, FCC entered into an agreement with UG pursuant
to which FCC provides management services necessary for UG to carry on its
business. In addition to the UG agreement, FCC and its affiliates have either
directly or indirectly entered into management and/or cost-sharing
arrangements whereby FCC provides management services. FCC received net
management fees of $10,464,000, $10,912,000 and $10,658,000 under these
arrangements in 1995, 1994 and 1993, respectively. UG paid $10,164,000,
$10,587,000 and $10,368,000 to FCC in 1995, 1994 and 1993, respectively.
In addition to the above agreements, USA has a service agreement with UII to
provide services for claim processing, underwriting, processing and servicing
of policies, accounting services, agency services, data processing and all
other expenses necessary to carry on the business of a life insurance company.
Fees are based on percentages of premium revenue applied to both first year
and renewal premiums. USA paid $2,015,000, $1,357,000 and $1,202,000 under
this agreement in 1995, 1994 and 1993, respectively.
The agreements of the insurance companies have been approved by their
respective domiciliary insurance departments and it is Management's opinion
that where applicable, costs have been allocated fairly and such allocations
are based upon generally accepted accounting principles. The costs paid by
FCC for these services include costs related to the production of new business
which are deferred as policy acquisition costs and charged off to the income
statement through "Amortization of deferred policy acquisition costs". Also
included are costs associated with the maintenance of existing policies which
are charged as current period costs and included in "general expenses".
The transactions described below, which transpired during 1994, were necessary
to position Universal Guaranty Investment Company ("UGIC"), Investors Trust,
Inc. ("ITI") and Commonwealth Industries Corporation ("CIC") for liquidation
and dissolution.
54
<PAGE>
Pursuant to an Agreement of Merger dated July 7, 1994 between Investors Trust
Assurance Company, an Illinois life insurance company ("ITAC"), and ALIC, on
July 31, 1994, ITAC merged with and into ALIC and ALIC was the surviving
company. On the effective date of the merger, ALIC succeeded to all the
rights and property of ITAC and assumed all of the liabilities and obligations
and became subject to all of the debts of ITAC in the same manner as if ALIC
had itself incurred them. The merger was approved by the Illinois Director of
Insurance.
Prior to the merger of ITAC with and into ALIC, ITAC was a wholly owned
subsidiary of ITI. ITAC owned 1,549,549 (approximately 66%) of the issued and
outstanding common stock of UGIC. Prior to July 31, 1994, ITI was the
indirect beneficial owner of the shares of UGIC common stock directly owned by
ITAC. On July 31, immediately prior to the effectiveness of the merger of
ITAC with and into ALIC, ITI purchased 758,946 shares of the UGIC common stock
owned by ITAC. The total purchase price was $2,276,793. On July 31, 1994,
ITAC also transferred to ITI at no cost 790,603 shares of the common stock of
the Company. On such date, ITI became the direct beneficial owner of all
1,549,549 shares of the common stock of UGIC. In order to purchase the
758,946 shares of UGIC common stock, ITI received a loan from UTI and UII in
the aggregate principal amount of $2,164,293. ITI transferred 721,431 shares
of the common stock of UGIC that it purchased from ITAC to UTI and UII in
payment of the loan. These shares were then contributed by UTI and UII to
their subsidiary, UTG.
The balance sheet of Commonwealth Industries Corporation for the period ended
July 31, 1994, included liabilities in the aggregate amount of $402,861
comprised of a future liability under a consulting agreement, escheat funds
and an account payable. On July 31, 1994, these liabilities were assumed by
UTG in exchange for 1,558,318 shares of the common stock of ITI.
The balance sheet of UGIC for the period ended July 31, 1994, included
liabilities in the aggregate amount of $461,102. On July 31, 1994, these
liabilities were assumed by UTG in exchange for 106,392 shares of the common
stock of FCC and 315 shares of the common stock of CIC. The FCC shares
transferred reduced UGIC's percentage ownership of FCC from 50.396% to
49.959%.
Prior to these transactions, UGIC, ITI and CIC each had liabilities in excess
of assets excluding the stock holdings of their respective subsidiary. The
1994 transactions enabled the companies to extinguish their liabilities.
On August 15, 1995, the shareholders of CIC, ITI, and UGIC voted to
voluntarily liquidate each of the companies and distribute the assets to the
shareholders (consisting solely of common stock of their respective
subsidiary). As a result of the liquidations, the shareholders of each
company became shareholders of FCC, following the liquidations, UTG holds 72%
of the common stock of FCC.
10. NOTES PAYABLE
At December 31, 1995, the Company has $20,623,000 in long term debt
outstanding. The debt is comprised of the following components:
1995 1994
Senior debt $ 11,400,000 $ 12,300,000
Subordinated 10 yr. notes 5,370,000 5,670,000
Subordinated 20 yr. notes 3,830,000 3,530,000
Encumbrance on real estate 23,000 29,000
$ 20,623,000 $ 21,529,000
55
<PAGE>
The senior debt is comprised of participations of the First Bank of Missouri,
(First Bank of Missouri was the successor bank to a merger with First Bank of
Gladstone, Citizen's Bank and Trust Company, and Bank of St. Joseph, all
Missouri Banks), Massachusetts General Life Insurance Company and Philadelphia
Life Insurance Company (the "Senior Lenders"). The loan is subject to a
certain Credit Agreement between the parties stipulating the terms of the
loan. 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, 1996, the "Base
Rate" was 8.25%. The principal balance of the FCC Senior Debt is payable in
installments on June 1st of each year commencing June 1, 1994 and ending June
1, 1998. On January 31, 1996, FCC prepaid $1,500,000 of the $3,900,000
scheduled principal payment due June 1, 1996. At December 31, 1995, the
principal amount of the FCC Senior Debt to outside parties was $10,400,000.
The Credit Agreement includes an earnings covenant which provides that FCC
will not permit the sum of (i) the combined pre-tax earnings of the
subsidiaries of FCC, excluding the results of any surplus relief reinsurance
and any intercompany dividends, determined in accordance with statutory
accounting practices, and (ii) the pre-tax earnings of FCC plus interest
expense and non-cash charges, determined in accordance with generally accepted
accounting practices, to be less than the amounts specified in the Credit
Agreement. The Credit Agreement requires that the earnings as specified
above, be not less than $7,450,000 for 1995. The Company has not satisfied
the earnings requirement for the past several years. The lenders have granted
waivers or modifications to the earnings requirement in each of the past years
in which the Company did not meet the requirement. Management expects similar
treatment of the 1995 requirement.
The subordinated debt was incurred June 16, 1992 as a part of an acquisition.
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.
During 1995, the Company refinanced $300,695 of the 10 year notes to 20 year
notes bearing interest at the rate of 8.75%. The repayment terms of these
notes are similar to the original 20 year notes. 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
is as follows:
Year Amount
1996 3,900,000
1997 4,437,000
1998 3,137,000
1999 537,000
2000 537,000
56
<PAGE>
11. OTHER CASH FLOW DISCLOSURE
On a cash basis, the Company paid $1,887,170, $1,883,198, and $1,836,881 in
interest expense for the years 1995, 1994 and 1993, respectively. The Company
paid $25,821, $190, and $425,071 in federal income tax for the years 1995,
1994 and 1993 respectively.
The Company held an investment in an intermediate parent, Commonwealth
Industries Corporation ("CIC"), with a carrying value of $3,462,500. Upon
liquidation of CIC in August of 1995, FCC received 372,506 shares of its own
stock from the distribution of assets of CIC. These shares are classified as
treasury stock with a basis equal to the carrying value of the original CIC
shares.
12. DEFERRED COMPENSATION PLAN
UTI and FCC have instituted a deferred compensation plan effective May 1, 1993
pursuant to which an officer or agent of FCC, UTI or affiliates of UTI, may
defer a portion of their income over the next two and one-half years in return
for a deferred compensation payment payable at the end of seven years in the
amount equal to the total income deferred plus interest at a rate of
approximately 8.5% per annum and a stock option to purchase shares of common
stock of UTI. An officer or agent will receive an immediately exercisable
option to purchase 23,000 shares of UTI common stock at $1.75 per share for
each $25,000 ($10,000 per year for two and one-half years) of total income
deferred. The option expires on December 31, 2000. At December 31, 1995 and
1994, the Company held a liability of $1,167,000 and $851,000, respectively,
relating to this plan.
13. CONCENTRATION OF CREDIT RISK
The Company maintains cash balances in financial institutions which at times
may exceed federally insured limits. The Company has not experienced any
losses in such accounts and believes it is not exposed to any significant
credit risk on cash and cash equivalents.
14. NEW ACCOUNTING STANDARDS
The Financial Accounting Standards Board (FASB) has issued Statement of
Financial Accounting Standards No. 114 entitled "Accounting by Creditors for
Impairment of a Loan" and Statement of Financial Accounting Standards No. 118,
an amendment of Statement No. 114. The Statement amends FASB Statement No. 5
"Accounting for Contingencies" and FASB Statement No. 15 "Accounting by
Debtors and Creditors for Troubled Debt Restructuring". This Statement, which
becomes effective for financial statements for fiscal years beginning after
December 15, 1994, applied to all troubled debt restructuring involving a
modification of terms.
A loan is impaired when, based on current information and events, it is
probable that a creditor will be unable to collect all amounts due according
to the contractual terms of the loan agreement. As used in this Statement and
in Statement 5, as amended, all amounts due according to the contractual terms
means that both the contractual interest payments and the contractual
principal payments of a loan will be collected as scheduled in the loan
agreement. This Statement does not specify how a creditor should determine
that it is probable that it will be unable to collect all amounts due
according to the contractual terms of a loan. A creditor should apply its
normal loan review procedures in making that judgment. An insignificant delay
or insignificant shortfall in amount of payments does not require application
of this Statement. A loan is not impaired during a period of delay in
57
<PAGE>
payment if the creditor expects to collect all amounts due including interest
accrued at the contractual interest rate for the period of delay. Thus, a
demand loan or other loan with no stated maturity is not impaired if the
creditor expects to collect all amounts due including interest accrued at the
contractual interest rate during the period the loan is outstanding.
This statement was adopted for the 1995 financial statements. The adoption
did not have any impact on the Company's financial statements.
The Financial Accounting Standards Board (FASB) has issued Statement of
Financial Accounting Standards No. 121 entitled "Accounting for the Impairment
of Long-Lived Assets and for Long-Lived Assets to be Disposed of". This
Statement, becomes effective for financial statements for fiscal years
beginning after December 31, 1995, with early adoption encouraged.
An entity shall review long-lived assets and certain identifiable intangibles
for impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. If certain events or
changes in circumstances indicate that the carrying amount of an asset may not
be recoverable, the entity shall estimate the future cash flows expected to
result from the use of the asset and its eventual disposition. Future cash
flows are the future cash inflows expected to be generated by an asset less
the future cash outflows expected to be necessary to obtain those inflows. If
the sum of the expected future cash flows (undiscounted and without interest
charges) is less than the carrying amount of the asset, the entity shall
recognize an impairment loss in accordance with this Statement. Otherwise, an
impairment loss shall not be recognized; however, a review of depreciation
policies may be appropriate.
This statement was adopted for the 1995 financial statements. The adoption
did not have any impact on the Company's financial statements.
58
<PAGE>
15. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
1995
1st 2nd 3rd 4th
Premium income and other
considerations, net $ 9,445,222 $ 8,765,804 $ 7,868,803 $ 7,018,707
Net investment income $ 3,868,022 $ 3,871,973 $ 3,746,400 $ 4,013,356
Total revenues $ 13,393,826 $ 12,589,288 $ 11,555,186 $10,826,874
Policy benefits
including dividends $ 8,227,705 $ 8,940,389 $ 7,014,070 $ 7,041,851
Amortization of def.
policy acquisitions $ 2,243,591 $ 2,601,769 $ 1,845,751 $ 694,340
Operating expenses $ 3,001,897 $ 2,296,482 $ 2,025,224 $ 3,349,393
Operating income (loss) $ (570,700) $ (1,722,716) $ 193,517 $ (734,749)
Net income (loss) $ 124,352 $ (1,544,567) $ 1,186,214 $(1,217,637)
Net income (loss) per
share $ 0.01 $ (0.06) $ 0.05 $ (0.06)
1994
1st 2nd 3rd 4th
Premium income and other
considerations, net $ 8,964,962 $ 9,934,140 $ 7,910,808 $ 8,214,359
Net investment income $ 3,300,446 $ 3,417,511 $ 3,622,195 $ 3,848,309
Total revenues $ 12,681,470 $ 13,207,458 $ 11,297,282 $12,075,161
Policy benefits
including dividends $ 7,383,334 $ 9,440,534 $ 8,994,923 $ 9,613,116
Amortization of def.
policy acquisitions $ 1,759,083 $ 1,791,036 $ 1,797,961 $ 1,271,180
Operating expenses $ 2,214,390 $ 1,406,224 $ 2,345,992 $ 3,009,379
Operating income $ 876,062 $ 88,949 $ (2,346,822) $(2,325,535)
Net income (loss) $ 768,075 $ 427,438 $ (2,090,687) $ (879,670)
Net income (loss) per
share $ 0.03 $ 0.02 $ (0.09) $ (0.03)
1993
1st 2nd 3rd 4th
Premium income and other
considerations, net $ 9,721,559 $ 8,651,168 $ 7,312,005 $ 7,411,913
Net investment income $ 3,949,496 $ 3,339,979 $ 3,353,208 $ 3,445,026
Total revenues $ 13,556,195 $ 12,159,438 $ 11,136,672 $ 10,332,416
Policy benefits
including dividends $ 8,445,955 $ 9,282,815 $ 7,485,959 $ 5,052,857
Amortization of def.
policy acquisitions $ 2,631,755 $ 1,564,443 $ 2,088,932 $ 1,850,218
Operating expenses $ 2,737,801 $ 2,702,851 $ 2,254,271 $ 2,905,800
Operating income $ (752,387) $ (1,880,563) $ (1,147,901) $ (243,179)
Net income (loss) $ (650,633) $ (1,708,410) $ (588,683) $ (394,958)
Net income (loss) per
share $ (0.03) $ (0.07) $ (0.02) $ (0.02)
59
<PAGE>
PART III
With respect to Items 10 through 13, the Company will file with the Securities
and Exchange Commission, within 120 days of the close of its fiscal year, a
definitive proxy statement pursuant to Regulation 14-A.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information regarding directors of the Company will be set forth in the
Company's proxy statement relating to the annual meeting of shareholders to be
held June 3, 1996, and is incorporated herein by reference. Information
regarding executive officers of the Company is set forth under the caption
"Executive Officers".
ITEM 11. EXECUTIVE COMPENSATION
Information regarding executive compensation will be set forth in the
Company's proxy statement relating to the annual meeting of shareholders to be
held June 3, 1996, and is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information regarding security ownership of certain beneficial owners and
management will be set forth in the Company's proxy statement relating to the
annual meeting of shareholders to be held June 3, 1996, and is incorporated
herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information regarding certain relationships and related transactions will be
set forth in the Company's proxy statement relating to the annual meeting of
shareholders to be held June 3, 1996, and is incorporated herein by reference.
60
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) The following documents are filed as a part of the report:
(1) Financial Statements:
See Item 8, Index to Financial Statements
(2) Financial Statement Schedules
Schedule I - Summary of Investments - other than invested in
related parties.
Schedule II - Condensed financial information of registrant
Schedule IV - Reinsurance
Schedule V - Valuation and Qualifying Accounts
NOTE: Schedules other than those listed above are omitted
for the reasons they are not required or the information is
disclosed in the financial statements or footnotes.
(b) Reports on Form 8-K filed during fourth quarter.
None
(c) Exhibits:
Index to Exhibits (See Pages 62 - 65).
61
<PAGE>
INDEX TO EXHIBITS
Exhibit
Number
3(a) (1) Articles of Incorporation for the Company dated August 25, 1967.
3(b) (1) Amended Articles of Incorporation for the Company dated January
27, 1988.
3(c) (1) Charter Agreement for the Company dated May 22, 1991.
3(d) (1) Amended Articles of Incorporation for the Company dated March 12,
1993.
3(e) (1) Code of By-Laws for the Company dated September 30, 1992.
10(a) (1) Compromise and Settlement Agreement dates as of February 27, 1991,
among First Commonwealth Corporation, Universal Guaranty Life
Insurance Company, Alliance Life Insurance Company, Roosevelt
National Life Insurance Company of America, Abraham Lincoln
Insurance Company, Appalachian Life Insurance Company, Liberty
American Assurance Company, and Farmers and Ranchers Life
Insurance Company, and Southshore Holding Corp., Public Investors,
Inc., Fidelity Fire and Casualty Insurance Company, Insurance
Premium Assistance Company, Agency Premium Assistance Company,
Coastal Loans Acquisition Company, Bob F. Shamburger, Gary E.
Jackson, Leonard H. Aucoin, Dennis J. Lafont, William Joel Herron
and Jerry Palmer
10(b) (1) Credit Agreement dated as of December 11, 1989 among First
Commonwealth Corporation, Commonwealth Industries Corporation,
Investors Trust, Inc., Universal Guaranty Investment Company, John
K. Cantrell, Mildred G. Cantrell and First Bank of Gladstone
10(c) (1) Guaranty Agreement among Commonwealth Industries Corporation,
Investors Trust, Inc. and Universal Guaranty Investment Company
dated as of December 11, 1989
10(d) (1) Security Agreement-Pledge dated as of December 11, 1989 between
First Commonwealth Corporation and First Bank of Gladstone
10(e) (1) Security Agreement-Pledge dated as of December 11, 1989 between
Commonwealth Industries Corporation and First Bank of Gladstone
10(f) (1) Security Agreement-Pledge dated as of December 11, 1989 between
Universal Guaranty Investment Company and First Bank of Gladstone
10(g) (1) Security Agreement-Pledge dated as of December 11, 1989 between
Investors Trust, Inc. and First Bank of Gladstone
62
<PAGE>
INDEX TO EXHIBITS
Exhibit
Number
10(h) (1) Amendment to the Credit Agreement dated as of May 31, 1991 among
First Commonwealth Corporation, Commonwealth Industries
Corporation, Investors Trust, Inc., Universal Guaranty Investment
Company, John K. Cantrell,, Mildred G. Cantrell, and the Banks
10(i) (1) Confirmation of Guaranty Agreement dated as of May 31, 1991 by
Commonwealth Industries Corporation, Investors Trust, Inc. and
Universal Guaranty Investment Company
10(j) (1) Confirmation of Security Agreement-Pledge dated as of May 31, 1991
by Universal Guaranty Investment Company
10(k) (1) Confirmation of Security Agreement-Pledge dated as of May 31, 1991
by First Commonwealth Corporation
10(l) (1) Confirmation of Security Agreement-Pledge dated as of May 31, 1991
by Commonwealth Industries Corporation
10(m) (1) Confirmation of Security Agreement-Pledge dated as of May 31, 1991
by Investors Trust, Inc.
10(n) (1) Second Amendment to Credit Agreement dated as of June 12, 1992
among First Commonwealth Corporation, Commonwealth Industries
Corporation, Investors Trust, Inc., Universal Guaranty Investment
Company, John K. Cantrell, Mildred G. Cantrell, United Trust
Group, Inc. and the Banks
10(o) (1) Confirmation of Guaranty Agreement dated as of June 16, 1992 by
Commonwealth Industries Corporation, Investors Trust, Inc. and
Universal Guaranty Investment Company
10(p) (1) Confirmation of Security Agreement-Pledge dated as of June 16,
1992 by Commonwealth Industries Corporation
10(q) (1) Amendment and Confirmation of Security Agreement-Pledge dated as
of June 16, 1992 by First Commonwealth Corporation
10(r) (1) Amendment and Confirmation of Security Agreement-Pledge dated as
of June 16, 1992 by Investors Trust, Inc.
10(s) (1) Amendment and Confirmation of Security Agreement-Pledge dated as
of June 16, 1992 by Universal Guaranty Investment Company
10(t) (1) Pledge Agreement dated as of June 16, 1992 by United Trust Group,
Inc.
10(u) (1) Note Purchase Agreement dated as of June 16, 1992 by United Trust
Group, Inc.
63
<PAGE>
INDEX TO EXHIBITS
Exhibit
Number
10(v) (1) $1,909,882.00 Term Note of First Commonwealth Corporation to
Massachusetts General Life Insurance Company dated as of June 16,
1992
10(w) (1) $6,909,867.00 Term Note of First Commonwealth Corporation to
Philadelphia Life Insurance Company dated as of June 16, 1992
10(x) (1) $5,453,509.30 Term Note of First Commonwealth Corporation to First
Bank of Gladstone dated as of June 16, 1992
10(y) (1) $879,588.60 Term Note of First Commonwealth Corporation to
Citizens Bank & Trust Co. dated as of June 16, 1992
10(z) (1) $1,847,153.10 Term Note of First Commonwealth Corporation to Bank
of St. Joseph dated as of June 16, 1992
10(aa)(1) Subcontract Agreement dated September 1, 1990 between United
Trust, Inc. and United Income, Inc.
10(bb)(1) Service Agreement dated November 8, 1989 between United Security
Assurance Company and United Income, Inc.
10(cc)(1) Management and Consultant Agreement dated as of January 1, 1993
between First Commonwealth Corporation and Universal Guaranty Life
Insurance Company
10(dd)(1) Management Agreement dated December 20, 1981 among Commonwealth
Industries Corporation, Executive National Life Insurance Company
(now known as Investors Trust Assurance Company) and Abraham
Lincoln Insurance Company
10(ee)(1) Reinsurance Agreement dated January 1, 1991 between Universal
Guaranty Life Insurance Company and Republic-Vanguard Life
Insurance Company
10(ff)(1) Reinsurance Agreement dated July 1, 1992 between United Security
Assurance Company and Life Reassurance Corporation of America
10(gg)(1) United Trust, Inc. Stock Option Plan
10(hh)(1) Board Resolution adopting United Trust, Inc.'s Officer Incentive
Fund
10(ii)(1) Employment Agreement dated as of April 15, 1993 between Larry E.
Ryherd and First Commonwealth Corporation and United Trust, Inc.
10(jj)(1) Employment Agreement dated as of April 15, 1993 between Thomas F.
Morrow and First Commonwealth Corporation and United Trust, Inc.
64
<PAGE>
INDEX TO EXHIBITS
Exhibit
Number
10(kk)(1) Employment Agreement dated as of April 15, 1993 between James E.
Melville and First Commonwealth Corporation and United Trust, Inc.
10(ll)(1) Employment Agreement dated as of June 16, 1992 between George E.
Francis and First Commonwealth Corporation
10(mm)(1) Amendment Number One to Employment Agreement dated as of April 15,
1993 between George E. Francis and First Commonwealth Corporation
10(nn)(1) Consulting Arrangement entered into June 15, 1987 between Robert
E. Cook and United Trust, Inc.
10(oo)(1) Agreement dated June 16, 1992 between John K. Cantrell and First
Commonwealth Corporation
10(pp)(1) Termination Agreement dated as of January 29, 1993 between Scott
J. Engebritson and United Trust, Inc., United Fidelity, Inc.,
United Income, Inc., First Commonwealth Corporation and United
Security Assurance Company
10(qq)(1) Stock Purchase Agreement dated February 20, 1992 between United
Trust Group, Inc. and Sellers
10(rr)(1) Amendment No. One dated April 20, 1992 to the Stock Purchase
Agreement between the Sellers and United Trust Group, Inc.
10(ss)(1) Security Agreement dated June 16, 1992 between United Trust Group,
Inc. and the Sellers
10(tt)(1) Stock Purchase Agreement dated June 16, 1992 between United Trust
Group, Inc. and First Commonwealth Corporation
Footnote
(1) Incorporated by reference from the Company's Annual Report on Form
10-K, File No. 0-5392, as of December 31, 1993.
65
<PAGE>
<TABLE>
FIRST COMMONWEALTH CORPORATION Schedule I
SUMMARY OF INVESTMENTS - OTHER THAN
INVESTMENTS IN RELATED PARTIES
As of December 31, 1995
Column A Column B Column C Column D
Amount at
Which Shown
in Balance
Cost Value Sheet
<S> <C> <C> <C>
Fixed maturities:
Bonds:
United States Goverment
and government agencies
and authorities $ 27,205,449 $ 28,253,557 $ 27,205,449
State, municipalities,
and political subdivisions 6,774,185 7,079,634 6,774,185
Collateralized mortgage
obligations 15,395,913 15,623,785 15,395,913
Public utilities 59,101,260 61,282,114 59,101,260
All other corporate bonds 82,081,544 84,767,167 82,081,544
Total fixed maturities 190,558,351 $ 197,006,257 190,558,351
Investments held for sale:
Fixed maturities:
United States Goverment and
government agencies
and authorities 2,001,860 $ 2,003,817 2,003,817
State, municipalities, and
political subdivisions 812,454 823,018 823,018
Collateralized mortgage
obligations 32,177 32,683 32,683
Public utilities 119,379 117,829 117,829
All other corporate bonds 258,169 248,828 248,828
3,224,039 $ 3,226,175 3,226,175
Equity securities:
Public utilities 82,073 $ 60,923 60,923
All other corporate
securities 1,164,091 1,885,558 1,885,558
1,246,164 $ 1,946,481 1,946,481
Mortgage loans on real estate 13,891,762 13,891,762
Investment real estate 11,683,575 11,978,575
Real estate acquired in
satisfaction of debt 5,332,413 5,332,413
Policy loans 16,941,359 16,941,359
Short term investments 425,000 425,000
TOTAL INVESTMENTS $243,302,663 $244,005,116
</TABLE>
66
<PAGE>
FIRST COMMONWEALTH CORPORATION
CONDENSED FINANCIAL INFORMATION OF REGISTRANT Schedule II
NOTES TO CONDENSED FINANCIAL INFORMATION
(a) The condensed financial information should be read in conjunction with
the consolidated financial statements and notes of First Commonwealth
Corporation and Consolidated Subsidiaries.
67
<PAGE>
<TABLE>
FIRST COMMONWEALTH CORPORATION
CONDENSED FINANCIAL INFORMATION OF
REGISTRANT PARENT ONLY BALANCE SHEETS
As of December 31, 1995 and 1994 Schedule III
1995 1994
<S> <C> <C>
ASSETS
Mortgage loans $ 11,023 $ 12,667
Cash and cash equivalents 1,735,664 926,699
Investment in Commonwealth Industries
Corporation 0 3,462,500
Investment in Universal Guaranty Life
Insurance Company 58,862,430 61,099,902
Deferred income taxes 295,168 343,739
Other assets 11,521 39,008
TOTAL ASSETS $ 60,915,806 $ 65,884,515
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Notes payable $ 20,599,853 $ 21,499,853
Indebtedness of subsidiaries
and affiliates, net 464,356 (261,031)
Income taxes payable 12,029 32,000
Other liabilities 1,154,768 1,307,456
TOTAL LIABILITIES 22,231,006 22,578,278
Shareholders' equity:
Common stock 23,967,545 24,340,051
Additional paid-in capital 28,498,565 31,588,559
Unrealized depreciation of
investments held for sale
of affiliates (131,215) (423,916)
Accumulated deficit (13,650,095) (12,198,457)
TOTAL SHAREHOLDERS' EQUITY 38,684,800 43,306,237
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $60,915,806 $65,884,515
</TABLE>
68
<PAGE>
<TABLE>
FIRST COMMONWEALTH CORPORATION
CONDENSED FINANCIAL INFORMATION OF
REGISTRANT PARENT ONLY STATEMENTS OF OPERATIONS
Three Years Ended December 31, 1995 Schedule III
1995 1994 1993
<S> <C> <C> <C>
Revenues:
Net investment income $ 42,714 $ 98,194 $ 47,502
Management fees from affiliates 10,486,574 10,911,520 10,658,088
Other income 794 1,145 2,421
10,530,082 11,010,859 10,708,011
Expenses:
Interest expense 1,916,564 1,941,565 1,885,927
Operating expenses 7,473,514 7,356,280 7,916,454
9,390,078 9,297,845 9,802,381
Operating income 1,140,004 1,713,014 905,630
Credit (provision) for
income taxes (61,469) 32,945 (129,616)
Equity in loss of subsidiaries (2,530,173) (3,520,803) (4,118,698)
Net loss $(1,451,638) $(1,774,844) $(3,342,684)
</TABLE>
69
<PAGE>
<TABLE>
FIRST COMMONWEALTH CORPORATION
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
PARENT ONLY STATEMENTS OF CASH FLOWS
Three Years Ended December 31, 1995 Schedule III
1995 1994 1993
<S> <C> <C> <C>
Increase (decrease) in cash and
cash equivalents
Cash flows from operating activities:
Net loss $ (1,451,638) $ (1,774,844) $ (3,342,684)
Adjustments to reconcile net
loss to net cash provided by
operating activities:
Equity in loss of subsidiaries 2,530,173 3,520,803 4,118,698
Dividends from subsidiary
eliminated in consolidated 0 0 1,230,000
Change in indebtedness of
affiliates, net 725,387 (851,969) 1,285,116
Change in other assets
and liabilities (125,201) 231,330 (356,326)
Change in deferred income taxes 48,571 (66,933) 129,616
Change in income taxes payable (19,971) 32,000 0
Net cash provided by
operating activities 1,707,321 1,090,387 3,064,420
Cash flows from investing activities:
Proceeds from mortgage loan
payments 1,644 45,524 0
Cost of investments acquired
mortgage loans 0 (57,921) 0
Net cash provided (used) by
investing activities 1,644 (12,667) 0
Cash flows from financing activities:
Payments of principal on
notes payable (900,000) (2,000,000) (2,700,000)
Net cash used in
financing activities (900,000) (2,000,000) (2,700,000)
Net increase (decrease) in
cash and cash equivalents 808,965 (922,280) 364,420
Cash and cash equivalents at
beginning of year 926,699 1,848,979 1,484,559
Cash and cash equivalents at
end of year $1,735,664 $ 926,699 $ 1,848,979
</TABLE>
70
<PAGE>
<TABLE>
FIRST COMMONWEALTH CORPORATION
REINSURANCE
As of December 31, 1995 and the year ended December 31, 1995 Schedule VI
Column A Column B Column C Column D Column E Column F
Percentage
Ceded to Assumed of amount
other from other assumed to
Gross amount companies companies Net amount net
<S> <C> <C> <C> <C> <C>
Life insurance
in force $4,207,695,000 $1,087,774,000 $1,039,517,000 $4,159,438,000 25.0%
Premiums:
Life
insurance $ 34,952,367 $ 5,149,939 $ 0 $ 29,802,428 0.0%
Accident and health
insurance 248,448 52,751 0 195,697 0.0%
$ 35,200,815 $ 5,202,690 $ 0 $ 29,998,125 0.0%
</TABLE>
* All assumed business represents the Company's participation in the
Servicemen's Group Life Insurance Program (SGLI).
71
<PAGE>
<TABLE>
FIRST COMMONWEALTH CORPORATION
REINSURANCE
As of December 31, 1994 and the year ended December 31, 1994 Schedule VI
Column A Column B Column C Column D Column E Column F
Percentage
Ceded to Assumed of amount
other from other assumed to
Gross amount companies companies* Net amount net
<S> <C> <C> <C> <C> <C>
Life insurance
in force $4,543,746,000 $1,217,119,000 $1,077,413,000 $4,404,040,000 24.5%
Premiums:
Life
insurance $ 37,667,044 $ 5,580,736 $ 0 $ 32,086,308 0.0%
Accident and health
insurance 243,769 45,846 0 197,923 0.0%
$ 37,910,813 $ 5,626,582 $ 0 $ 32,284,231 0.0%
</TABLE>
* All assumed business represents the Company's participation in the
Servicemen's Group Life Insurance Program (SGLI).
72
<PAGE>
<TABLE>
FIRST COMMONWEALTH CORPORATION
REINSURANCE
As of December 31, 1993 and the year ended December 31, 1993 Schedule VI
Column A Column B Column C Column D Column E Column F
Percentage
Ceded to Assumed of amount
other from other assumed to
Gross amount companies companies* Net amount net
<S> <C> <C> <C> <C> <C>
Life insurance
in force $4,438,715,000 $1,426,000,000 $1,950,136,000 $4,962,851,000 39.3%
Premiums:
Life
insurance $ 38,952,960 $ 8,657,707 $ 0 $ 30,295,253 0.0%
Accident and health
insurance 404,474 (27,310) 0 431,784 0.0%
$ 39,357,434 $ 8,630,397 $ 0 $ 30,727,037 0.0%
</TABLE>
* All assumed business represents the Company's participation in the
Servicemen's Group Life Insurance Program (SGLI).
73
<PAGE>
<TABLE>
FIRST COMMONWEALTH CORPORATION
VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED DECEMBER 31, 1995, 1994, & 1993 Schedule V
Balance at Additions
Beginning Charges Balances at
Description of Period and Expenses Deductions End of Period
<S> <C> <C> <C> <C>
DECEMBER 31, 1995
Allowance for doubtful accounts
mortgage loans $ 26,000 $ 0 $ 16,000 $ 10,000
Accumulated depreciation on
property and equipment and
EDP conversion costs 2,886,575 230,968 0 3,117,543
Accumulated amortization of
costs in excess of net
assets purchased 4,389,972 691,307 0 5,081,279
Accumulated depreciation on
real estate 3,006,803 300,396 53,220 3,253,979
Total 10,309,350 1,222,671 69,220 11,462,801
DECEMBER 31, 1994
Allowance for doubtful accounts -
mortgage loans $ 300,000 $ 0 $ 274,000 $ 26,000
Accumulated depreciation on
property and equipment and
EDP conversion costs 2,539,131 356,390 8,946 2,886,575
Accumulated amortization of
costs in excess of net
assets purchased 4,007,303 450,669 68,000 4,389,972
Accumulated depreciation on
real estate 2,705,660 301,143 0 3,006,803
Total 9,552,094 1,108,202 350,946 10,309,350
DECEMBER 31, 1993
Allowance for doubtful accounts -
mortgage loans $ 1,500,000 $ 0 $ 1,200,000 $ 300,000
Accumulated depreciation on
property and equipment and
EDP conversion costs 2,200,435 342,649 3,953 2,539,131
Accumulated amortization of
costs in excess of net
assets purchased 3,348,036 659,267 0 4,007,303
Accumulated depreciation on
real estate 2,401,530 304,130 0 2,705,660
Total 9,450,001 1,306,046 1,203,953 9,552,094
</TABLE>
74
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
FIRST COMMONWEALTH CORPORATION
Registrant
/s/ John S. Albin Date: March 26, 1996
John S. Albin, Director
/s/ John K. Cantrell Date: March 26, 1996
John K. Cantrell, Chairman of the Board
and Director
/s/ William F. Cellini Date: March 26, 1996
William F. Cellini, Director
/s/ John W. Collins Date: March 26, 1996
John W. Collins, Director
/s/ George E. Francis Date: March 26, 1996
George E. Francis, Senior Vice President
and Director
/s/ Donald G. Geary Date: March 26, 1996
Donald G. Geary, Director
/s/ James E. Melville Date: March 26, 1996
James E. Melville, Senior Executive
Vice President, Chief Financial Officer
and Director
<PAGE>
/s/ Joseph H. Metzger Date: March 26, 1996
Joseph H. Metzger, Senior Vice President
and Director
/s/ Luther C. Miller Date: March 26, 1996
Luther C. Miller, Director
/s/ Thomas F. Morrow Date: March 26, 1996
Thomas F. Morrow, Vice Chairman, Chief
Operating Officer and Director
/s/ Robert V. O'Keefe Date: March 26, 1996
Robert V. O'Keefe, Director
/s/ Larry E. Ryherd Date: March 26, 1996
Larry E. Ryherd, President, Chief
Executive Officer and Director
/s/ Robert W. Teater Date: March 26, 1996
Robert W. Teater, Director
/s/ Howard A. Young Date: March 26, 1996
Howard A. Young Director
