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, 1996 Commission File Number 0-5392
FIRST COMMONWEALTH CORPORATION
(Exact Name of Registrant as specified in its charter)
5250 South Sixth Street
P.O. Box 5147
Springfield, IL 62705
(Address of principal executive offices, including zip code)
VIRGINIA 54-0832816
(State or other jurisdiction (I.R.S. Employer
incorporation or organization) Identification No.)
Registrant's telephone number, including area code: (217) 241-6300
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 3, 1997 was $818,573 based on the bid price for
the Common Stock in the over-the-counter market on such date.
At March 3, 1997, the Registrant had outstanding 23,967,749 shares of
Common Stock, par value $1 per share.
DOCUMENTS INCORPORATED BY REFERENCE: Portions of the Registrant's proxy
statement for the annual meeting of shareholders to be held during 1997
are incorporated by reference into Part III of this Report.
<PAGE> 1 of 69
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, 1996, the parent, significant majority-owned
subsidiaries and affiliates of the Registrant were as depicted on the
following organizational chart:
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> 2
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.
First Commonwealth Corporation, ("FCC") was incorporated in August 1967, as
a Virginia corporation. FCC is an intermediate holding company, (See
organizational chart) ultimately controlled by United Trust, Inc., ("UTI").
UTI was incorporated December 14, 1984, as an Illinois corporation. During
the next two and a half years, UTI was engaged in an intrastate public
offering of its securities, raising over $12,000,000 net of offering costs.
In 1986, UTI formed a life insurance subsidiary and by 1987 began selling
life insurance products.
United Income, Inc. ("UII"), an affiliated company, was incorporated on
November 2, 1987, as an Ohio corporation. Between March 1988 and August
1990, UII raised a total of approximately $15,000,000 in an intrastate
public offering in Ohio. During 1990, UII formed a life insurance
subsidiary and began selling life insurance products.
In December 1989, FCC acquired Universal Guaranty Life Insurance Company
("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.
On February 20, 1992, UTI and UII, formed a joint venture, United Trust
Group, Inc., ("UTG"). On June 16, 1992, UTI contributed $2.7 million in
cash, an $840,000 promissory note and 100% of the common stock of its
wholly owned life insurance subsidiary. UII contributed $7.6 million in
cash and 100% of its life insurance subsidiary to UTG. After the
contributions of cash, subsidiaries, and the note, UII owns 47% and UTI
owns 53% of UTG.
On June 16, 1992, UTG acquired 67% of the outstanding common stock of the
now dissolved Commonwealth Industries Corporation, ("CIC") for a purchase
price of $15,567,000. Following the acquisition UTI controlled eleven life
insurance subsidiaries. The Company has taken several steps to streamline
and simplify the corporate structure following the acquisitions.
On December 28, 1992, Universal Guaranty Life Insurance Company ("UG") was
the surviving company of a merger with Roosevelt National Life Insurance
Company ("RNLIC"), United Trust Assurance Company ("UTAC"), Cimarron Life
Insurance Company ("CIM") and Home Security Life Insurance Company
("HSLIC"). 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.
On July 31, 1994, Investors Trust Assurance Company ("ITAC") was merged
into Abraham Lincoln Insurance Company ("ALIC").
On August 15, 1995, the shareholders of CIC, Investors Trust, Inc.,
("ITI"), and Universal Guaranty Investment Company, ("UGIC"), all
intermediate holding companies within the UTI group, 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 the shareholders of the liquidated companies
became shareholders of FCC. Following the liquidations, UTG owns 72% of
the outstanding common stock of FCC.
<PAGE> 3
PRODUCTS
The Company's portfolio consists of two 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 and 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 universal life 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 5.5% interest with
a 4.5% guaranteed interest rate. Partial withdrawals, subject to a
remaining minimum $500 cash surrender value and a $25 fee, are allowed once
a year after the first duration. 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
operations. The Company has a variety of policies in force different from
those which are currently being marketed. Approximately 30% of the
insurance in force is participating business. The Company's average
persistency rate for its policies in force for 1996 and 1995 has been 87.9%
and 87.5%, respectively. The Company does not anticipate any material
fluctuations in these rates in the future that may result from competition.
The Company's actual experience for earned interest, persistency and
mortality vary from the assumptions applied to pricing and for determining
premiums. Accordingly, differences between the Company's actual 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 monitors
investment yields, and when necessary adjusts credited interest rates on
its insurance products to preserve targeted interest spreads. Credited
rates are reviewed and established by the Board of Directors of the
respective life insurance subsidiaries.
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 60 captive agents and 15 independent
agents who actively write new business. No individual sales agent
accounted for over 10% of the Company's premium volume in 1996. 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 restructuring 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.
<PAGE> 4
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 of 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 1996, Ohio accounted
for 99% of USA's direct premiums collected.
ALIC is licensed in Alabama, Arizona, Illinois, Indiana, Louisiana and
Missouri. During 1996, Illinois and Indiana accounted for 44% and 36%,
respectively of ALIC's direct premiums collected.
APPL is licensed in Alabama, Arizona, Arkansas, Colorado, Georgia,
Illinois, Indiana, Kansas, Kentucky, Louisiana, Missouri, Montana,
Nebraska, Ohio, Oklahoma, Pennsylvania, Rhode Island, South Carolina, South
Dakota, Tennessee, Texas, Utah, Virginia, Washington, West Virginia and
Wyoming. During 1996, 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 1996, Illinois and Ohio accounted for 33% and 15%, respectively, of
UG's direct premiums collected. No other states account for more than 7%
of UG's direct premiums collected.
UNDERWRITING
The underwriting procedures of the Company's insurance subsidiaries are
established by management. Insurance 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 inspection reports, 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 with an extra premium charge because of unfavorable factors or rejects
the application. Substandard risks may be referred to reinsurers for full
or partial reinsurance of the substandard risk.
The Company's insurance subsidiaries require blood samples to be drawn with
individual insurance applications for coverage over $45,000 (age 46 and
above) or $95,000 (ages 16-45). Blood samples are tested for a wide range
of chemical values and are screened for antibodies to the HIV virus.
Applications also contain questions permitted by law regarding the HIV
virus which must be answered by the proposed insureds.
RESERVES
The applicable insurance laws under which the Company's insurance
subsidiaries operate require that each insurance company report policy
reserves as liabilities to meet future obligations on the policies in
force. These reserves are the amounts which, with the additional premiums
to be received and interest thereon compounded annually at certain assumed
rates, are calculated in accordance with applicable law to be sufficient to
meet the various policy and contract obligations as they mature. These
laws specify that the reserves shall not be less than reserves calculated
using certain mortality tables and interest rates.
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
<PAGE> 5
include provisions for possible unfavorable deviations. The Company makes
these assumptions at the time the contract is issued or, in the case of
contracts acquired by purchase, at the purchase date. 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 each of the years 1996, 1995 and 1994.
REINSURANCE
As is customary in the insurance industry, the Company's insurance
subsidiaries cede insurance to other insurance companies under reinsurance
agreements. Reinsurance agreements are intended to limit a life insurer's
maximum loss on a large or unusually hazardous risk or to obtain a greater
diversification of risk. The ceding insurance company remains contingently
liable with respect to ceded insurance should any reinsurer be unable to
meet the obligations assumed by it, 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. The Company sets a
limit on the amount of insurance retained on the life of any one person.
The Company will not retain more than $125,000, including accidental death
benefits, on any one life. At December 31, 1996, the Company had insurance
in force of $3.953 billion of which approximately $1.109 billion was ceded
to reinsurers.
The Company's reinsured business is ceded to numerous reinsurers. The
Company believes the assuming companies are able to honor all contractual
commitments, based on the Company's periodic reviews of their financial
statements, insurance industry reports and reports filed with state
insurance departments.
The Company's insurance subsidiary ("UG") entered into a coinsurance
agreement with First International Life Insurance Company ("FILIC") as of
September 30, 1996. Under the terms of the agreement, UG ceded to FILIC
substantially all of its paid-up life insurance policies. Paid-up life
insurance generally refers to non-premium paying life insurance policies.
A.M. Best, an industry rating company, assigned a Best's Rating of A++
(Superior) to The Guardian Life Insurance Company of America ("Guardian"),
parent of FILIC, based on the consolidated financial condition and
operating performance of the company and its life/health subsidiaries. The
agreement with FILIC accounts for approximately 66% of the reinsurance
receivables as of December 31, 1996.
As a result of the FILIC coinsurance agreement, effective September 30,
1996, UG received a reinsurance credit in the amount of $28,318,000 in
exchange for an equal amount of assets. UG also received $6,375,000 as a
commission allowance.
Currently, the Company is utilizing reinsurance agreements with Business
Men's Assurance Company, ("BMA") and Life Reassurance Corporation, ("LIFE
RE") for new business. BMA and LIFE RE each hold an "A+" (Superior) rating
from A.M. Best, an industry rating company. The reinsurance agreements
were effective December 1, 1993, and cover 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.
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;
<PAGE> 6
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.
The Company does not have any short-duration reinsurance contracts. The
effect of the Company's long duration reinsurance contracts on premiums
earned in 1996, 1995 and 1994 was as follows:
Shown in thousands
1996 1995 1994
Premiums Premiums Premiums
Earned Earned Earned
Direct $ 32,387 $ 35,201 $ 37,911
Assumed 0 0 0
Ceded (4,768) (5,203) (5,627)
Net premiums $ 27,619 $ 29,998 $ 32,284
INVESTMENTS
The Company retains the services of 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.
The following table reflects net investment income by type of investment.
December 31,
1996 1995 1994
Fixed maturities and
fixed maturities
held for sale $ 13,396,431 $ 13,292,552 $ 12,174,226
Equity securities 88,661 52,445 3,999
Mortgage Loans 1,047,461 1,257,189 1,408,558
Real Estate 794,844 975,080 990,857
Policy Loans 1,121,538 1,041,900 978,555
Short-term investments 512,322 498,496 412,135
Other 170,872 143,527 135,051
Total consolidated
investment income 17,132,129 17,261,189 16,103,381
Investment expenses (1,222,903) (1,761,438) (1,914,920)
Consolidated net
investment income $ 15,909,226 $ 15,499,751 $ 14,188,461
<PAGE> 7
At December 31, 1996, the Company had a total of $5,750,000 of investments,
which did not produce income during 1996. These investments are comprised
of $5,050,000 in real estate including its home office property and
$700,000 in equity securities.
The following table summarizes the Company's fixed maturities distribution
at December 31, 1996 and 1995 by ratings category as issued by Standard and
Poor's, a leading ratings analyst.
FIXED MATURITIES
RATING % OF
PORTFOLIO
1996 1995
Investment Grade
AAA 30% 27%
AA 13% 14%
A 46% 48%
BBB 10% 11%
Below investment
grade 1% 0%
100% 100%
The following table summarizes the Company's fixed maturities and fixed
maturities held for sale by major classification.
Carrying Value
1996 1995
U.S. government and
government agencies $ 29,744,995 $ 29,209,267
States, municipalities and
political subdivisions 14,527,351 7,597,203
Collateralized mortgage
obligations 13,246,780 15,428,596
Public utilities 51,913,970 59,219,088
Corporate 72,063,931 82,330,372
$ 181,497,027 $ 193,784,526
The following table shows the composition and average maturity of the
Company's investment portfolio at December 31, 1996.
Carrying Average Average
Investments Value Maturity Yield
Fixed maturities and fixed
maturities held for sale $181,497,027 6 years 7.08%
Equity securities 1,794,405 not applicable 4.74%
Mortgage loans 11,022,792 11 years 8.41%
Investment real estate 14,115,436 not applicable 5.01%
Policy loans 14,438,120 not applicable 6.55%
Short-term investments 400,000 159 days 4.15%
Total Investments $223,267,780 7.21%
At December 31, 1996, fixed maturities and fixed maturities held for sale
have a market value of $183,776,000. Fixed maturities are carried at
amortized cost. Management has the ability and intent to hold these
securities until maturity. Fixed maturities held for sale are carried at
market.
<PAGE> 8
The Company holds approximately $400,000 in short-term investments.
Management monitors its investment maturities and in their opinion is
sufficient to meet the Company's cash requirements. The following is a
summary of other investments maturing in one to five years. Fixed
maturities and mortgage loans of $13,360,000 and $1,039,000 respectively,
maturing in one year and $75,579,000 and $885,000, respectively, maturing
in two to five years.
The Company holds approximately $11,023,000 in mortgage loans which
represents 3% 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, a credit report, personal
financial information such as outstanding debt, sources of income, and
personal equity. Loans issued are limited to no more than 80% of the
appraised value of the property and must be first position against the
collateral.
The Company has $603,000 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
one loan that total approximately $63,900 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 are loans which were held in portfolios by acquired companies at
the time of acquisition. Management believes the current internal controls
surrounding, the mortgage loan selection process provide 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 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 current and adequate insurance
on the properties are 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 $ 676,176 6%
Commercial 1,878,158 17%
Residential 8,468,458 77%
<PAGE> 9
The following table shows a geographic distribution of the mortgage loan
portfolio and real estate held.
MORTGAGE LOANS REAL ESTATE
Colorado 2% 0%
Illinois 12% 59%
Kansas 12% 0%
Louisiana 14% 12%
Mississippi 0% 16%
Missouri 2% 1%
North Carolina 6% 5%
Oklahoma 7% 1%
Virginia 4% 0%
West Virginia 37% 4%
Other 4% 2%
Total 100% 100%
The following table summarizes delinquent mortgage loan holdings.
Delinquent
31 Days or More 1996 1995 1994
Non-accrual status $ 0 $ 0 $ 0
Other 613,000 628,000 911,000
Reserve on
delinquent loans (10,000) (10,000) (26,000)
Total Delinquent $603,000 $ 618,000 $ 885,000
Interest income
forgone
(Delinquent
loans) $ 29,000 $ 16,000 $ 4,000
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.
<PAGE> 10
COMPETITION
The insurance business is a highly competitive industry 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 insurance industry is a mature industry. In recent years, the industry
has experienced virtually no growth in life insurance sales, though the
aging population has increased the demand for retirement savings products.
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 policyholders, 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
The Company's insurance subsidiaries are subject to government regulation
in each of the states in which they conduct business. Such regulation is
vested in state agencies having broad administrative power dealing with all
aspects of the insurance business, including the power to: (i) grant and
revoke licenses to transact business; (ii) regulate and supervise trade
practices and market conduct; (iii) establish guaranty associations; (iv)
license agents; (v) approve policy forms; (vi) approve premium rates for
some lines of business; (vii) establish reserve requirements; (viii)
prescribe the form and content of required financial statements and
reports; (ix) determine the reasonableness and adequacy of statutory
capital and surplus; and (x) regulate the type and amount of permitted
investments. Insurance regulation is concerned primarily with the
protection of policyholders. The Company cannot predict the form of any
future proposals or regulation. The Company's insurance subsidiaries, USA,
UG, APPL and ALIC are domiciled in the states of Ohio, Ohio, West Virginia
and Illinois, respectively.
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, however its primary purpose 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 individual states unmodified, modified to meet the
state's own needs or requirements, or dismissed entirely.
Each year the NAIC calculates 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.
<PAGE> 11
At year end 1996, UG had two ratios outside the normal range. The first
ratio compared commission allowances with statutory capital and surplus.
The ratio was outside the normal range due to the coinsurance agreement
with First International Life Insurance Company ("FILIC"). Additional
information about the coinsurance agreement with FILIC can be found in the
section titled Reinsurance or in Note 7 of the Notes to the Consolidated
Financial Statements. Management does not believe that this ratio will be
outside the normal range in future periods.
The second ratio is related to the decrease in premium income. The ratio
fell outside the normal range the last two years. The decrease in premium
income is directly attributable to the change in distribution systems and
marketing strategy. The Company changed its focus from primarily a broker
agency distribution system to a captive agent system and changed its
marketing strategy from traditional whole life insurance products to
universal life insurance products. Management is taking a long-term
approach to its recent changes to the marketing and distribution systems
and believes these changes will provide long-term benefits to the Company.
The NAIC has adopted Risk Based Capital ("RBC") rules 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.
4) General risk - the risk of fraud, mismanagement, and other
business risks.
The RBC formula is 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 companies below specific trigger points or
ratios are classified within certain levels, each of which requires
specific corrective action. 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 2.0*
Regulatory action level 1.5
Authorized control level 1.0
Mandatory control level 0.7
* Or, 2.5 with negative trend.
At December 31, 1996, each of the Company's insurance subsidiaries has a
Ratio that is in excess of 300% of the authorized control level;
accordingly the Company's subsidiaries meet the RBC requirements.
<PAGE> 12
The NAIC has recently released the Life Illustration Model Regulation.
This regulation requires products which contain non-guaranteed elements,
such as universal life and interest sensitive life, to comply with certain
established actuarial tests. These tests are intended to target future
performance and profitability of a product under various scenarios. The
regulation does not prevent a company from selling a product which does not
meet the various tests. The only implication is the way in which the
product is marketed to the consumer. A product which does not pass the
tests uses guaranteed assumptions rather than current assumptions in
presenting future product performance to the consumer.
As states in which the Company does business adopt the regulation or adopt
a modified version of the regulation, the Company will be required to
comply with this new regulation. The Company may need to modify existing
products or sales methods.
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.
EMPLOYEES
There are approximately 100 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 $ 2,610,908 19%
Commercial $ 2,318,514 17%
Residential development $ 5,341,858 37%
Foreclosed real estate $ 3,846,946 27%
Real estate holdings, net of accumulated depreciation of $3,565,000 and
$3,254,000 at December 31, 1996 and 1995, respectively, represent
approximately 4% 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. The properties are carried at approximately $2,688,000. 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 $198,000. 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.
<PAGE> 13
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
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
<PAGE> 14
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.
BID
PERIOD LOW HIGH
1996
First quarter 1/16 1/8
Second quarter 1/16 3/16
Third quarter 1/16 5/32
Fourth quarter 3/32 1/8
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
The Company did not pay any dividends during 1996 or 1995. Limitations on
shareholders dividends are described in Note 2 of the Notes to Financial
Statements.
Number of Common Shareholders as of March 3, 1997
15,393
<PAGE> 15
ITEM 6. SELECTED FINANCIAL DATA
<TABLE>
FINANCIAL HIGHLIGHTS
(000's omitted, except per share data)
1996 1995 1994 1993 1992
<S> <C> <C> <C> <C> <C>
Premium income
net of reinsurance $ 27,619 $ 29,998 $ 32,284 $ 30,727 $ 21,614
Total revenues $ 46,538 $ 48,365 $ 49,261 $ 47,185 $ 41,049
Net income (loss) $ (3,032) $ (1,452) $ (1,775) $ (3,343) $ (4,020)
Net income (loss)
per share $ (0.13) $ (0.06) $ (0.07) $ (0.14) $ (0.21)
Total assets $336,639 $334,058 $331,410 $326,390 $319,628
Total long term debt $ 19,000 $ 20,623 $ 21,529 $ 23,535 $ 26,240
Dividends paid
per share NONE NONE NONE NONE NONE
</TABLE>
<PAGE> 16
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 companies 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 5% and 4% as
of December 31, 1996, and 1995, respectively. Fixed maturities as a
percentage of total invested assets were 80% and 78% as of December 31,
1996 and 1995, respectively.
Future policy benefits are primarily long-term in nature and therefore, the
Company's investments are predominantly in long term fixed maturity
investments such as bonds and mortgage loans which provide a sufficient
return to cover these obligations. Most of the insurance company assets,
other than policy loans, are invested in fixed maturities and other
investments, substantially all of which are readily marketable. Although
there is no present need or intent to dispose of such investments, the life
companies could liquidate portions of their investments if such a need
arose. The Company has the ability and intent to hold these investments to
maturity; consequently, the Company's investment in long term fixed
maturities are reported in the financial statements at their amortized
cost.
Many of the Company's products contain surrender charges and other features
which reward persistency and penalize the early withdrawal of funds. With
respect to such products, surrender charges are generally sufficient to
cover the Company's unamortized deferred policy acquisition costs with
respect to the policy being surrendered.
Consolidated operating activities of the Company produced cash flows of
$2,559,000, $687,000 and $1,338,000 in 1996, 1995 and 1994, respectively.
The net cash provided by operating activities plus net policyholder
contract deposits after the payment of policyholder withdrawals, equalled
$9,370,000 in 1996, $9,701,000 in1995, and $9,555,000 in 1994. Management
utilizes this measurement of cash flows as an indicator of 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 provided by (used in) investing activities was $16,163,000,
($8,030,000) and ($26,847,000), for 1996, 1995 and 1994, respectively. The
most significant aspect of cash provided by (used in) investing activities
is the fixed maturity transactions. Fixed maturities account for 82%, 76%
and 79% of the total cost of investments acquired in 1996, 1995 and 1994,
respectively. The net cash provided by investing activities in 1996, is
due to the fixed maturities sold in conjunction with the coinsurance
agreement with FILIC. The Company has not directed its investable funds to
so-called "junk bonds" or derivative investments.
Net cash provided by (used in) financing activities was ($13,900,000),
$8,108,000 and $6,211,000 for 1996, 1995 and 1994, respectively. The
change between 1996 and 1995 is due to a coinsurance agreement with First
International Life Insurance Company as of September 30, 1996. At closing
of the transaction, UG received a reinsurance credit of $28,318,000 for
policy liabilities covered under the agreement. UG transferred assets
equal to the credit received. This transfer included policy loans of
$2,855,000 associated with policies under the agreement and a net cash
transfer of $19,088,000 after deducting the ceding commission due UG of
$6,375,000.
Policyholder contract deposits decreased 11% in 1996 compared to 1995, and
increased 8% in 1995 when compared to 1994. Policyholder contract
withdrawals has decreased 4% in 1996 compared to 1995, and increased 7% in
1995 compared to 1994. The changes in policyholder contract withdrawals 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.
<PAGE> 17
On May 8, 1996, FCC refinanced its senior debt of $8,900,000. The
refinancing was completed through First of America Bank - NA and is subject
to a credit agreement. The refinanced debt bears interest to a rate equal
to the "base rate" plus nine-sixteenths of one percent. The Base rate is
defined as the floating daily, variable rate of interest determined and
announced by First of America Bank from time to time as its "base lending
rate". The base rate at issuance of the loan was 8.25%, and has remained
unchanged through March 1, 1997. Interest is paid quarterly and principal
payments of $1,000,000 are due in May of each year beginning in 1997, with
a final payment due May 8, 2005. On November 8, 1996, the Company prepaid
$500,000 of the May 8, 1997 principal payment.
On a parent only basis, FCC's cash flow is dependent on revenues from its
life insurance subsidiaries from management and cost sharing arrangements
and through dividends. At December 31, 1996, substantially all of the
consolidated shareholders equity represents net assets of its subsidiaries.
Cash requirements of FCC primarily relate to servicing its long-term debt.
The payment of cash dividends to shareholders is not legally restricted.
However, 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, 1996, UG had a statutory gain from operations of $8,006,000.
At December 31, 1996, UG's statutory capital and surplus amounted to
$10,227,000. Extraordinary dividends (amounts in excess of ordinary
dividend limitations) require prior approval of the insurance commissioner
and are not restricted to a specific calculation.
A life insurance company's statutory capital is computed according to rules
prescribed by the National Association of Insurance Commissioners
("NAIC"), as modified by the insurance company's state of domicile.
Statutory accounting rules are different from generally accepted accounting
principles and are intended to reflect a more conservative view by, for
example, requiring immediate expensing of policy acquisition costs. The
achievement of long-term growth will require growth in the statutory
capital of the Company's insurance subsidiaries. The subsidiaries may
secure additional statutory capital through various sources, such as
internally generated statutory earnings or equity contributions by the
Company from funds generated through debt or equity offerings.
The NAIC's risk-based capital requirements require insurance companies to
calculate and report information under a risk-based capital formula.
These requirements are intended to allow insurance regulators to identify
inadequately capitalized insurance companies based upon the types and
mixtures of risks inherent in the insurer's operations. The formula
includes components for asset risk, liability risk, interest rate exposure,
and other factors. Based upon their December 31, 1996, statutory financial
reports, the Company's insurance subsidiaries are adequately capitalized
under the formula.
The Company is not aware of any litigation that will have a material
adverse effect on the financial position of the Company. The Company does
not believe that the regulatory initiatives currently under consideration
by various regulatory agencies will have a material adverse impact on the
Company. The Company is not aware of any material pending or threatened
regulatory action with respect to the Company or any of its subsidiaries.
The Company does not believe that any insurance guaranty fund assessments
will be materially different from amounts already provided for in the
financial statements.
Management believes the overall sources of liquidity available will be
sufficient to satisfy its financial obligations.
<PAGE> 18
RESULTS OF OPERATIONS
1996 COMPARED TO 1995
(a) REVENUES
Premium income, net of reinsurance premium, decreased 8% when comparing
1996 to 1995. The decrease in premium income is primarily attributed to
the change in marketing strategy and to a lesser extent the change in
distribution systems. The Company changed its marketing strategy from
traditional life insurance products to universal life insurance products.
Universal life and interest sensitive products contribute only the risk
charge to premium income, however traditional insurance products contribute
all monies received to premium income. The Company changed its marketing
strategy to remain competitive.
The Company 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. (The termination of the broker agency force caused a non-
recurring write down of the value of agency force asset in 1995. See
discussion of amortization of agency force for further details.)
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. The Company's average
persistency rate for all policies in force for 1996 and 1995 has been 87.9%
and 87.5%, respectively.
Other considerations net of reinsurance increased 7% 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 3% when comparing 1996 to 1995. The
overall investment yields for 1996, 1995 and 1994, are 7.21%, 7.10% and
7.19%, respectively. The improvement in investment yield is primarily
attributed to the fixed maturity portfolio. The Company has invested
financing cash flows generated by cash received through sales of universal
life insurance products.
The Company's investments are generally managed to match related insurance
and policyholder liabilities. 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 adjusts credited interest rates on its insurance products to
preserve targeted spreads. 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 the Company
has in force and will write in the future.
Realized investment losses were $411,000 and $349,000 in 1996 and 1995,
respectively. The Company sold two foreclosed real estate properties that
resulted in approximately $357,000 in realized losses in 1996. The Company
had other gains and losses during the period that comprised the remaining
amount reported but were immaterial in nature on an individual basis.
(b) EXPENSES
Life benefits net of reinsurance benefits and claims increased 13% compared
to 1995. The increase in life benefits is due primarily to settlement
expenses discussed in the following paragraph:
<PAGE> 19
In 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 non-standard policies had a face
amount of $22,700,000 and represented 1/2 of 1% of the insurance in-force
in 1994. Management's initial analysis indicated that expected death
claims on the business in-force was adequate in relation to mortality
assumptions inherent in the calculation of statutory reserves.
Nevertheless, management determined it was in the best interest of the
Company to repurchase as many of the non-standard policies as possible.
Through December 31, 1996, the Company spent approximately $7,099,000 for
the settlement of non-standard policies and for the legal defense of
related litigation. In relation to settlement of non-standard policies the
Company incurred life benefits of $3,307,000, $720,000 and $1,250,000 in
1996, 1995 and 1994, respectively. The Company incurred legal costs of
$906,000, $687,000 and $229,000 in 1996, 1995 and 1994, respectively. All
the policies associated with this issue have been settled as of December
31, 1996. The Company has approximately $3,742,000 of insurance in-force
and $1,871,000 of reserves from the issuance of paid-up life insurance
policies for settlement of matters related to the original non-standard
policies. Management believes the reserves are adequate in relation to
expected mortality on this block of in force.
Commissions and amortization of deferred policy acquisition costs decreased
8% in 1996 compared to 1995. The decrease was due to the decline in first
year premium production.
Amortization of cost of insurance acquired decreased 12% in 1996 compared
to 1995. Cost of insurance acquired is amortized in relation to expected
future profits, including direct charge-offs for any excess of the
unamortized asset over the projected future profits. The Company did not
have any charge-offs during the periods covered by this report. The
decrease in amortization during the current period is a normal fluctuation
due to the expected future profits. Amortization of cost of insurance
acquired is particularly sensitive to changes in persistency of certain
blocks of insurance in-force.
Operating expenses increased 9% in 1996 compared to 1995. The primary
factor that caused the increase in operating expenses is directly related
to increased legal costs and reserves established for litigation. The
legal costs are due to the settlement of non-standard insurance policies as
was discussed in the review of life benefits. The Company incurred legal
costs of $906,000, $687,000 and $229,000 in 1996, 1995 and 1994,
respectively in relation to the settlement of the non-standard insurance
policies.
Interest expense decreased 11% in 1996 compared to 1995. Since December
31, 1995, notes payable decreased approximately $1,623,000 which has
directly attributed to the decrease in interest expense during 1996.
Interest expense was also reduced as a result of the refinancing of the
senior debt under which the new interest rate is more favorable. Please
refer to Note 10 "Notes Payable" of the Notes to the Consolidated Financial
Statements for more information on this matter.
(c) NET LOSS
The Company had a net loss of $3,032,000 in 1996 compared to a net loss of
$1,452,000 in 1995. The net loss in 1996 is attributed to the increase in
life benefits net of reinsurance and operating expenses primarily
associated with settlement and other related costs of the non-standard life
insurance policies.
<PAGE> 20
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.
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 acquired 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.
<PAGE> 21
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 to recent
appraisals and marketing analysis. The Company had other gains and losses
during the period that comprised 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
non-standard policies had a face amount of $22,700,000 and represented 1/2
of 1% of the insurance in force in 1994. Management's initial analysis
indicated 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 determined it was in the
best interest of the Company to repurchase as many of the non-standard
policies as possible. As of December 31, 1995, there remained
approximately $5,738,000 of the original face amount which had not been
settled. Through December 31, 1995, the Company spent a total of
$2,886,000 for the repurchase of the non-standard policies and for the
legal defense of related litigation. In relation to settlement of non-
standard 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.
<PAGE> 22
Commissions and amortization of deferred policy acquisition costs increased
23% 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.
Amortization of cost of insurance acquired decreased 11% in 1995 compared
to 1994. Cost of insurance acquired is amortized in relation to expected
future profits, including direct charge-offs for any excess of the
unamortized asset over the projected future profits. The Company did not
have any charge-offs during the periods covered by this report. The
decrease in amortization during the current period is a normal fluctuation
due to the expected future profits. Amortization of cost of insurance
acquired is particularly sensitive to changes in persistency of certain
blocks of insurance in force. The Company's average persistency rate for
all policies in force for 1995 and 1994 has been approximately 87.5% and
86.3%, respectively.
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.
<PAGE> 23
FINANCIAL CONDITION
The financial condition of the Company was affected by a coinsurance
agreement between First International Life Insurance Company ("FILIC") and
the Company's insurance subsidiary Universal Guaranty Life Insurance
Company ("UG") on September 30, 1996. The agreement provided UG an
additional $6,375,000 of statutory capital and surplus. Under the terms of
the agreement, UG ceded to FILIC substantially all of its paid-up life
insurance policies. Paid-up life insurance generally refers to non-premium
paying life insurance policies. Certain balance sheet line items were
impacted by this agreement and effects the comparability of the current
period with the prior period.
(a) ASSETS
The Company's insurance subsidiaries are regulated by insurance statutes
and regulations as to the type of investments that they are permitted to
make and the amount of funds that may be used for any one type of
investment. In light of these statutes and regulations and the Company's
business and investment strategy, the Company generally seeks to invest in
United States government and government agency securities and corporate
securities rated investment grade by established nationally recognized
rating organizations.
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, 1996, 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, with changes
in market value charged directly to shareholders' equity.
Mortgage loans decreased 21% in 1996 as compared to 1995. 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 $603,000 in mortgage loans, net of a $10,000 reserve allowance, which
are in default or in the process of foreclosure, this represents
approximately 5% of the total portfolio. The mortgage delinquency rate for
the insurance industry as published by the NAIC as the "Industry Experience
Factor" is 6.5%.
Investment real estate and real estate acquired in satisfaction of debt
decreased 17% in 1996 compared to 1995. The decrease was due to the sale
of lots from the Company's Lake Pointe development and the sale of two
foreclosed properties. Real estate holdings represent approximately 4% of
the total assets of the Company. Total real estate is separated into four
categories: Home Office 19%, Commercial 17%, Residential Development 37%
and Foreclosed Properties 27%.
Policy loans decreased 15% in 1996 compared to 1995. Policy loans
decreased approximately $2,787,000 due to the coinsurance agreement with
FILIC. Industry experience for policy loans indicates few policy loans are
ever repaid by the policyholder other than through termination of the
policy. Policy loans are systematically reviewed to ensure 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.
Reinsurance receivables increased significantly due to the
coinsurance agreement with FILIC. The coinsurance agreement
contributed approximately $28,000,000 to reinsurance receivables for future
policy benefits as of December 31, 1996.
<PAGE> 24
Deferred policy acquisition costs decreased 5% in 1996 compared to 1995.
The costs, which vary with, and are primarily related to producing new
business are referred to as deferred policy acquisition costs ("DAC"). DAC
consists primarily of commissions and certain costs of policy issuance and
underwriting, net of fees charged to the policy in excess of ultimate fees
charged. To the extent that these costs are recoverable from future
profits, the Company defers these costs and amortizes them with interest in
relation to the present value of expected gross profits from the contracts,
discounted using the interest rate credited by the policy. The Company
had $1,276,000 in policy acquisition costs deferred, $854,000 in interest
accretion and $3,010,000 in amortization in 1996. The Company did not
recognize any impairments during the period.
Cost of insurance acquired decreased significantly during 1996. The
decrease is primarily attributed to the coinsurance agreement with FILIC.
(b) LIABILITIES
Total liabilities increased 2% in 1996 compared to 1995. Future policy
benefits increased 4% in 1996 and represented 84% of total liabilities at
December 31, 1996. 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 increased 3% in 1996 compared to 1995.
There is no single event that caused this item to increase. 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 9% in 1996 compared to 1995. 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 universal life insurance policyholders are credited to the
life insurance policy and are reflected in future policy benefits.
Dividend and endowment accumulations increased 11% in 1996 compared to
1995. 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
significantly in 1996 compared to 1995. The primary reason for the
decrease in deferred income taxes is due to the coinsurance agreement with
FILIC. The change in deferred income taxes payable is attributable to
temporary differences between Generally Accepted Accounting Principles
("GAAP") and tax basis. Federal income taxes are discussed in more detail
in Note 3 of the Notes to the Consolidated Financial Statements.
Notes payable decreased approximately $1,623,000 in 1996 compared to 1995.
On May 8, 1996, FCC refinanced its senior debt of $8,900,000. The
refinancing was completed through First of America Bank - NA. The
refinanced debt bears interest to a rate equal to the "base rate" plus
nine-sixteenths of one percent. The Base rate is defined as the floating
daily, variable rate of interest determined and announced by First of
America Bank from time to time as its "base lending rate". The base rate
at issuance of the loan was 8.25%, and has remained unchanged through March
1, 1997. Interest is paid quarterly. Principal payments of $1,000,000 are
due in May of each year beginning in 1997, with a final payment due May 8,
2005. On November 8, 1996, the Company prepaid $500,000 of the May 8, 1997
principal payment. The Company's long term debt is discussed in more
detail in Note 10 of the Notes to the Financial Statements.
<PAGE> 25
(c) SHAREHOLDERS' EQUITY
Total shareholders' equity decreased 8% in 1996 compared to 1995. The
decrease in shareholders' equity is primarily due to the net loss of
$3,032,000 in 1996. The Company experienced $175,000 in unrealized
depreciation of equity securities and investments held for sale in 1996.
REGULATORY ENVIRONMENT
The Company's insurance subsidiaries are subject to government regulation
in each of the states in which they conduct business. Such regulation is
vested in state agencies having broad administrative power dealing with all
aspects of the insurance business, including the power to: (i) grant and
revoke licenses to transact business; (ii) regulate and supervise trade
practices and market conduct; (iii) establish guaranty associations; (iv)
license agents; (v) approve policy forms; (vi) approve premium rates for
some lines of business; (vii) establish reserve requirements; (viii)
prescribe the form and content of required financial statements and
reports; (ix) determine the reasonableness and adequacy of statutory
capital and surplus; and (x) regulate the type and amount of permitted
investments. Insurance regulation is concerned primarily with the
protection of policyholders. The Company cannot predict the form of any
future proposals or regulation. The Company's insurance subsidiaries, USA,
UG, APPL and ALIC are domiciled in the states of Ohio, Ohio, West Virginia
and Illinois, respectively.
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 of the Notes to the Financial
Statements), and payment of dividends (see Note 2 of the Notes to the
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, however its primary purpose 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 individual states unmodified, modified to meet the
state's own needs or requirements, or dismissed entirely.
Each year the NAIC calculates 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 1996, UG had two ratios outside the normal range. The first
ratio compared commission allowances with statutory capital and surplus.
The ratio was outside the normal range due to the coinsurance agreement
with First International Life Insurance Company ("FILIC"). Additional
information about the coinsurance agreement with FILIC can be found in Note
7 of the Notes to the Consolidated Financial Statements. Management does
not believe that this ratio will be outside the normal range in future
periods.
The second ratio is related to the decrease in premium income. The ratio
fell outside the normal range the last two years. The decrease in premium
income is directly attributable to the change in distribution systems and
marketing strategy. The Company changed its focus from primarily a broker
agency distribution system to a captive agent system and changed its
marketing strategy from traditional whole life insurance products to
universal life insurance products. Management is taking a long-term
approach to its recent changes to the marketing and distribution systems
and believes these changes will provide long-term benefits to the Company.
<PAGE> 26
The Company receives funds from its insurance subsidiaries in the form of
management and cost sharing arrangements (See Note 9 of the Notes to the
Consolidated Financial Statements) and through dividends. Annual dividends
in excess of maximum amounts prescribed by state statutes ("extraordinary
dividends") may not be paid without the prior approval of the insurance
commissioner in which an insurance subsidiary is domiciled. (See Note 2 of
the Notes to the Consolidated Financial Statements.)
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 companies
below specific trigger points or ratios are classified within certain
levels, each of which requires specific corrective action. 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, 1996, each of the Company's insurance subsidiaries has a
Ratio that is in excess of 300% of the authorized control level;
accordingly the Company's subsidiaries meet the RBC requirements.
The NAIC has recently released the Life Illustration Model Regulation.
This regulation requires products which contain non-guaranteed elements,
such as universal life and interest sensitive life, to comply with certain
actuarial established tests. These tests are intended to target future
performance and profitability of a product under various scenarios. The
regulation does not prevent a company from selling a product which does not
meet the various tests. The only implication is the way in which the
product is marketed to the consumer. A product which does not pass the
tests uses guaranteed assumptions rather than current assumptions in
presenting future product performance to the consumer.
As states in which the Company does business adopt the regulation or adopt
a modified version of the regulation, the Company will be required to
comply with this new regulation. The Company may need to modify existing
products or sales methods.
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.
<PAGE> 27
FUTURE OUTLOOK
The Company operates in a highly competitive industry. In connection with
the development and sale of its products, the Company encounters
significant competition from other insurance companies, many of which have
financial resources or ratings greater than those of the Company.
The insurance industry is a mature industry. In recent years, the industry
has experienced virtually no growth in life insurance sales, though the
aging population has increased the demand for retirement savings products.
Management believes that the Company's ability to compete is dependent
upon, among other things, its ability to attract and retain agents to
market its insurance products and its ability to develop competitive and
profitable products.
<PAGE> 28
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
No new accounting standards became effective or were adopted by the Company
during the year which resulted in a material impact on the Company's
financial statements.
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 Auditor's Report for the
Years ended December 31, 1996, 1995, 1994 . . . . . . . . . . 30
Consolidated Balance Sheets . . . . . . . . . . . . . . . . . 31
Consolidated Statements of Operations . . . . . . . . . . . . 32
Consolidated Statements of Shareholders' Equity . . . . . . . 33
Consolidated Statements of Cash Flows . . . . . . . . . . . . 34
Notes to Consolidated Financial Statements . . . . . . . . 35-54
ITEM 9. DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
None
<PAGE> 29
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, 1996 and 1995, and the related consolidated statements of
operations, shareholders' equity, and cash flows for each of the three
years in the period ended December 31, 1996. 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, 1996 and 1995,
and the consolidated results of their operations and their consolidated
cash flows for each of the three years in the period ended December 31,
1996, in conformity with generally accepted accounting principles.
We have also audited Schedule I as of December 31, 1996, and Schedules
II, IV and V as of December 31, 1996 and 1995, 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, 1997
<PAGE> 30
<TABLE>
FIRST COMMONWEALTH CORPORATION
CONSOLIDATED BALANCE SHEETS
As of December 31, 1996 and 1995
ASSETS
1996 1995
<S> <C> <C>
Investments:
Fixed maturities at amortized cost (market
$181,815,225 and $197,006,257) $ 179,535,861 $ 190,558,351
Investments held for sale:
Fixed maturities, at market (cost
$1,984,661 and $3,224,039) 1,961,166 3,226,175
Equity securities, at market
(cost $2,086,159 and $2,086,159) 1,794,405 1,946,481
Mortgage loans on real estate at amortized cost 11,022,792 13,891,762
Investment real estate, at cost, net of
accumulated depreciation 10,268,490 11,683,575
Real estate acquired in satisfaction of debt,
at cost, net of accumulated depreciation 3,846,946 5,332,413
Policy loans 14,438,120 16,941,359
Short term investments 400,000 425,000
223,267,780 244,005,116
Cash and cash equivalents 16,801,288 11,979,637
Investment in parent 350,000 350,000
Accrued investment income 3,424,546 3,620,367
Reinsurance receivables:
Future policy benefits 38,745,093 13,540,364
Policy claims and other benefits 3,856,124 861,488
Other accounts and notes receivable 894,321 963,468
Deferred policy acquisition costs 18,162,356 19,041,728
Cost of insurance acquired 19,886,494 27,964,733
Cost in excess of net assets purchased,
net of accumulated amortization 9,624,135 10,071,170
Other assets 1,626,987 1,659,714
Total assets $ 336,639,124 $ 334,057,785
LIABILITIES AND SHAREHOLDERS' EQUITY
Policy liabilities and accruals:
Future policy benefits $ 252,718,388 $ 242,763,581
Policy claims and benefits payable 3,193,806 3,110,378
Other policyholder funds 2,784,967 3,053,411
Dividend and endowment accumulations 13,647,676 12,324,949
Income taxes payable:
Current 60,044 211,979
Deferred 3,043,775 7,865,853
Notes payable 18,999,853 20,623,328
Indebtedness to (from) affiliates, net 36,933 (162,388)
Other liabilities 5,088,785 4,051,080
Total liabilities 299,574,227 293,842,171
Minority interests in consolidated subsidiaries 1,586,246 1,530,814
Shareholders' equity:
Common stock - $1 par value per share. Authorized
25,000,000 shares - 23,967,749 and 23,967,749
shares issued after deducting treasury shares
of 372,506 and 372,506 23,967,749 23,967,749
Additional paid-in capital 28,498,361 28,498,361
Unrealized depreciation of investments held
for sale (305,715) (131,215)
Accumulated deficit (16,681,744) (13,650,095)
Total shareholders' equity 35,478,651 38,684,800
Total liabilities and shareholders' equity $ 336,639,124 $ 334,057,785
</TABLE>
See accompanying notes.
<PAGE> 31
<TABLE>
FIRST COMMONWEALTH CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
Three Years Ended December 31, 1996
1996 1995 1994
<S> <C> <C> <C>
Revenues:
Premium income $ 32,386,635 $ 35,200,815 $ 37,910,813
Reinsurance premium (4,767,743) (5,202,690) (5,626,582)
Other considerations 3,504,974 3,280,823 2,969,131
Other considerations paid
to reinsurers (179,408) (180,412) (229,093)
Net investment income 15,909,226 15,499,751 14,188,461
Realized investment gains and
(losses), net (411,053) (348,582) (145,697)
Other income 95,400 115,469 194,338
46,538,031 48,365,174 49,261,371
Benefits and other expenses:
Benefits, claims and settlement
expenses:
Life 30,800,404 28,094,061 33,373,186
Reinsurance benefits and claims (2,283,956) (2,849,806) (2,807,763)
Annuity 1,826,600 1,762,584 1,526,492
Dividends to policyholders 4,100,552 4,217,176 3,339,992
Commissions and amortization of
deferred policy
acquisition costs 4,992,885 5,440,653 4,438,133
Amortization of cost of
insurance acquired 1,703,400 1,944,798 2,181,127
Operating expenses 11,631,839 10,672,996 8,975,985
Interest expense 1,700,823 1,917,360 1,941,565
54,472,547 51,199,822 52,968,717
Loss before income taxes
and minority interest (7,934,516) (2,834,648) (3,707,346)
Credit for income taxes 4,961,506 1,435,824 1,996,284
Minority interest in gain
of consolidated subsidiaries (58,639) (52,814) (63,782)
Net loss $ (3,031,649) $ (1,451,638) $ (1,774,844)
Net loss per common share $ (0.13) $ (0.06) $ (0.07)
Weighted average common
shares outstanding 23,967,749 24,198,193 24,340,051
</TABLE>
See accompanying notes
<PAGE> 32
<TABLE>
FIRST COMMONWEALTH CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Three Years Ended December 31, 1996
1996 1995 1994
<S> <C> <C> <C>
Common stock
Balance, beginning of year $ 23,967,749 $ 24,340,051 $ 24,340,051
Treasury stock acquired through
liquidation of Commonwealth
Industries Corporation 0 (372,302) 0
Issued during year 0 0 0
Balance, end of year $ 23,967,749 $ 23,967,749 $ 24,340,051
Additional paid-in capital
Balance, beginning of year $ 28,498,361 $ 31,588,559 $ 31,588,559
Treasury stock acquired through
liquidation of Commonwealth
Industries Corporation 0 (3,090,198) 0
Issued during year 0 0 0
Balance, end of year $ 28,498,361 $ 28,498,361 $ 31,588,559
Unrealized appreciation (depreciation)
of investments held for sale
Balance, beginning of year $ (131,215)$ (423,916)$ (178,621)
Change during year (174,500) 292,701 (245,295)
Balance, end of year $ (305,715)$ (131,215)$ (423,916)
Accumulated deficit
Balance, beginning of year $ (13,650,095)$ (12,198,457)$ (10,423,613)
Net loss (3,031,649) (1,451,638) (1,774,844)
Balance, end of year $ (16,681,744)$ (13,650,095)$ (12,198,457)
Total shareholders' equity,
end of year $ 35,478,651 $ 38,684,800 $ 43,306,237
</TABLE>
See accompanying notes.
<PAGE> 33
<TABLE>
FIRST COMMONWEALTH CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
Three Years Ended December 31, 1996
1996 1995 1994
<S> <C> <C> <C>
Increase (decrease) in cash and
cash equivalents
Cash flows from operating
activities:
Net loss $ (3,031,649) $ (1,451,638) $ (1,774,844)
Adjustments to reconcile net
loss to net cash provided by
operating activities net of
changes in assets and
liabilities resulting from the
sales and purchases of
subsidiaries:
Amortization/accretion of
fixed maturities 829,326 866,658 1 ,028,327
Realized investment (gains)
losses, net 411,053 348,582 145,697
Policy acquisition costs
deferred (1,276,000) (2,370,000) (4,939,000)
Amortization of deferred
policy acquisition costs 2,155,372 2,100,748 1,529,012
Amortization of cost of
insurance acquired 1,703,400 1,944,798 2,181,127
Amortization of costs in
excess of net assets
purchased 447,035 691,307 450,669
Depreciation 514,507 531,364 657,533
Minority interest 58,639 52,814 63,782
Change in accrued investment
income 195,821 (173,350) (583,950)
Change in reinsurance
receivables 83,742 (482,226) (1,012,799)
Change in policy liabilities
and accruals 7,444,348 4,954,300 9,990,664
Charges for mortality and
administration of universal
life and annuity products (10,239,476) (9,757,354) (9,178,363)
Interest credited to account
balances 7,075,921 6,644,282 5,931,019
Change in income taxes
payable (4,974,013) (1,460,367) (1,996,474)
Change in indebtedness (to)
from affiliates, net 199,321 21,528 205,977
Change in other assets and
liabilities, net 961,680 (1,774,381) (1,360,067)
Net cash provided by operating
activities 2,559,027 687,065 1,338,310
Cash flows from investing activities:
Proceeds from investments sold
and matured:
Fixed maturities held for
sale matured 1,152,736 619,612 250,000
Fixed maturities sold 18,736,612 0 0
Fixed maturities matured 20,787,782 16,265,140 23,601,817
Equity securities 8,990 104,260 49,557
Mortgage loans 3,364,427 2,252,423 4,006,557
Real estate 3,219,851 1,768,254 2,640,025
Policy loans 3,937,471 4,110,744 3,974,404
Short term 825,000 25,000 1,038,856
Total proceeds from investments
sold and matured 52,032,869 25,145,433 35,561,216
Cost of investments acquired:
Fixed maturities held for
sale 0 0 (839,375)
Fixed maturities (29,365,111) (25,112,358) (51,929,105)
Equity securities 0 (1,000,000) (249,925)
Mortgage loans (503,113) (322,129) (5,669,888)
Real estate (841,793) (1,927,413) (3,321,599)
Policy loans (4,329,124) (4,713,471) (3,557,237)
Short term (830,983) (100,000) (650,000)
Total cost of investments
acquired (35,870,124) (33,175,371) (66,217,129)
Cash of subsidiary at date of sale 0 0 (3,134,343)
Cash received in sale of subsidiary 0 0 3,978,586
Cash of subsidiaries at acquisition
date 0 0 2,965,115
Net cash provided by (used in)
investing activities 16,162,745 (8,029,938) (26,846,555)
Cash flows from financing
activities:
Policyholder contract deposits 22,245,369 25,021,983 23,110,031
Policyholder contract withdrawals (15,433,644) (16,008,462) (14,893,221)
Net cash transferred from
coinsurance ceded (19,088,371) 0 0
Proceeds from notes payable 9,300,000 300,000 0
Payments of principal on notes
payable (10,923,475) (1,205,861) (2,005,687)
Net cash provided by (used in)
financing activities (13,900,121) 8,107,660 6,211,123
Net increase (decrease) in cash
and cash equivalents 4,821,651 764,787 (19,297,122)
Cash and cash equivalents at
beginning of year 11,979,637 11,214,850 30,511,972
Cash and cash equivalents at end
of year $ 16,801,288 $ 11,979,637 $ 11,214,850
</TABLE>
See accompanying notes.
<PAGE> 34
FIRST COMMONWEALTH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A. ORGANIZATION - At December 31, 1996, 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, 1996
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> 35
A summary of the Company's significant accounting policies
consistently applied in the preparation of the accompanying
consolidated 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. Accumulated
depreciation on real estate was $3,565,073 and $3,253,979 as
of December 31, 1996 and 1995, respectively.
Policy loans -- at unpaid balances including accumulated
interest but not in excess of the cash surrender value.
Short-term investments -- at cost, which approximates current
market value.
Realized gains and losses on sales of investments are
recognized in net income on the specific identification
basis.
<PAGE> 36
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 that vary with and
are primarily related to the production of new business have
been deferred. Traditional life 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. Under SFAS No. 97,
"Accounting and Reporting by Insurance Enterprises for
Certain Long-Duration Contracts and for Realized Gains and
Losses from the Sale of Investments," the Company makes
certain assumptions regarding the mortality, persistency,
expenses, and interest rates it expects to experience in
future periods. These assumptions are to be best estimates
and are to be periodically updated whenever actual experience
and/or expectations for the future change from initial
assumptions. The amortization is adjusted retrospectively
when estimates of current or future gross profits to be
realized from a group of products are revised.
The following table summarizes deferred policy acquisition
costs and related data for the years shown.
1996 1995 1994
Deferred, beginning of year $ 19,042,000 $ 18,772,000 $ 16,254,000
Acquisition costs deferred:
Commissions, net of reinsurance
of $0
$0 and $1,837,000 845,000 1,838,00 3,182,000
Marketing, salaries and
other expenses 431,000 532,000 1,757,000
Total 1,276,000 2,370,000 4,939,000
Interest accretion 854,000 817,000 684,000
Amortization charged to income (3,010,000) (2,917,000) (2,213,000)
Net amortization (2,156,000) (2,100,000) (1,529,000)
Deferred acquisition costs
disposed of at sale of
subsidiary 0 0 (892,000)
Change for the year (880,000) 270,000 2,518,000
Deferred, end of year $ 18,162,000 $ 19,042,000 $ 18,772,000
<PAGE> 37
The following table reflects the components of the income
statement for the line item Commissions and amortization of
deferred policy acquisition costs.
1996 1995 1994
Net amortization of deferred
policy acquisition costs $ 2,156,000 $ 2,100,000 $ 1,529,000
Commissions 2,837,000 3,341,000 2,909,000
Total $ 4,993,000 $ 5,441,000 $ 4,438,000
Estimated net amortization expense of deferred policy
acquisition costs for the next five years is as follows:
Interest Net
Accretion Amortization Amortization
1997 $ 800,000 $ 2,700,000 $ 1,900,000
1998 700,000 2,400,000 1,700,000
1999 700,000 2,200,000 1,500,000
2000 600,000 1,900,000 1,300,000
2001 600,000 1,700,000 1,100,000
I. COST OF INSURANCE ACQUIRED - When an insurance company is
acquired, the Company assigns a portion of its cost to the
right to receive future cash flows from insurance contracts
existing at the date of the acquisition. The cost of
policies purchased represents the actuarially determined
present value of the projected future cash flows from the
acquired policies. Cost of Insurance Acquired is 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. The
interest rates utilized in the amortization calculation are
9% on approximately 72% of the balance and 15% on the
remaining balance. The interest rates vary due to
differences in the blocks of business.
1996 1995 1994
Cost of insurance
acquired, beginning
of year $ 27,965,000 $ 29,910,000 $ 32,091,000
Additions from
acquisitions 0 0 0
Interest accretion 2,695,000 2,825,000 2,967,000
Amortization (4,398,000) (4,770,000) (5,148,000)
Net amortization (1,703,000) (1,945,000) (2,181,000)
Balance attributable to
coinsurance agreement (6,375,000) 0 0
Write-offs due to
impairment 0 0 0
Cost of insurance
acquired, end of year $ 19,887,000 $ 27,965,000 $ 29,910,000
<PAGE> 38
Estimated net amortization expense of cost of insurance
acquired for the next five years is as follows:
Interest Net
Accretion Amortization Amortization
1997 $ 2,100,000 $ 3,300,000 $ 1,200,000
1998 2,000,000 3,000,000 1,000,000
1999 2,000,000 2,800,000 800,000
2000 1,900,000 2,800,000 900,000
2001 1,800,000 2,800,000 1,000,000
J. COST IN EXCESS OF NET ASSETS PURCHASED - Cost in excess of
net assets purchased is the excess of the amount paid to
acquire a company over the fair value of its net assets.
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.
Accumulated amortization of cost in excess of net assets
purchased was $5,528,314 and $5,081,279 as of December 31,
1996 and 1995, respectively.
K. 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. The Company makes these assumptions
at the time the contract is issued or, in the case of
contracts acquired by purchase, at the purchase date.
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 1996, 1995 and
1994.
L. 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.
M. PARTICIPATING INSURANCE - Participating business represents
30% and 34% of the ordinary life insurance in force at
December 31, 1996 and 1995, respectively. Premium income
from participating business represents 52%, 55%, and 53% of
total premiums for the years ended December 31, 1996, 1995
and 1994, respectively. The amount of dividends to be paid
is determined annually by the respective insurance
subsidiary's Board of Directors. Earnings allocable to
participating policyholders are based on legal requirements
which vary by state.
<PAGE> 39
N. 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.
O. BUSINESS SEGMENTS - The companies operate principally in the
individual life insurance business.
P. EARNINGS PER SHARE - Earnings per share are based on the
weighted average number of common shares outstanding during
the respective period.
Q. CASH EQUIVALENTS - The Company considers certificates of
deposit and other short-term instruments with an original
purchased maturity of three months or less as cash equivalents.
R. RECLASSIFICATIONS - Certain prior year amounts have been
reclassified to conform with the 1996 presentation. Such
reclassifications had no effect on previously reported net
income, total assets, or shareholders' equity.
S. 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, 1996, 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, 1996, UG had a statutory gain from operations of $8,006,000.
At December 31, 1996, UG's statutory capital and surplus amounted to
$10,227,000. Extraordinary dividends (amounts in excess of ordinary
dividend limitations) require prior approval of the insurance commissioner
and are not restricted to a specific calculation.
<PAGE> 40
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.
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 $ 5,242,000 $ 1,150,000
APPL 4,943,000 1,525,000
UG 24,038,000 4,364,000
USA 981,000 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:
1996 1995 1994
Current tax
expense (credit) $ (153,000) $ (1,000) $ 35,000
Deferred tax
expense (credit) (4,809,000) (1,435,000) (2,031,000)
$ (4,962,000) $(1,436,000) $(1,996,000)
The Companies have net operating loss carryforwards for federal income tax
purposes expiring as follows:
UG FCC
2002 $ 0 $ 527,000
2003 0 285,000
2004 0 283,000
2005 0 139,000
2006 2,109,000 33,000
2007 783,000 676,000
2008 940,000 4,000
2009 0 169,000
2010 0 19,000
TOTAL $ 3,832,000 $ 2,135,000
<PAGE> 41
The Company has established a deferred tax asset of $2,088,000 for its
operating loss carryforwards and has established an allowance of
$2,088,000.
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.
The sources and effects of such differences are summarized in the following
table:
1996 1995 1994
Tax computed at standard
corporate rate $ (2,777,000) $ (992,000) $ (1,298,000)
Changes in taxes due to:
Cost in excess of net assets
purchased 156,000 154,000 158,000
Benefit of prior losses (2,393,000) (599,000) (696,000)
Other 52,000 1,000 (160,000)
Income tax expense (credit) $ (4,962,000) $(1,436,000) $ (1,996,000)
The following table summarizes the major components which comprise the
deferred tax liability as reflected in the balance sheets:
1996 1995
Investments $ (355,325) $ (332,722)
Deferred policy acquisition costs 6,356,825 6,664,605
Cost of insurance acquired 6,960,273 9,787,657
Agent balances (65,609) (71,625)
Furniture and equipment (21,463) (34,104)
Due premiums (1,175,166) (1,285,212)
Discount of notes 922,766 1,003,038
Future policy benefits (6,074,568) (3,656,260)
Other liabilities (1,587,422) (1,346,525)
Federal tax DAC (1,916,536) (2,862,999)
Deferred tax liability $ 3,043,775 $ 7,865,853
<PAGE> 42
4. ANALYSIS OF INVESTMENTS, INVESTMENT INCOME AND INVESTMENT GAIN
A. NET INVESTMENT INCOME - The following table reflects net investment
income by type of investment:
December 31,
1996 1995 1994
Fixed maturities and fixed
maturities held for sale $ 13,396,431 $ 13,292,552 $ 12,174,226
Equity securities 88,661 52,445 3,999
Mortgage loans 1,047,461 1,257,189 1,408,558
Real estate 794,844 975,080 990,857
Policy loans 1,121,538 1,041,900 978,555
Short-term investments 512,322 498,496 412,135
Other 170,872 143,527 135,051
Total consolidated investment income 17,132,129 17,261,189 16,103,381
Investment expenses (1,222,903) (1,761,438) (1,914,920)
Consolidated net investment income $ 15,909,226 $ 15,499,751 $ 14,188,461
At December 31, 1996, the Company had a total of $5,750,000 of investments,
comprised of $5,050,000 in real estate including its home office property
and $700,000 in equity securities, which did not produce income during 1996.
The following table summarizes the Company's fixed maturity holdings
and investments held for sale by major classifications.
Carrying Value
1996 1995
Investments held for sale:
Fixed maturities $ 1,961,166 $ 3,226,175
Equity securities 1,794,405 1,946,481
Fixed maturities:
U.S. Government, government
agencies and authorities 28,301,386 27,205,449
State, municipalities and
political subdivisions 14,387,883 6,774,185
Collateralized mortgage
obligations 13,246,781 15,395,913
Public utilities 51,794,312 59,101,260
All other corporate bonds 71,805,499 82,081,544
$ 183,291,432 $ 195,731,007
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.
<PAGE> 43
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 1996 1995 1994
State, Municipalities and
Political Subdivisions $ 10,000 $ 0 $ 32,370
Public Utilities 119,658 119,379 168,869
Corporate 819,677 833,142 848,033
Total $ 949,335 $ 952,521 $ 1,049,272
<PAGE> 44
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
1996 Amortized Unrealized Unrealized Market
Investments Held for Sale:
U.S. Government and govt.
agencies and authorities $ 1,461,067 $ 0 $ 17,458 $ 1,443,609
States, municipalities and
political subdivisions 145,199 665 6,397 139,467
Collateralized mortgage
obligations 0 0 0 0
Public utilities 119,970 363 675 119,658
All other corporate bonds 258,425 4,222 4,215 258,432
1,984,661 5,250 28,745 1,961,166
Equity securities 2,086,159 37,000 328,754 1,794,405
Total $ 4,070,820 $ 42,250 $ 357,499 $ 3,755,571
Held to Maturity Securities:
U.S. Government and govt.
agencies and authorities $ 28,301,386 $ 674,768 $ 136,411 $ 28,839,743
States, municipalities and
political subdivisions 14,387,883 352,534 28,084 14,712,333
Collateralized mortgage
obligations 13,246,781 175,163 157,799 13,264,145
Public utilities 51,794,312 912,535 381,285 52,325,562
All other corporate bonds 71,805,499 1,316,380 448,437 72,673,442
Total $179,535,861 $3,431,380 $1,152,016 $181,815,225
<PAGE> 45
1995
Cost or Gross Gross Estimated
Amortized Unrealized Unrealized Market
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
The amortized cost of debt securities at December 31, 1996, 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 for Sale Amortized
December 31, 1996 Cost
Due in one year or less $ 139,724
Due after one year through five years 1,569,804
Due after five years through ten years 115,183
Due after ten years 159,950
$ 1,984,661
<PAGE> 46
Fixed Maturities Held to Maturity Amortized
December 31, 1996 Cost
Due in one year or less $ 13,220,430
Due after one year through five years 74,009,289
Due after five years through ten years 77,165,456
Due after ten years 15,140,686
$ 179,535,861
Proceeds from sales, calls, and maturities of investments in debt
securities during 1996 were $40,677,000. Gross gains of $101,000 and gross
losses of $221,000 were realized on those sales, calls and maturities.
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.
C. INVESTMENTS ON DEPOSIT - At December 31, 1996, investments carried at
approximately $18,016,000 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, 1996 and 1995, 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.
(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.
<PAGE> 47
(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.
The estimated fair values of the Company's financial instruments required
to be valued by SFAS 107 are as follows as of December 31:
1996 1995
Estimated Estimated
Carrying Fair Carrying Fair
Amount Value Amount Value
Fixed maturities $ 179,535,861 $ 181,815,225 $ 190,558,351 $ 197,006,257
Fixed maturities
held for sale 1,961,166 1,961,166 3,226,175 3,226,175
Equity securities 1,794,405 1,794,405 1,946,481 1,946,481
Mortgage loans on
real estate 11,022,792 11,022,792 13,891,762 13,891,762
Policy loans 14,438,120 14,438,120 16,941,359 16,941,359
Short-term investments 400,000 400,000 425,000 425,000
Investment in real
estate 10,268,490 10,268,490 11,683,575 11,683,575
Real estate acquired
in satisfaction of
debt 3,846,946 3,846,946 5,332,413 5,332,413
Notes receivable 840,066 783,310 840,066 775,399
Liabilities
Notes payable 18,999,853 18,153,803 20,623,328 19,987,666
<PAGE> 48
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 1997, 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
$10,227,000 and $7,274,000 at December 31, 1996 and 1995, respectively.
The combined statutory gain from operations (exclusive of intercompany
dividends) was $10,297,000, $3,633,000 and $3,074,000 for 1996, 1995 and
1994, respectively.
7. REINSURANCE
The Company assumes risks from, and reinsures certain parts of its risks
with other insurers under yearly renewable term and coinsurance agreements
which are accounted for by passing a portion of the risk to the reinsurer.
Generally, the reinsurer receives a proportionate part of the premiums less
commissions and is liable for a corresponding part of all benefit payments.
While the amount retained on an individual life will vary based upon age
and mortality prospects of the risk, the Company generally will not carry
more than $125,000 individual life insurance on a single risk.
The Company has reinsured approximately $1.109 billion, $1.088 billion and
$1.217 billion in face amount of life insurance risks with other insurers
for 1996, 1995 and 1994, respectively. Reinsurance receivables for future
policy benefits were $38,745,000 and $13,540,000 at December 31, 1996 and
1995, respectively, for estimated recoveries under reinsurance treaties.
Should any of the reinsurers be unable to meet its obligation at the time
of the claim, obligation to pay such claim would remain with the Company.
The Company's insurance subsidiary ("UG") entered into a coinsurance
agreement with First International Life Insurance Company ("FILIC") as of
September 30, 1996. Under the terms of the agreement, UG ceded to FILIC
substantially all of its paid-up life insurance policies. Paid-up life
insurance generally refers to non-premium paying life insurance policy.
A.M. Best, an industry rating company, assigned a Best's Rating of A++
(Superior) to The Guardian Life Insurance Company of America ("Guardian"),
parent of FILIC, based on the consolidated financial condition and
operating performance of the company and its life/health subsidiaries. The
agreement with FILIC accounts for approximately 66% of the reinsurance
receivables as of December 31, 1996.
As a result of the FILIC coinsurance agreement, effective September 30,
1996, UG received a reinsurance credit in the amount of $28,318,000 in
exchange for an equal amount of assets. UG also received $6,375,000 as a
commission allowance.
Currently, the Company is utilizing reinsurance agreements with Business
Men's Assurance Company, ("BMA") and Life Reassurance Corporation, ("LIFE
RE") for new business. BMA and LIFE RE each hold an "A+" (Superior) rating
from A.M. Best, an industry rating company. The reinsurance agreements
were effective December 1, 1993, and cover 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.
<PAGE> 49
The Company does not have any short-duration reinsurance contracts. The
effect of the Company's long duration reinsurance contracts on premiums
earned in 1996, 1995 and 1994 was as follows:
Shown in thousands
1996 1995 1994
Premiums Premiums Premiums
Earned Earned Earned
Direct $ 32,387 $ 35,201 $ 37,911
Assumed 0 0 0
Ceded (4,768) (5,203) (5,627)
Net premiums $ 27,619 $ 29,998 $ 32,284
8. COMMITMENTS AND CONTINGENCIES
The insurance industry has experienced a number of civil jury verdicts
which have been returned against life and health insurers in the
jurisdictions in which the Company does business involving the insurers'
sales practices, alleged agent misconduct, failure to properly supervise
agents, and other matters. Some of the lawsuits have resulted in the
award of substantial judgements against the insurer, including material
amounts of punitive damages. In some states, juries have substantial
discretion in awarding punitve damages in these circumstances.
Under insurance guaranty fund laws in most states, insurance companies
doing business in a participating state can be assessed up to prescribed
limits for policyholder losses incurred by insolvent or failed insurance
companies. Although the Company cannot predict the amount of any future
assessments, most insurance guaranty fund laws currently provide that an
assessment may be excused or deferred if it would threaten an insurer's
financial strength. Those mandatory assessments may be partially recovered
through a reduction in future premium taxes in some states. The Company
does not believe such assessments will be materially different from amounts
already provided for in the financial statements.
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.
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 $9,927,000, $10,464,000 and $10,912,000
under these arrangements in 1996, 1995 and 1994, respectively. UG paid
$9,627,000, $10,164,000 and $10,587,000 to FCC in 1996, 1995 and 1994,
respectively.
<PAGE> 50
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 $1,568,000,
$2,015,000 and $1,357,000 under their agreement with UII for 1996, 1995 and
1994, 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".
10. NOTES PAYABLE
At December 31, 1996, the Company has $19,000,000 in long term debt
outstanding. The debt is comprised of the following components:
1996 1995
Senior debt $ 8,400,000 $11,400,000
Subordinated 10 yr. notes 5,369,000 5,369,000
Subordinated 20 yr. notes 3,831,000 3,831,000
Other notes payable 1,400,000 0
Encumbrance on real
estate 0 23,000
$19,000,000 $20,623,000
On May 8, 1996, FCC refinanced its senior debt of $8,900,000. The
refinancing was completed through First of America Bank - NA and is subject
to a credit agreement. The refinanced debt bears interest to a rate equal
to the "base rate" plus nine-sixteenths of one percent. The Base rate is
defined as the floating daily, variable rate of interest determined and
announced by First of America Bank from time to time as its "base lending
rate". The base rate at issuance of the loan was 8.25%, and has remained
unchanged through March 1, 1997. Interest is paid quarterly. Principal
payments of $1,000,000 are due in May of each year beginning in 1997, with
a final payment due May 8, 2005. On November 8, 1996, the Company prepaid
$500,000 of the May 8, 1997 principal payment.
The credit agreement contains certain covenants with which the Company must
comply. The covenants contain provisions common to a loan of this type and
include such items as: a minimum consolidated net worth of FCC to be no
less than 400% of the outstanding balance of the debt, Statutory capital
and surplus of Universal Guaranty Life Insurance Company be maintained at
no less than $6,500,000; an earnings covenant requiring the sum of the pre-
tax earnings plus non-cash charges of FCC (based on parent only GAAP
practices) shall not be less than two hundred percent (200%) of the
Company's interest expense on all of its debt service. The Company is
current and in compliance with all of the terms on all of its outstanding
debt and does not foresee any problem in maintaining compliance in the
future.
<PAGE> 51
United Income, Inc. (UII) and First Fidelity Mortgage Company through an
assignment from United Trust, Inc. owned a participating interest of
$700,000 and $300,000 respectively of the senior debt. At the date of the
refinance, these obligations were converted from participations of senior
debt to promissory notes. These notes bear interest at the rate of 1%
above the variable per annum rate of interest most recently published by
the Wall Street Journal as the prime rate. Interest is payable quarterly
with principal due at maturity on May 8, 2006. In February 1996, FCC
borrowed an additional $150,000 from UII and $250,000 from UTI to provide
additional cash for liquidity. The note bears interest at the rate of 1%
over prime as published in the Wall Street Journal, with interest payments
due quarterly and principal due upon maturity of the note on June 1, 1999.
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
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
1997 $ 1,037,000
1998 1,537,000
1999 1,937,000
2000 1,537,000
2001 1,537,000
11. OTHER CASH FLOW DISCLOSURE
On a cash basis, the Company paid $1,657,246, $1,887,170, and $1,883,198 in
interest expense for the years 1996, 1995 and 1994, respectively. The
Company paid $12,149, $25,821, and $190 in federal income tax for the years
1996, 1995 and 1994 respectively.
The Company's insurance subsidiary ("UG") entered into a coinsurance
agreement with First International Life Insurance Company ("FILIC") as of
September 30, 1996. At closing of the transaction, UG received a
coinsurance credit of $28,318,000 for policy liabilities covered under the
agreement. UG transferred assets equal to the credit received. This
transfer included policy loans of $2,855,000 associated with policies under
the agreement and a net cash transfer of $19,088,000 after deducting the
ceding commission due UG of $6,375,000.
12. DEFERRED COMPENSATION PLAN
UTI and FCC established a deferred compensation plan during 1993 pursuant
to which an officer or agent of FCC, UTI or affiliates of UTI, could 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 received 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. A total
of 1,050,000 options were granted in 1993 under this plan. As of December
31, 1996 no options were exercised. At December 31, 1996 and 1995, the
Company held a liability of $1,268,000 and $1,167,000, respectively,
relating to this plan.
<PAGE> 52
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. PENDING CHANGE IN CONTROL OF UNITED TRUST, INC.
On September 23, 1996, UTI and UII entered into a stock purchase agreement
with LaSalle Group, Inc., a Delaware corporation ("LaSalle"), whereby
LaSalle will acquire 12,000,000 shares of authorized but unissued shares of
UTI for $1.00 per share and 10,000,000 shares of authorized but unissued
shares of UII for $0.70 per share. Additionally, LaSalle intends,
contemporaneously with the closing of the above transaction, to purchase in
privately negotiated transactions additional shares of UTI and UII so that
LaSalle will own not less than 51% of the outstanding common stock of UTI
and UII.
The agreement requires and is pending approval of the Commissioner of
Insurance of the State of Ohio, Illinois and West Virginia, (the states of
domicile of the insurance subsidiaries). It is anticipated the transaction
will be completed during the second quarter of 1997.<PAGE>
<PAGE> 53
15. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
1996
1st 2nd 3rd 4th
Premium income and other
considerations, net $ 8,481,511 $ 8,514,175 $ 7,348,199 $ 6,600,573
Net investment income 3,982,268 3,919,715 4,000,172 4,007,071
Total revenues 12,554,619 12,178,359 11,329,201 10,475,852
Policy benefits including
dividends 7,141,235 7,805,748 8,786,608 10,710,009
Commissions and
amortization of DAC 1,942,777 1,482,101 1,263,969 2,007,438
Operating expenses 3,281,560 2,719,974 3,326,744 2,303,561
Operating (loss) (250,496) (252,231) (2,473,828) (4,957,961)
Net income (loss) 329,576 (122,482) (2,162,608) (1,076,135)
Net income (loss) per share 0.01 (0.01) (0.09) (0.04)
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 8,227,705 8,940,389 7,014,070 7,041,851
dividends
Commissions and
amortization of DAC 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 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
Commissions and
amortization of DAC 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 (loss) 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)
<PAGE> 54
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 during 1997, 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 during 1997, 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 during 1997,
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 during 1997, and is
incorporated herein by reference.
<PAGE> 55
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 57 and 58).
<PAGE> 56
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) Credit Agreement dated May 8, 1996 between First of America Bank
- Illinois, N.A., as lender and First Commonwealth Corporation,
as borrower.
10(c) $8,900,000 Term Note of First Commonwealth Corporation to First
of America Bank - Illinois, N.A. dated May 8, 1996.
10(d) Coinsurance Agreement dated September 30, 1996 between Universal
Guaranty Life Insurance Company and First International Life
Insurance Company, including assumption reinsurance agreement
exhibit and amendments.
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 Insuance Company
10(ee) (1) Reinsurance Agreement dated January 1, 1991 between Universal
Guaranty Life Insurance Company and Republic-Vanguard Life
Insurance Company
<PAGE> 57
INDEX TO EXHIBITS
Exhibit
Number
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.
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.
<PAGE> 58
<TABLE>
FIRST COMMONWEALTH CORPORATION Schedule I
SUMMARY OF INVESTMENTS - OTHER THAN
INVESTMENTS IN RELATED PARTIES
As of December 31, 1996
Column A Column B Column C Column D
Amount at
Which Shown
in Balance
Cost Value Sheet
<S> <C> <C> <C>
Fixed maturities:
United States Government and
government agencies and
authorities $ 28,301,386 $ 28,839,743 $ 28,301,386
State, municipalities, and
political subdivisions 14,387,883 14,712,333 14,387,883
Collateralized mortgage
obligations 13,246,781 13,264,145 13,246,781
Public utilities 51,794,312 52,325,562 51,794,312
All other corporate bonds 71,805,499 72,673,442 71,805,499
Total fixed maturities 179,535,861 $ 181,815,225 179,535,861
Investments held for sale:
Fixed maturities:
United States Government
and government agencies and
authorities 1,461,067 $ 1,443,609 1,443,609
State, municipalities, and
political subdivisions 145,199 139,467 139,467
Collateralized mortgage
obligations 0 0 0
Public utilities 119,970 119,658 119,658
All other corporate bonds 258,425 258,432 258,432
1,984,661 $ 1,961,166 1,961,166
Equity securities:
Public utilities 82,073 $ 56,053 56,053
All other corporate securities 2,004,086 1,738,352 1,738,352
2,086,159 $ 1,794,405 1,794,405
Mortgage loans on real estate 11,022,792 11,022,792
Investment real estate 10,268,490 10,268,490
Real estate acquired in
satisfaction of debt 3,846,946 3,846,946
Policy loans 14,438,120 14,438,120
Short term investments 400,000 400,000
Total investments $ 223,583,029 $ 223,267,780
</TABLE>
<PAGE> 59
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.
<PAGE> 60
<TABLE>
FIRST COMMONWEALTH CORPORATION
CONDENSED FINANCIAL INFORMATION OF
REGISTRANT PARENT ONLY BALANCE SHEETS Schedule II
As of December 31, 1996 and 1995
1996 1995
<S> <C> <C>
ASSETS
Investment in Universal Guaranty Life Insurance
Company $ 55,383,654 $ 58,862,430
Cash and cash equivalents 1,484,550 1,735,664
Mortgage loans 0 11,023
Deferred income taxes 703,583 295,168
Other assets 89,875 11,521
Total assets $ 57,661,662 $ 60,915,806
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Notes payable $ 18,999,853 $ 20,599,853
Indebtedness to subsidiaries and affiliates,
net 795,392 464,356
Income taxes payable 12,906 12,029
Other liabilities 2,374,860 1,154,768
Total liabilities 22,183,011 22,231,006
Shareholders' equity:
Common stock 23,967,749 23,967,749
Additional paid-in capital 28,498,361 28,498,361
Unrealized depreciation of investments held
for sale of affiliates (305,715) (131,215)
Accumulated deficit (16,681,744) (13,650,095)
Total shareholders' equity 35,478,651 38,684,800
Total liabilities and shareholders'
equity $ 57,661,662 $ 60,915,806
</TABLE>
<PAGE> 61
<TABLE>
FIRST COMMONWEALTH CORPORATION
CONDENSED FINANCIAL INFORMATION OF
REGISTRANT PARENT ONLY STATEMENTS OF OPERATIONS
Three Years Ended December 31, 1996 Schedule II
1996 1995 1994
<S> <C> <C> <C>
Revenues:
Net investment income $ 54,028 $ 42,714 $ 98,194
Management fees from affiliates 9,988,960 10,486,574 10,911,520
Other income 12,071 794 1,145
10,055,059 10,530,082 11,010,859
Expenses:
Interest expense 1,700,426 1,916,564 1,941,565
Operating expenses 8,477,037 7,473,514 7,356,280
10,177,463 9,390,078 9,297,845
Operating income (loss) (122,404) 1,140,004 1,713,014
Credit (provision) for income taxes 395,031 (61,469) 32,945
Equity in loss of subsidiaries (3,304,276) (2,530,173) (3,520,803)
Net loss $ (3,031,649) $(1,451,638) $(1,774,844)
</TABLE>
<PAGE> 62
<TABLE>
FIRST COMMONWEALTH CORPORATION
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
PARENT ONLY STATEMENTS OF CASH FLOWS
Three Years Ended December 31, 1996 Schedule II
1996 1995 1994
<S> <C> <C> <C>
Increase (decrease) in cash and cash
equivalents
Cash flows from operating activities:
Net loss $ 3,031,649 $(1,451,638) $(1,774,844)
Adjustments to reconcile net loss
to net cash provided by operating
activities:
Equity in loss of subsidiaries 3,304,276 2,530,173 3,520,803
Change in indebtedness to
affiliates, net 331,036 725,387 (851,969)
Change in other assets and
liabilities 1,141,738 (125,201) 231,330
Change in deferred income taxes (408,415) 48,571 (66,933)
Change in income taxes payable 877 (19,971) 32,000
Net cash provided by operating
activities 1,337,863 1,707,321 1,090,387
Cash flows from investing activities:
Proceeds from mortgage loan payments 11,023 1,644 45,254
Cost of investments acquired mortgage
loans 0 0 (57,921)
Net cash provided by (used in) investing
activities 11,023 1,644 (12,667)
Cash flows from financing activities:
Proceeds from notes payable 9,300,000 0 0
Payments of principal on notes
payable (10,900,000) (900,000) (2,000,000)
Net cash used in financing
activities (1,600,000) (900,000) (2,000,000)
Net increase (decrease) in cash and
cash equivalents (251,114) 808,965 (922,280)
Cash and cash equivalents at beginning
of year 1,735,664 926,699 1,848,979
Cash and cash equivalents at end
of year $ 1,484,550 $1,735,664 $ 926,699
</TABLE>
<PAGE> 63
<TABLE>
FIRST COMMONWEALTH CORPORATION
REINSURANCE
As of December 31, 1996 and
for the year ended December 31, 1996 Schedule IV
Column A Column B Column C Column D Column E Column F
<S> <C> <C> <C> <C> <C>
Percentage
Ceded to Assumed of amount
other from other assumed to
Gross amount companies companies* Net amount net
Life
insurance
in force $3,952,958,000 $1,108,534,000 $1,271,766,000 $4,116,190,000 30.9%
Premiums:
Life
insurance $ 32,128,258 $ 4,717,488 $ 0 $ 27,410,770 0.0%
Accident
and health
insurance 258,377 50,255 0 208,122 0.0%
$ 32,386,635 $ 4,767,743 $ 0 $ 27,618,892 0.0%
* All assumed business represents the Company's participation in the
Servicemen's Group Life Insurance Program (SGLI).
</TABLE>
<PAGE> 64
<TABLE>
FIRST COMMONWEALTH CORPORATION
REINSURANCE
As of December 31, 1995 and
for the year ended December 31, 1995 Schedule IV
Column A Column B Column C Column D Column E Column F
<S> <C> <C> <C> <C> <C>
Percentage
Ceded to Assumed of amount
other from other assumed to
Gross amount companies companies* Net amount net
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%
* All assumed business represents the Company's participation in the
Servicemen's Group Life Insurance Program (SGLI).
</TABLE>
<PAGE>
<TABLE>
FIRST COMMONWEALTH CORPORATION
REINSURANCE
As of December 31, 1994 and
for the year ended December 31, 1994 Schedule IV
Column A Column B Column C Column D Column E Column F
<S> <C> <C> <C> <C> <C>
Percentage
Ceded to Assumed of amount
other from other assumed to
Gross amount companies companies* Net amount net
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%
* All assumed business represents the Company's participation in the
Servicemen's Group Life Insurance Program (SGLI).
</TABLE>
<PAGE> 66
<TABLE>
FIRST COMMONWEALTH CORPORATION
VALUATION AND QUALIFYING ACCOUNTS
For the years ended December 31, 1996, 1995, & 1994 Schedule V
Balance at Additions Balances
Beginning Charges at
Description Of Period and Expenses Deductions End of Period
<C> <C> <C> <C>
December 31, 1996
Allowance for doubtful
accounts - mortgage
loans $ 10,000 $ 0 $ 0 $ 10,000
Accumulated depreciation
on property and
equipment and EDP
conversion costs 3,117,543 203,413 0 3,320,956
Accumulated amortization
of costs in excess of net
assets purchased 5,081,279 447,035 0 5,528,314
Accumulated depreciation
on real estate 3,253,979 311,094 0 3,565,073
Total $ 11,462,801 $ 961,542 $ 0 $ 12,424,343
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 $3 50,946 $ 10,309,350
</TABLE>
<PAGE> 67
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 25, 1997
John S. Albin, Director
/s/ John K. Cantrell Date: March 25, 1997
John K. Cantrell, Chairman of the Board
and Director
/s/ William F. Cellini Date: March 25, 1997
William F. Cellini, Director
/s/ John W. Collins Date: March 25, 1997
John W. Collins, Director
/s/ George E. Francis Date: March 25, 1997
George E. Francis, Senior Vice President
and Director
/s/ Donald G. Geary Date: March 25, 1997
Donald G. Geary, Director
/s/ James E. Melville Date: March 25, 1997
James E. Melville, Senior Executive
Vice President, Chief Financial Officer
and Director
<PAGE> 68
/s/ Joseph H. Metzger Date: March 25, 1997
Joseph H. Metzger, Senior Vice President
and Director
/s/ Luther C. Miller Date: March 25, 1997
Luther C. Miller, Director
/s/ Thomas F. Morrow Date: March 25, 1997
Thomas F. Morrow, Vice Chairman, Chief
Operating Officer and Director
/s/ Robert V. O'Keefe Date: March 25, 1997
Robert V. O'Keefe, Director
/s/ Larry E. Ryherd Date: March 25, 1997
Larry E. Ryherd, President, Chief
Executive Officer and Director
/s/ Robert W. Teater Date: March 25, 1997
Robert W. Teater, Director
/s/ Howard A. Young Date: March 25, 1997
Howard A. Young, Director
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 7
<S> <C> <C>
<PERIOD-TYPE> 12-MOS 12-MOS
<FISCAL-YEAR-END> DEC-31-1996 DEC-31-1995
<PERIOD-END> DEC-31-1996 DEC-31-1995
<DEBT-HELD-FOR-SALE> 1,961,166 3,226,175
<DEBT-CARRYING-VALUE> 179,535,861 190,558,351
<DEBT-MARKET-VALUE> 181,815,225 197,006,257
<EQUITIES> 1,794,405 1,946,481
<MORTGAGE> 11,022,792 13,891,762
<REAL-ESTATE> 10,268,490 11,683,575
<TOTAL-INVEST> 223,267,780 244,005,116
<CASH> 16,801,288 11,979,637
<RECOVER-REINSURE> 42,601,217 14,401,852
<DEFERRED-ACQUISITION> 18,162,356 19,041,728
<TOTAL-ASSETS> 336,639,124 334,057,785
<POLICY-LOSSES> 0 0
<UNEARNED-PREMIUMS> 0 0
<POLICY-OTHER> 252,718,388 242,763,581
<POLICY-HOLDER-FUNDS> 19,626,449 18,488,738
<NOTES-PAYABLE> 18,999,853 20,623,328
0 0
0 0
<COMMON> 23,967,749 23,967,749
<OTHER-SE> 11,510,902 14,717,051
<TOTAL-LIABILITY-AND-EQUITY> 336,639,124 334,057,785
27,618,892 29,998,125
<INVESTMENT-INCOME> 15,909,226 15,499,751
<INVESTMENT-GAINS> (411,053) (348,582)
<OTHER-INCOME> 3,420,966 3,215,880
<BENEFITS> 34,443,600 31,224,015
<UNDERWRITING-AMORTIZATION> 4,992,885 5,440,653
<UNDERWRITING-OTHER> 15,036,062 14,535,154
<INCOME-PRETAX> (7,934,516) (2,834,648)
<INCOME-TAX> (4,961,506) (1,435,824)
<INCOME-CONTINUING> (3,031,649) (1,451,638)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (3,031,649) (1,451,638)
<EPS-PRIMARY> (.13) (.06)
<EPS-DILUTED> (.13) (.06)
<RESERVE-OPEN> 0 0
<PROVISION-CURRENT> 0 0
<PROVISION-PRIOR> 0 0
<PAYMENTS-CURRENT> 0 0
<PAYMENTS-PRIOR> 0 0
<RESERVE-CLOSE> 0 0
<CUMULATIVE-DEFICIENCY> 0 0
</TABLE>
CREDIT AGREEMENT
$8,900,000
Dated May 8, 1996
between
FIRST OF AMERICA BANK-ILLINOIS, N.A., as Lender
and
FIRST COMMONWEALTH CORPORATION, as Borrower
<PAGE>
TABLE OF CONTENTS
SECTION 1. DEFINITIONS AND ACCOUNTING MATTERS. . . . . . . . 1
1.1 Certain Defined Terms . . . . . . . . . . . . . . . 1
1.2 Accounting Terms; Statements of Variation . . . . . 6
SECTION 2. LOAN . . . . . . . . . . . . . . . . . . . . . 7
2.1 $8,900,000.00 Loan . . . . . . . . . . . . . . . . 7
2.2 Optional Prepayments . . . . . . . . . . . . . . . 8
2.3 Payments . . . . . . . . . . . . . . . . . . . . . 8
2.4 Computation of Interest . . . . . . . . . . . . . . 8
2.5 Security . . . . . . . . . . . . . . . . . . . . . 8
SECTION 3. FEES . . . . . . . . . . . . . . . . . . . . . 9
3.1 Origination Fee . . . . . . . . . . . . . . . . . . 9
SECTION 4. CONDITIONS TO THE LOAN AND ADVANCES UNDER THE
NOTE . . . . . . . . . . . . . . . . . . . . . . . . . . 9
4.1 Conditions . . . . . . . . . . . . . . . . . . . . 9
SECTION 5. REPRESENTATIONS AND WARRANTIES . . . . . . . . 10
5.1 Corporate Existence and Structure . . . . . . . . . 10
5.2 Financial Condition . . . . . . . . . . . . . . . . 10
5.3 Litigation . . . . . . . . . . . . . . . . . . . . 10
5.4 No Breach . . . . . . . . . . . . . . . . . . . . . 10
5.5 Corporate Action . . . . . . . . . . . . . . . . . 11
5.6 Approvals . . . . . . . . . . . . . . . . . . . . . 11
5.7 ERISA . . . . . . . . . . . . . . . . . . . . . . . 11
5.8 Taxes . . . . . . . . . . . . . . . . . . . . . . . 11
5.9 Investment Company Act . . . . . . . . . . . . . . 11
5.10 Public Utility Holding Company Act . . . . . . . . 11
5.11 Capitalization of the Company and Universal . . . . 11
5.12 Assets of the Company and its Subsidiaries . . . . 12
5.13 Other Agreements . . . . . . . . . . . . . . . . . 12
5.14 Agreements . . . . . . . . . . . . . . . . . . . . 12
5.15 Solvency . . . . . . . . . . . . . . . . . . . . . 12
5.16 Security Documents . . . . . . . . . . . . . . . . 12
5.17 Margin Regulations . . . . . . . . . . . . . . . . 13
5.18 Use of Proceeds of the Loan . . . . . . . . . . . . 13
SECTION 6. COVENANTS . . . . . . . . . . . . . . . . . . 13
6.1 Information . . . . . . . . . . . . . . . . . . . . 13
6.2 Litigation . . . . . . . . . . . . . . . . . . . . 14
6.3 Corporate Existence Etc . . . . . . . . . . . . . . 14
6.4 Minimum Consolidated Net Worth . . . . . . . . . . 15
6.5 Capital and Surplus . . . . . . . . . . . . . . . . 15
6.6 Indebtedness . . . . . . . . . . . . . . . . . . . 15
6.7 Capital Expenditures . . . . . . . . . . . . . . . 15
6.8 Mergers, Acquisitions Sale of Assets Etc. . . . . . 16
6.9 Restricted Payments . . . . . . . . . . . . . . . . 16
6.10 Amendments to Documents; Prepayment of
Indebtedness . . . . . . . . . . . . . . . . . . . 16
<PAGE>
6.11 Liens . . . . . . . . . . . . . . . . . . . . . . . 16
6.12 Issuance of Capital Stock . . . . . . . . . . . . . 16
6.13 Investment and Joint Ventures . . . . . . . . . . . 16
6.14 Additional Security Documents . . . . . . . . . . . 16
6.15 Transactions With Affiliates . . . . . . . . . . . 17
6.16 Further Assurances . . . . . . . . . . . . . . . . 17
6.17 Compensation . . . . . . . . . . . . . . . . . . . 17
6.18 Senior Lender Status . . . . . . . . . . . . . . . 17
6.19 Earnings Covenants . . . . . . . . . . . . . . . . 17
6.20 Management Agreements . . . . . . . . . . . . . . . 17
6.21 Risk Based Capital Ratio. . . . . . . . . . . . . . 18
6.22 Surplus Relief Reinsurance. . . . . . . . . . . . . 18
6.23 Methods of Calculation. . . . . . . . . . . . . . . 18
SECTION 7. EVENTS OF DEFAULT. . . . . . . . . . . . . . . 18
SECTION 8. MISCELLANEOUS . . . . . . . . . . . . . . . . 20
8.1 Waiver . . . . . . . . . . . . . . . . . . . . . . 20
8.2 Notices . . . . . . . . . . . . . . . . . . . . . . 20
8.3 Expenses, Etc . . . . . . . . . . . . . . . . . . . 20
8.4 Amendments Etc . . . . . . . . . . . . . . . . . . 21
8.5 Successors and Assigns . . . . . . . . . . . . . . 21
8.6 Assignments and Participations . . . . . . . . . . 21
8.7 Survival . . . . . . . . . . . . . . . . . . . . . 21
8.8 Captions . . . . . . . . . . . . . . . . . . . . . 21
8.9 Counterparts . . . . . . . . . . . . . . . . . . . 21
8.10 Integration; Severability . . . . . . . . . . . . . 21
8.11 Governing Law; Submission to Jurisdiction; Etc . . 22
8.12 Waiver of Trial by Jury . . . . . . . . . . . . . . 22
<PAGE>
EXHIBITS
Exhibit A - Assignment of Policy as Collateral Security A-1
Exhibit B - Security Agreement - Pledge . . . . . . . . B-1
Exhibit C - Term Note . . . . . . . . . . . . . . . . . C-1
Exhibit D - Opinion . . . . . . . . . . . . . . . . . . D-1
ANNEXES
Annex I - Liens . . . . . . . . . . . . . . . . . . . I-1
Annex II - List of Subsidiaries . . . . . . . . . . . II-1
Annex III - Existing Indebtedness . . . . . . . . . . III-1
Annex IV - Management Agreements . . . . . . . . . . IV-1
Annex V - Litigation and Other Proceedings . . . . . . V-1
<PAGE>
THIS CREDIT AGREEMENT (this "Agreement" as the same may be
amended, modified, supplemented or replaced from time to time) is
entered into May 8, 1996, by and between FIRST COMMONWEALTH
CORPORATION, a Virginia corporation (the "Company"), and FIRST OF
AMERICA BANK-ILLINOIS, N.A. (the "Bank").
To induce the Bank to extend credit and financial accom-
modations to the Company and for other good and valuable
consideration, the receipt and sufficiency of which are hereby
acknowledged, the parties hereto agree as follows, intending to
be legally bound:
SECTION 1. DEFINITIONS AND ACCOUNTING MATTERS.
1.1 CERTAIN DEFINED TERMS. As used herein, the following
terms shall have the following meanings (all terms defined in
this Section 1 or in other provisions of this Agreement in the
singular to have the same meanings when used in the plural and
vice versa):
ACQUISITION shall mean any transaction, or any series of
related transactions, consummated after the date of this
Agreement, by which the Company and/or any of its Affiliates (in
one transaction or as the most recent transaction in a series of
transactions) (a) acquires any going business or all or
substantially all of the assets of any firm, corporation or
division thereof, whether through purchase of assets, merger or
otherwise, (b) directly or indirectly acquires control of at
least a majority (in number of votes) of the securities of a
corporation which have ordinary voting power for the election of
directors or (c) directly or indirectly acquires control of a
majority ownership interest in any partnership or joint venture.
ADJUSTED STATUTORY CAPITAL AND SURPLUS shall mean the sum of
(i) the capital of Universal Guaranty Life Insurance Company, an
Ohio life insurance company ("Universal"), (ii) Universal's
surplus, (iii) the Asset Valuation Reserve of Universal and its
insurance company subsidiaries, (iv) the Interest Maintenance
Reserve of Universal and its insurance company subsidiaries, (v)
the miscellaneous reserves that would be reflected in Exhibit 8,
Part G of the Annual Statements of Universal and its
subsidiaries, (vi) the non-admitted agent debit balances of
Universal and its insurance company subsidiaries, (viii) the
provision for policyholders' dividends payable in the following
calendar year of Universal and its insurance company
subsidiaries, and (ix) the excess, if any, of the market value
over the carrying value of the bond portfolio of Universal and
its insurance company subsidiaries. Item (i) - (ix) shall each
be computed in accordance with Statutory Accounting Practices,
which are or would be reflected on the statutory financial
statements of Universal or its insurance company subsidiaries as
of the date in question.
AFFILIATE shall mean, with respect to any Person, any other
Person or group of affiliated Persons directly or indirectly con-
trolling (including without limitation all directors and officers
of such Person), controlled by, or under direct or indirect
common control with, such Person. For purposes of this
definition, a Person shall be deemed to control another Person if
such first Person possesses, directly or indirectly, the power
(a) to vote 20% or more of the securities having ordinary voting
power for the election of directors of such other Person or (b)
to direct or cause the direction of the management or policies of
such other Person, whether through the ownership of voting
securities, by contract or otherwise, provided, however, a
natural person shall not be considered an Affiliate for purposes
of this Agreement.
APPALACHIAN shall mean Appalachian Life Insurance Company, a
West Virginia life insurance company.
ASSIGNMENT shall mean collectively those certain Assignments
of Policy as Collateral Security in the form of Exhibit A,
attached hereto, assigning to the Bank policies of life insurance
as collateral security on the lives of James E. Melville and
Larry E. Ryherd, each in the amount of Five Million and No/100
Dollars ($5,000,000).
BASE COMPENSATION shall mean the aggregate amount of
compensation, in all forms, paid to the following officers of the
Company: President, Vice Chairman, Senior Executive Vice
President, Senior Vice President and Secretary and Senior Vice
President - Real Estate; which initial aggregate sum for purposes
of this Agreement shall be One Million Four Hundred Thousand and
No/100 Dollars ($1,400,000).
<PAGE>
BASE RATE shall mean the floating daily, variable rate of
interest determined and announced by the Bank from time to time
as its "Base Lending Rate" (without reference to prime or base
rate of any other financial institution) which rate may not
necessarily be the lowest rate of interest charged by the Bank to
any of its customers. The Bank's Base Rate is an "Index" and the
actual rate charged to any borrower for a specific loan may be
above or below that "Index".
BASIC RATE shall mean a variable per annum rate of interest
equal to the sum of (i) nine sixteenths percent (9/16%) plus (ii)
the Base Rate, which Basic Rate shall change when and as the Base
Rate shall change, effective on the day of such change.
BUSINESS DAY shall mean any day on which commercial banks
are not authorized or required to close in Springfield, Illinois.
CAPITAL EXPENDITURES shall mean (a) expenditures (whether
paid in cash or accrued as a liability) for fixed assets,
tooling, plant and equipment (including without limitation
payments of Capital Lease Obligations), (b) any other
expenditures that would be classified as capital expenditures
under GAAP and (c) the amount of consideration paid and/or any
monetary obligation incurred in respect of the purchase price for
any Acquisition.
CAPITAL LEASE OBLIGATIONS shall mean, as to any Person, the
obligations of such Person to pay rent or other amounts under a
lease of (or other agreement conveying the right to use) real
and/or personal property, which obligations are required to be
classified and accounted for as a capital lease on a balance
sheet of such Person under GAAP and, for purposes of this
Agreement, the amount of such obligations shall be the
capitalized amount thereof, determined in accordance with GAAP.
CHANGE IN CONTROL shall mean any transaction or series of
transactions whether or not by operation of law, contract or
otherwise, which result in more than 49% of the Company Capital
Stock or substantially all of the assets of the Company being
owned legally or beneficially by any Person other than United
Trust Group.
CODE shall mean the Internal Revenue Code of 1986, as
amended.
COMPANY PLEDGE AGREEMENT shall mean a Security Agreement-
Pledge executed by the Company in favor of the Bank in
substantially the form of Exhibit B attached hereto, whereby the
Company shall pledge to the Bank as collateral security for the
Loan one hundred percent (100%) of the Stock, as the same may be
amended, modified, supplemented or replaced from time to time.
CONSOLIDATED NET WORTH shall mean, at any date, the amount
which would be set forth opposite the caption "total
shareholders' equity" (or any like caption) on a consolidated
balance sheet of the Company and its consolidated Subsidiaries.
CREDIT DOCUMENTS shall mean, collectively, this Agreement,
the Note, the Security Documents, and any and all other documents
executed in connection therewith or as security for the Loan, as
the same may be renewed, extended, amended, modified,
supplemented or replaced from time to time.
DEFAULT shall mean an Event of Default or an event which
with notice or lapse of time or both would become an Event of
Default.
DOLLARS and $ shall mean lawful money of the United States
of America.
ERISA shall mean the Employee Retirement Income Security Act
of 1974, as amended from time to time.
<PAGE>
ERISA AFFILIATE shall mean any corporation or trade or busi-
ness which is a member of the same controlled group of
corporations (within the meaning of Section 414(b) of the Code)
as the Company or is under common control (within the meaning of
Section 414(c) of the Code) with the Company.
EVENT OF DEFAULT shall have the meaning assigned to such
term in Section 7 hereof.
FCC NOTES shall mean those certain Promissory Notes made by
the Company payable to United Trust Group, Inc., and any and all
renewals, extensions, modifications, replacements, supplements or
rearrangements thereof, and referred to in the UTG Security
Agreement by and among United Trust Group, Inc. and the Lenders,
as defined therein, Commonwealth Industries Corporation and the
Company.
GAAP shall mean generally accepted accounting principles in
the United States of America, as in effect from time to time.
GUARANTEE shall mean, in respect of any Person, any obliga-
tion, contingent or otherwise, of such Person directly or
indirectly guaranteeing any Indebtedness of another Person,
including without limitation by means of an agreement to purchase
or pay (or advance or supply funds for the purchase or payment
of) such Indebtedness or to maintain financial covenants, or to
assure the payment of such Indebtedness by an agreement to make
payments in respect of goods or services regardless of whether
delivered, or otherwise, provided, that the term "Guarantee"
shall not include endorsements for deposit or collection in the
ordinary course of business; and such term when used as a verb
shall have a correlative meaning.
INDEBTEDNESS shall mean, as to any Person, without duplica-
tion: (a) all obligations of such Person for borrowed money or
evidenced by bonds, debentures, notes or similar instruments; (b)
all obligations of such Person for the deferred purchase price of
property or services, except trade accounts payable and accrued
liabilities arising in the ordinary course of business which are
not overdue by more than 30 days or which are being contested in
good faith by appropriate proceedings; (c) all Capital Lease
Obligations of such Person; (d) all Indebtedness of others
secured by a Lien on any properties, assets or revenue of such
Person to the extent of the value of the property subject to such
Lien; (e) all Indebtedness of others Guaranteed by such Person;
and (f) all obligations of such Person, contingent or otherwise,
in respect of any letters of credit or bankers' acceptances.
INVESTMENT by any Person in any other Person shall mean:
(a) The amount paid or committed to be paid, or the value
of property or services contributed or committed to be
contributed, by such first Person for or in connection with any
stock, bonds, notes, debentures, partnership or other ownership
interests or other securities of such other Person or as a
capital contribution to such other Person; and
(b) the principal amount of any advance, loan or extension
of credit by such first Person to such other Person (other than
any such advance, loan or extension of credit having a term not
exceeding 45 days made by such first Person to its trade
customers in the ordinary course of its business) and (without
duplication) any amount committed to be advanced, loaned or
extended by such first Person to such other Person.
INVESTMENT STRATEGY shall mean the practice of investing in
investments rated higher than BB by Standard and Poors Rating
Service.
JOINT VENTURE shall mean a joint venture, partnership or
other similar arrangement, whether in corporate, partnership or
other legal form; provided that, as to any such arrangement in
corporate form, such corporation shall not, as to any Person of
which such corporation is a Subsidiary, be considered to be a
Joint Venture to which such Person is a party.
<PAGE>
LIEN shall mean any mortgage, lien, pledge, charge, security
interest or encumbrance of any kind, including without limitation
the interest of a vendor or lessor under any conditional sale
agreement, capital lease or other title retention agreement.
LINCOLN shall mean Abraham Lincoln Insurance Company, an
Illinois insurance company.
LOAN shall mean the loan from the Bank to the Company pro-
vided for in Section 2.1 hereof.
MANAGEMENT AGREEMENTS shall mean those Management Agreements
described in Annex IV, attached hereto.
MARGIN STOCK shall mean "margin stock" as defined in
Regulation U.
MAXIMUM RATE shall mean the maximum lawful rate of interest
permitted by applicable laws, now or hereafter enacted, which
interest rate shall change when and as such laws change, to the
extent permitted by such laws, effective.
MULTI-EMPLOYER PLAN shall mean a Plan defined as such in
Section 3(37) of ERISA to which contributions have been made by
the Company or any ERISA Affiliate and which is covered by Title
IV of ERISA.
NOTE shall mean the promissory note executed by the Company
and payable to the order of the Bank evidencing the Loan, as
provided for by Section 2.1 hereof, as the same may be renewed,
extended, modified, supplemented, replaced or rearranged at any
time.
OTHER DEBT DOCUMENTS shall mean collectively the FCC Notes
and the Other Notes.
OTHER NOTES shall mean the notes of the Company payable to
United Income, Inc. and First Fidelity Mortgage Company, and
referenced in Annex III attached hereto, the aggregate principal
amount of which shall not exceed One Million Dollars
($1,000,000).
PBGC shall mean the Pension Benefit Guaranty Corporation or
any entity succeeding to any or all of its functions under ERISA.
PERMITTED LIENS shall mean:
(a) pledges or deposits by the Company, and/or any
Subsidiaries or Affiliate under workmen's compensation laws,
unemployment insurance laws or similar legislation, or good faith
deposits in connection with bids, tenders, contracts (other than
for the payment of Indebtedness of the Company, and/or any
Subsidiaries or Affiliate), or leases to which the Company,
and/or any Subsidiaries or Affiliate are parties, deposits to
secure public or statutory obligations of the Company, and/or any
Subsidiaries or Affiliate, deposits with state insurance
departments, deposits of cash or U.S. Government bonds to secure
surety or appeal bonds or performance bonds to which the Company,
and/or any Subsidiaries or Affiliate are parties or which are
issued for its account, or deposits for the payment of rent
(provided that such deposits as security for the payment of rent
are required in the ordinary course of business);
(b) Liens imposed by law, such as carriers', warehouse-
men's, materialmen's and mechanics' liens, or Liens arising out
of judgments or awards against the Company, and/or any of its
Subsidiaries with respect to which the Company, and/or any
Subsidiaries or Affiliate at the time shall currently be
prosecuting an appeal or proceedings for review in good faith and
by proper procedure;
(c) Liens for taxes not yet subject to penalties for non-
payment and Liens for taxes which are not yet overdue and the
payment of which is being contested in good faith by appropriate
proceedings;
<PAGE>
(d) minor survey exceptions, minor encumbrances, easements
or reservations of, or rights of others for, rights of way,
highways and railroad crossings, sewers, electric lines,
telegraph and telephone lines and other similar purposes, or
zoning or other restrictions as to the use of real properties or
other Liens incidental to the conduct of the business of the
Company, and/or any Subsidiaries or Affiliate or to the ownership
of their property which were not incurred in connection with
Indebtedness of the Company, and/or any Subsidiaries or
Affiliate, which Liens do not in the aggregate materially detract
from the value of said properties or materially impair the
operation of the business of the Company, and/or any Subsidiaries
or Affiliate;
(e) Liens created in connection with Capital Lease Obli-
gations, provided that such Liens do not encumber any property
other than the property financed by the capital lease under which
such Capital Lease Obligations exist;
(f) Liens existing on any assets acquired by the Company,
and/or any Subsidiaries or Affiliate (subject to Section 6.6
hereof) or created at the time of acquisition of such assets to
secure purchase money Indebtedness;
(g) Liens existing on the date hereof in respect of
property, assets or revenues of the Company, Subsidiaries and
their Subsidiaries listed on Annex I hereto;
(h) Liens created pursuant to the Security Documents;
(i) Statutory liens held by policy holders of the Company,
the Subsidiaries or an Affiliate.
(j) extensions, renewals, refinancings or replacements of
any Permitted Liens referred to above, provided that the
principal amount of the obligation secured thereby is not
increased and that any such extension, renewal, refinancing or
replacement is limited to the property originally encumbered
thereby.
PERSON shall mean any individual, corporation, partnership,
trust, joint venture, unincorporated association or other
enterprise or any government or any agency, instrumentality or
political subdivision thereof.
PLAN shall mean an employee benefit plan established or
maintained by the Company or any ERISA Affiliate and which is
covered by Title IV of ERISA, other than a Multi-Employer Plan.
POST-DEFAULT RATE shall mean, in respect of any principal of
the Loan or any other amount whatsoever payable by the Company
under this Agreement or the Note which is not paid when due
(whether at stated maturity, by acceleration or otherwise), a
rate per annum during the period commencing on and including the
due date of such amount to but not including the date such amount
is paid in full equal to five percent (5%) per annum above the
Base Rate as it varies from time to time.
REGULATION U shall mean Regulation U of the Board of
Governors of the Federal Reserve System (or any successor
thereto), as the same may be amended or supplemented from time to
time.
RISK BASED CAPITAL RATIO shall mean the ratio of Adjusted
Capital to Authorized Control Level Risk Based Capital, as
defined by the National Association of Insurance Commissioners.
RESTRICTED PAYMENTS shall mean: (a) any declaration or pay-
ment of dividends of the Company or any of its Affiliates (in
cash, property or obligations) on, or other payments or
distributions on account of (whether made by the Company or any
of its Affiliates), or the setting apart of money for a sinking
or other analogous fund (whether made by the Company or any of
its Affiliates) for, the purchase, redemption, prepayment,
retirement or other acquisition of, any shares of any class of
stock of the Company, or any Subsidiaries; (b) any payment
(whether made by the Company or any of its Affiliates) on account
of the purchase, redemption, prepayment, defeasance (including,
but not limited to, in-substance or legal defeasance) or other
acquisition or retirement for value of any Indebtedness of the
Company or any of its Affiliates which is subordinated to the
prior payment of the Loan (including without limitation the
Subordinated Debt); and (c) any payment of management, financial
advisory, investment banking or similar fees
<PAGE>
by the Company or any of its Affiliates to any Person, except
management fees paid by the Company or any of its Affiliates
under existing or future management contracts which have been, or
will be, furnished to the Bank and approved by the applicable
state insurance commission or other insurance regulatory authority
and by the Bank in writing.
SEC shall mean the Securities and Exchange Commission or any
successor thereto.
SECURITY DOCUMENTS shall mean, collectively, the Company
Pledge Agreement, the Assignment, and any and all other documents
executed in connection therewith or as security for the Note, as
the same may be amended, modified, supplemented or replaced from
time to time.
SENIOR AFFILIATE means United Trust Group, United Trust,
Inc. and United Income, Inc..
SENIOR INDEBTEDNESS shall mean all Indebtedness of the Com-
pany and its Affiliates other than the FCC Notes and the Other
Notes.
STATUTORY ACCOUNTING PRACTICES shall mean accounting
practices prescribed or permitted by state insurance laws
applicable to, or state insurance regulatory authorities with
jurisdiction over, the Company or any of its Affiliates, applied
on a consistent basis and to the extent described in financial
statements submitted to such state insurance regulatory
authorities or any other Person.
STATUTORY CAPITAL AND SURPLUS shall mean, with respect to
Universal and its Subsidiaries, the capital and surplus of
Universal and its Subsidiaries which is or would be reflected as
such on a balance sheet of Universal as of the date in question,
prepared in accordance with Statutory Accounting Practices.
STOCK shall mean the Universal Capital Stock, as defined in
Section 5.11.
SUBSIDIARY shall mean, with respect to any Person, any cor-
poration or other entity of which at least a majority of the out-
standing securities or other ownership interests having by the
terms thereof ordinary voting power to elect a majority of the
board of directors or other persons performing similar functions
(irrespective of whether or not at the time stock of any other
class or classes of such corporation shall have or might have
voting power by reason of the happening of any contingency) is at
the time directly or indirectly owned or controlled by such
Person or one or more of its Subsidiaries or by such Person and
one or more of its Subsidiaries.
SURPLUS RELIEF shall mean any reinsurance agreement
involving insurance business currently in force which results in
a direct increase in capital and surplus in the aggregate in
excess of One Hundred Thousand Dollars ($100,000).
UNITED SECURITY shall mean United Security Assurance
Company, an Ohio insurance company.
UNIVERSAL shall mean Universal Guaranty Life Insurance Co.,
an Ohio life insurance company.
UTG SECURITY AGREEMENT shall mean that certain Security
Agreement dated June 16, 1992 between United Trust Group, Inc.
and certain shareholders of Commonwealth Industries Corporation,
First Commonwealth Corporation, and Commonwealth Industries
Corporation.
WHOLLY-OWNED SUBSIDIARY shall mean, with respect to any
Person, any Subsidiary of such Person all of the shares of
capital stock (and all rights and options to purchase such
shares) of which, other than directors' qualifying shares, are
owned, beneficially and of record, by such Person or another
Wholly-Owned Subsidiary of such Person.
<PAGE>
1.2 ACCOUNTING TERMS; STATEMENTS OF VARIATION.
(a) All accounting terms used herein shall (except as
otherwise expressly provided herein) be interpreted, and all
financial statements and certificates and reports as to financial
matters required to be delivered to the Bank hereunder shall be
prepared, in accordance with either (i) GAAP applied on a basis
consistent with that used in the preparation of prior financial
statements, or (ii) Statutory Accounting Practices applied on a
basis consistent with that used in the preparation of prior
financial statements.
(b) The Company shall deliver to the Bank at the same
time as the delivery of any annual or quarterly financial
statement under Section 6.1 hereof a description in reasonable
detail of any material variation between the application of
accounting principles employed in the preparation of such
statement and the application of accounting principles employed
in the preparation of the next preceding annual or quarterly
financial statements and reasonable estimates of the differences
between such statements arising as a consequence thereof.
(c) Except as otherwise provided herein, if any
changes in accounting principles from those used in the
preparation of the financial statements referred to in Section
6.1 hereof are hereafter required or permitted by either (i) the
rules, regulations, pronouncements and opinions of the Financial
Accounting Standards Board or the American Institute of Certified
Public Accountants (or successors thereto or agencies with
similar functions), or (ii) state insurance laws applicable to,
or state insurance regulatory authorities with jurisdiction over,
the Company or any of its Affiliates, and are adopted by the
Company and its Subsidiaries with the agreement of its
independent certified public accountants or in accordance with
state insurance law or with the permission of any state insurance
commission or other state insurance regulatory authority, and
such changes result in a change in the method of calculation of
any of the financial covenants, standards or terms in or relating
to Section 6 hereof, the parties hereto agree to enter into
discussions with a view to amending such provisions so as to
equitably reflect such changes with the desired result that the
criteria for evaluating the financial condition of the Company
and its Subsidiaries shall be the same after such changes as if
such changes had not been made, provided that no change in GAAP
and no change in Statutory Accounting Practices that would affect
the method of calculation of any of said financial covenants,
standards or terms shall be given effect in such calculations
until such provisions are amended, in a manner satisfactory to
the Bank, to so reflect such change in accounting principles.
(d) The Company shall maintain its accounts and the
accounts of its Subsidiaries on the basis of a fiscal year ending
December 31 of each year.
SECTION 2. LOAN.
2.1 $8,900,000.00 LOAN. Subject to and upon the terms,
conditions, covenants and agreements contained herein, the Bank
agrees to lend to the Company the sum of $8,900,000.00 to be
evidenced by the Company's promissory note payable to the order
of the Bank in substantially the form of Exhibit C, attached
hereto. The principal amount from time to time outstanding under
the Note shall bear interest during each day the loan evidenced
thereby at a variable per annum rate equal to the lesser of (i)
the Basic Rate, as it varies, or (ii) the Maximum Rate, as it
varies. Notwithstanding the foregoing, if at any time the Basic
Rate shall exceed the Maximum Rate and thereafter the Basic Rate
shall become less than the Maximum Rate, the rate of interest
payable thereunder shall be the Maximum Rate until the Bank shall
have received the amount of interest which the Bank would have
received if the Basic Rate had not been limited by the Maximum
Rate during the period of time the Basic Rate exceeded the
Maximum Rate. All past due principal and interest thereunder,
whether due as a result of acceleration of maturity or otherwise,
shall bear interest at the lesser of (x) the Post-Default Rate,
as it varies, or (y) the Maximum Rate, as it varies, from the
date payment thereof shall have become due until same shall have
been discharged by payment. The principal of and interest to
accrue on the Note shall be due and payable as follows:
(a) Interest to accrue on the outstanding principal balance
of the Note shall be due and payable in quarter-annual
installments as it accrues, with the first such installment of
interest to be due and payable three (3) months from the date
hereof, and a subsequent installment of interest to be due and
payable on the same day of each succeeding
<PAGE>
third calendar month thereafter until May 8, 2005, on which date
the then remaining unpaid principal balance of the Note and all
accrued unpaid interest thereon shall be due and payable in full;
and
(b) The principal balance of the Note shall be due and
payable as follows: (i) an installment of principal in the amount
of $1,000,000 shall be due and payable on May 8, 1997, and (ii)
installments of principal in the amount of $1,000,000 shall be
payable on May 8 of each year thereafter until May 8, 2005, when
the then remaining unpaid balance of principal of the Note and
all accrued unpaid interest thereon shall be due and payable in
full.
(c) All renewals, extensions, modifications, replacements
and rearrangements of the Note, if any, shall be deemed to be
made pursuant to this Agreement and, accordingly, shall be
subject to the terms and provisions hereof, and the Company shall
be deemed to have ratified and confirmed, as of such renewal,
extension, modification, replacement or rearrangement date, and
on any borrowing date hereunder, all of the representations,
warranties, covenants and agreements set forth herein.
(d) The Bank may require payment in full of the Note at any
time after (i) the fourth (4th) anniversary of the Note, or (ii)
the separation from employment or change in position from that
position held with the Company on the date hereof, of any of
Larry E. Ryherd, James E. Melville or Thomas F. Morrow, or (iii)
A.M. Best shall have rated Universal below C+ (the "Call
Option"). The Bank shall exercise the Call Option, if at all, by
giving written notice of its election (the "Call Notice") to
Company, in which event the Note, and any other sums due under
the Credit Documents, shall be due and payable three hundred
sixty five (365) days after the date the Call Notice is given.
2.2 OPTIONAL PREPAYMENTS. The Company, at its option
without notice, premium or penalty, may prepay the Note in full
at any time or from time to time in part, upon payment of accrued
interest to the date of prepayment on the Note or the portion of
the unpaid principal amount thereof to be paid. Subject to
Section 2.3(c) hereof, all optional prepayments of principal
shall be applied to the principal of the Note in inverse order of
maturity.
2.3 PAYMENTS.
(a) All payments of principal of and interest on the Note
shall be made to the Bank at its office described in Section 8.2
hereof.
(b) Whenever any payment of principal of or interest on the
Note shall be due on a day which is not a Business Day, the date
for payment thereof shall be extended to the next succeeding
Business Day and interest shall be payable for such extended time
at the rate of interest with respect thereto in effect at the due
date.
(c) All payments under the Note, whether designated as
principal or interest, shall be applied first, to any expenses,
damages or other amounts for which the Bank may be entitled to
reimbursement hereunder or under any of the other Credit
Documents; second, to accrued unpaid interest under the Note; and
third, to the principal balance of the Note.
2.4 COMPUTATION OF INTEREST. Interest on the unpaid princi-
pal amount of the Note from time to time outstanding shall be
computed on the basis of a year of 360 days and paid for the
actual number of days elapsed.
2.5 SECURITY. Payment of the Note and the performance of
all obligations of the Company under the Credit Documents,
whether now existing or hereafter arising, will be secured,
directly or indirectly, by a first priority perfected security
interest, assignment, pledge, or Lien, as the case may be, in and
upon the following described property and assets:
(a) One hundred percent (100%) of the Universal Capital
Stock, which security interest, pledge or assignment will be
evidenced by the Company Pledge Agreement; and
(b) All of the life insurance evidenced by the Assignment.
<PAGE>
The Company agrees to execute, acknowledge and deliver to
the Bank such instruments, security agreements, security
agreement-pledges, guaranty agreements, statements, assignments
and financing statements, in form and substance acceptable to the
Bank as in the good faith and discretion of counsel for the Bank
may be necessary to enforce, grant to the Bank and perfect in the
United States the security interests, liens, pledges, and
assignments on or of the collateral; provided, however, that if
any requests by the Bank for execution of any such instruments
shall be made after the first draw hereunder, then such
instruments shall conform as closely as possible to the
instruments executed at closing and shall not contain any terms
or provisions which require the Company to take any action or
perform any act which is not required by the documents executed
at closing. The Company and the Bank agree that all collateral
now or hereafter securing the Note and/or the obligations of the
Company under the Credit Documents also shall secure any and all
other indebtedness and liabilities now or hereafter owing by any
of the Company to the Bank.
SECTION 3. FEES.
3.1 ORIGINATION FEE. Upon execution of this Agreement,
the Company shall pay to the Bank as an origination fee for the
Loan an amount equal to Fifty Thousand and No/100 Dollars
($50,000.00) (the "Fee").
SECTION 4. CONDITIONS TO THE LOAN AND ADVANCES UNDER THE
NOTE.
4.1 CONDITIONS. Any obligation of the Bank to make the
Loan or advance any funds under the Note is subject to complete
satisfaction of all of the following conditions precedent (but no
advance made before satisfaction of any such conditions shall be
deemed to be a waiver thereof in respect to any subsequent
advance):
(a) This Agreement, duly executed and delivered by the
Company;
(b) The Note to the Bank duly executed and delivered by the
Company;
(c) The Company Pledge Agreement, duly executed and
delivered by the Company;
(d) The Assignment, duly executed and delivered by the
Company; and
(e) The other Security Documents duly executed and
delivered to the Bank, and
(f) Certified copies of the certificate of incorporation
and by-laws (or equivalent documents) of the Company and of
resolutions of its Board of Directors authorizing the making and
performance by the Company of this Agreement, the Note and the
Company Pledge Agreement, and the other Security Documents to
which it is a party, and the transactions contemplated hereby and
thereby.
(g) A certificate of appropriate officers of the Company in
respect of each of its officers (i) who is authorized to execute
and deliver, as the case may be, this Agreement, the Note and
each of the Security Documents to which it is a party, and (ii)
who will, until replaced by another officer or officers duly
authorized for that purpose, act as its representative for the
purpose of signing documents and giving notices and other
communications in connection with this Agreement and the other
Credit Documents and the transactions contemplated hereby and
thereby (and the Bank may conclusively rely on such certificate
until it receives notice in
writing from the Company, as the case may be, to the contrary);
(h) Receipt by the Bank of the certificates evidencing the
shares of Stock to be pledged by the Company pursuant to the
Security Documents, accompanied by undated stock powers duly
executed in blank;
(i) An opinion of Fagel & Haber, counsel to the Company,
dated as of the date hereof, in substantially the form of Exhibit
D hereto;
<PAGE>
(j) Such other documents as the Bank or counsel to the Bank
shall reasonably request.
(k) (i) No Default shall have occurred and be continuing
and (ii) the representations and warranties made by the Company
herein and in the Security Documents to which it is a party shall
be true on and as of such date with the same force and effect as
if made on and as of such date.
(l) Payment of the Fee to the Bank specified in Section 3.1
hereof.
SECTION 5. REPRESENTATIONS AND WARRANTIES.
The Company represents and warrants to the Bank as follows:
5.1 CORPORATE EXISTENCE AND STRUCTURE. The Company, and the
Subsidiaries are corporations duly organized and validly existing
in good standing under the laws of the jurisdiction of their
respective organizations; have all requisite corporate power, and
have all material governmental licenses, authorizations, consents
and approvals necessary to own their respective assets and carry
on their respective businesses as now being or as proposed to be
conducted; and are qualified to do business in all jurisdictions
in which the nature of the business conducted by them makes such
qualification necessary and where failure so to qualify would
have a material adverse effect on the assets, prospects,
business, operations, financial condition, liabilities or
capitalization of the Company, or any of the Subsidiaries.
5.2 FINANCIAL CONDITION. The audited consolidated
balance sheet of the Company and its consolidated Subsidiaries as
of December 31, 1995 and the related consolidated statements of
earnings and changes in financial position of the Company and its
consolidated Subsidiaries for the fiscal year ended on said date,
with the opinion thereon of Kerber, Eck & Braeckel, LLP,
heretofore furnished to the Bank, fairly present the consolidated
financial condition of the Company and its consolidated
Subsidiaries as at said date and the consolidated results of
their operations for the period covered thereby, all in
accordance with GAAP applied on a consistent basis. Neither the
Company, nor any of its Subsidiaries had on said date any
material contingent liabilities, other than as disclosed in Annex
V, liabilities for past due taxes, unusual forward or long-term
commitments or unrealized or anticipated losses from any
unfavorable commitments, except as referred to or reflected or
provided for in said balance sheet or the notes thereto as at
said date. Since December 31, 1995 there has been no material
adverse change in the assets, prospects, business, operations,
financial condition, liabilities or capitalization of the Company
and its consolidated Subsidiaries taken as a whole or the Company
from that set forth in said financial statements as at said date.
5.3 LITIGATION. Except as disclosed in Annex V attached
hereto, there are no legal or arbitration proceedings or any
proceedings by or before any governmental or regulatory authority
or agency, now pending or to the Company's knowledge threatened
against the Company, or any of its Subsidiaries which are likely
to have a material adverse effect on the assets, prospects,
business, operations, financial condition, liabilities or
capitalization of the Company, any of its Subsidiaries, or on the
timely payment of the principal of or interest on the Loan or the
enforceability of this Agreement, the Note or any of the other
Credit Documents, or the rights and remedies of the Bank
hereunder or thereunder.
5.4 NO BREACH. The execution and delivery of this
Agreement, the Note or any of the other Credit Documents, or the
consummation of the transactions herein and therein contemplated
or performance or compliance with the terms and provisions hereof
or thereof, will not conflict with or result in a breach of, or
require any consent other than consent already obtained under:
(a) the charter or by-laws of the Company, or any of its
Subsidiaries, or
(b) any applicable law, rule or regulation (including
without limitation Regulations G, T, U or X of the Board of
Governors of the Federal Reserve System), or
<PAGE>
(c) any law, statute, regulation, rule, order, writ,
injunction or decree of any court or governmental authority or
agency applicable to or binding on the Company, any of its
Subsidiaries, or any of their respective properties or assets, or
(d) Any agreement or instrument to which the Company, any
of its Subsidiaries, or any of their respective properties or
assets, is a party or by which it is bound, or constitute a
default under any such agreement or instrument, or result in the
creation or imposition of any Lien (other than Permitted Liens)
upon any of the properties, assets or revenue of the Company, any
of its Subsidiaries, pursuant to the terms of any such agreement
or instrument.
5.5 CORPORATE ACTION. The Company has all necessary
corporate power and authority to make and perform this Agreement,
the Note, and each of the other Credit Documents executed or to
be executed by it; the making and performance by the Company of
this Agreement, the Note, and each of the other Credit Documents
executed or to be executed by it, have been duly authorized by
all necessary corporate action on its part; and this Agreement
constitutes, and the Note when executed and delivered by the
Company for value will constitute, and each of the other Credit
Documents constitute, the legal, valid and binding obligation of
the Company, enforceable in accordance with its terms, except to
the extent that enforcement may be limited by applicable bank-
ruptcy, insolvency, reorganization, moratorium or similar laws
affecting the enforcement of creditors' rights generally, and by
general principles of equity (regardless of whether enforcement
is sought in a proceeding in equity or at law).
5.6 APPROVALS. No authorizations, approvals or consents
of, which have not been obtained and no filings or registrations
with, any governmental or regulatory authority or agency are
necessary for the making or performance by the Company of the
Note or for the making or performance by the Company of this
Agreement or any of the other Credit Documents executed or to be
executed by it, or for the validity or enforceability thereof.
5.7 ERISA. The Company and each of its ERISA Affiliates
has fulfilled its obligations under the minimum funding standards
of ERISA and the Code with respect to each Plan and are in
compliance in all material respects with the presently applicable
provisions of ERISA and the Code, and have not incurred any
material liability to the PBGC or any Plan or Multi-Employer
Plan, other than an obligation to fund or make contributions to
any such Plan in accordance with its terms and in the ordinary
course.
5.8 TAXES. The Company, each of its Subsidiaries, have
filed all United States Federal income tax returns and all other
material tax returns which are required to be filed by them and
have paid all taxes shown to be due pursuant to such returns or
pursuant to any assessment received by them, except those taxes
being contested in good faith by proper proceedings and for which
adequate reserves are being maintained.
5.9 INVESTMENT COMPANY ACT. Neither the Company, nor any
of its Subsidiaries is an "investment company", or a company
"controlled" by an "investment company" within the meaning of the
Investment Company Act of 1940, as amended.
5.10 PUBLIC UTILITY HOLDING COMPANY ACT. Neither the
Company, nor any of its Subsidiaries is a "holding company" or a
"subsidiary company" of a "holding company" or an "affiliate" of
a "holding company" or of a "subsidiary company" of a "holding
company" within the meaning of the Public Utility Holding Company
Act of 1935, as amended.
5.11 CAPITALIZATION OF THE COMPANY AND UNIVERSAL.
(a) The authorized capital stock of the Company (the
"Company Capital Stock") consists of 25,000,000 shares of common
stock, par value $1.00 per share, of which 23,967,545 shares are
issued and outstanding on the date hereof. All such outstanding
shares of the Company Capital Stock are fully paid and
nonassessable. The Company shall not have any capital stock
other than the Company Capital Stock. The Company is a Subsidiary
of United Trust Group. As of the date hereof, the Company has
only the Subsidiaries listed on Annex II hereto. There are no
<PAGE>
outstanding subscriptions, options, warrants, calls, rights
(including preemptive rights) or other agreements or commitments
of any nature relating to the Company Capital Stock or any
capital stock of any of its Subsidiaries.
(b) The authorized capital stock of Universal (the
"Universal Capital Stock") consists of 400,000 shares of common
stock, par value $1.00 per share, of which 400,000 shares are
issued and outstanding on the date hereof. All such outstanding
shares of Universal Capital Stock are fully paid and non-
assessable, and one hundred percent (100%) of such outstanding
shares are owned beneficially and of record by the Company, free
and clear of all Liens and encumbrances whatsoever. The
outstanding capital stock of Universal consists only of Universal
Capital Stock, and the Company owns and has good title to free
and clear of all Liens and encumbrances whatsoever, and has the
unencumbered right to vote, one hundred percent (100%) of the
outstanding shares of the Universal Capital Stock. There are no
outstanding subscriptions, options, warrants, calls, rights
(including preemptive rights) or other agreements or commitments
of any nature relating to the Universal Capital Stock. Universal
shall not have any capital stock other than the Universal Capital
Stock. The only direct Subsidiary of Universal is United
Security Assurance Company.
5.12 ASSETS OF THE COMPANY AND ITS SUBSIDIARIES. The Company,
and each of its Subsidiaries has good and marketable title to
all of its properties and assets, free and clear of all Liens
(except Permitted Liens).
5.13 OTHER AGREEMENTS. As of the date hereof, no default
exists under the FCC Notes and no Event of Default, as defined in
the UTG Security Agreement, exists and no circumstance exist
which, with the passage of time, would constitute such and Event
of Default, and the UTG Security Agreement has not been amended
or otherwise modified, not have any of its provisions been
waived, except pursuant to a written agreement, a copy of which
has been provided to the Bank.
5.14 AGREEMENTS.
(a) Neither the Company, nor its Subsidiaries, is a party
to any agreement or instrument or subject to any restriction that
has or is likely to have a material and adverse effect on the
assets, prospects, business, operations, financial condition,
liabilities or capitalization of the Company.
(b) Neither the Company, nor its Subsidiaries, is in
default in any manner that could materially and adversely affect
the assets, prospects, business, operations, financial condition,
liabilities or capitalization of the Company, and/or its
Subsidiaries, or the performance, observance or fulfillment of
any of the obligations, covenants or conditions contained in any
material agreement or instrument to which it is a party.
5.15 SOLVENCY.
(a) The fair saleable value of the assets of the Company
respectively exceeds and will, immediately following the making
of the Loan, exceed the amount that will be required to be paid
on or in respect of the existing debts and other liabilities
(including contingent liabilities) of the Company as they mature.
(b) Neither the Company, nor Subsidiaries respectively, has
or will have, immediately following the making of the Loan,
unreasonably small capital to carry out its business as conducted
or as proposed to be conducted.
(c) Neither the Company, nor Subsidiaries respectively,
intends to, or believes that it will, incur debts beyond its
ability to pay such debts as they mature.
5.16 SECURITY DOCUMENTS. On and after the date hereof, the
Security Documents create, as security for the obligations
purported to be secured thereby, a valid and enforceable
perfected security interest in and Lien on all of the properties
covered thereby in favor of the Bank, superior to and prior to
the rights of all third Persons and subject to no other Liens
(other than Permitted Liens). The respective pledgor, assignor or
grantor, as the case may be, has good and marketable title to all
such properties free and clear of all Liens (other than Permitted
Liens).
<PAGE>
5.17 MARGIN REGULATIONS. Neither the making of the Loan
hereunder, nor the use of the proceeds thereof, will violate or
be inconsistent with the provisions of Regulation G, T, U or X of
the Board of Governors of the Federal Reserve System.
5.18 USE OF PROCEEDS OF THE LOAN. The proceeds of the Loan
will be used by the Company to refinance indebtedness evidenced
by that certain Credit Agreement between the Company and First
Bank of Gladstone dated as of December 11, 1989, as amended.
SECTION 6. COVENANTS.
Until payment in full of the principal of and interest on
the Loan and all other amounts payable by the Company hereunder:
6.1 INFORMATION. The Company shall deliver or cause to be
delivered to the Bank:
(a) as soon as available and in any event within 50 days
after the end of each fiscal quarter of the Company, consolidated
statements of earnings and cash flows of the Company and its
consolidated Subsidiaries for such quarter and for the period
from the beginning of the respective fiscal year to the end of
such quarter, and the related consolidated balance sheet as at
the end of such quarter, setting forth in each case in
comparative form the corresponding figures for the corresponding
period in the preceding fiscal year, accompanied by a certificate
of the principal financial officer of the Company, which
certificate shall state that said financial statements fairly
present the consolidated financial condition and results of
operations of the Company and its consolidated Subsidiaries in
accordance with GAAP consistently applied, as at the end of, and
for, such period (subject to normal year-end audit adjustments
and to the absence of footnote disclosures);
(b) as soon as available and in any event within 95 days
after the end of each fiscal year of the Company, consolidated
statements of earnings and cash flows the Company and its
consolidated Subsidiaries for such year and the related con-
solidated balance sheet as at the end of such year, setting forth
in each case in comparative form the corresponding figures for
the preceding fiscal year, and accompanied by an opinion thereon
of independent certified public accountants satisfactory to the
Bank, which opinion shall state without qualification that said
consolidated financial statements fairly present the consolidated
financial condition and results of operations of the Company and
its consolidated Subsidiaries as at the end of, and for, such
fiscal year.
(c) promptly upon their becoming available, copies of all
registration statements and annual, periodic or other regular
reports, and such proxy statements and other information, as
shall be filed by the Company or any of its Subsidiaries with the
SEC, any national securities exchange or any governmental
authority (including, without limitation, any state insurance
commission or other insurance regulatory authority);
(d) promptly upon the mailing thereof to the shareholders
of the Company or any of its Subsidiaries generally, copies of
all financial statements, reports and proxy statements so mailed;
(e) as soon as possible, and in any event within ten days
after the Company or any ERISA Affiliate knows or has reason to
know that any of the events or conditions specified below with
respect to any Plan or Multi-Employer Plan have occurred or
exist, a statement signed by a senior officer of the Company
setting forth details respecting such event or condition and the
action, if any, which the Company or its ERISA Affiliate proposes
to take with respect thereto (and a copy of any report or notice
required to be filed with or given to PBGC by the Company or an
ERISA Affiliate with respect to such event or condition):
(i) any reportable event, as defined in Section
4043(b) of ERISA and the regulations issued thereunder, with
respect to a Plan, as to which PBGC has not by regulation
waived the requirement of Section
<PAGE>
4043(a) of ERISA that it be notified within 30 days of the
occurrence of such event (provided that a failure to meet
the minimum funding standard of Section 412 of the Code or
Section 302 of ERISA shall be a reportable event regardless
of the issuance of any waivers in accordance with Section
412(d) of the Code);
(ii) the filing under Section 4041 of ERISA of a
notice of intent to terminate any Plan or the termination of
any Plan;
(iii) the institution by PBGC of proceedings
under Section 4042 of ERISA for the termination of, or the
appointment of a trustee to administer, any Plan, or the
receipt by the Company or any ERISA Affiliate of a notice
from a Multi-Employer Plan that such action has been taken
by PBGC with respect to such Multi-Employer Plan;
(iv) the complete or partial withdrawal by the
Company or any ERISA Affiliate under Section 4201 or 4205 of
ERISA from a Multi-Employer Plan, or the receipt by the
Company or any ERISA Affiliate of notice from a Multi-
Employer Plan that is in reorganization or insolvency
pursuant to Section 4241 or 4245 of ERISA or that it intends
to terminate or has terminated under Section 4041A of ERISA;
and
(v) the institution of a proceeding by a fidu-
ciary of any Multi-Employer Plan against the Company or any
ERISA Affiliate to enforce Section 515 of ERISA, which pro-
ceeding is not dismissed within 30 days;
(f) promptly after the Company knows that any Default has
occurred, notice of such Default, describing the same in
reasonable detail and describing the steps being taken to remedy
the same;
(g) promptly upon delivery of any notice or communication
to the Company of any notice required to be given pursuant to the
Other Debt Documents, including demands for payment and notices
of default, a copy thereof to the Bank (but only to the extent
such notice or communication has not previously been given to the
Bank hereunder);
(h) promptly from time to time such other information as
reasonably requested by the Bank regarding (i) the business,
affairs, operations or condition (financial or otherwise) of the
Company, or any of its Subsidiaries, (ii) compliance by the
Company with respect to its obligations contained herein or in
any of the other Credit Documents, or (iii) the transactions
contemplated hereby.
The Company will furnish to the Bank, at the time the Company
furnishes each set of financial statements pursuant to clauses
(a) or (b) above, a certificate of the principal financial
officer of the Company to the effect that no Default has occurred
and is continuing (or, if any Default has occurred and is
continuing, describing the same in reasonable detail and
describing the steps being taken to remedy the same) and
including such other information as the Bank may from time to
time request to be included in such certificate.
6.2 LITIGATION. The Company will promptly give to the
Bank notice of all legal or arbitration proceedings, and of all
proceedings by or before any governmental or regulatory authority
or agency, affecting the Company, and/or its Subsidiaries, which,
if adversely determined, might have a material adverse effect on
the assets, prospects, business, operations, financial condition,
liabilities or capitalization of the Company, and/or its
Subsidiaries, or on the timely payment of the principal of or
interest on the Loan or the enforceability of this Agreement, the
Note or any of the other Credit Documents, or the rights and
remedies of the Bank hereunder.
6.3 CORPORATE EXISTENCE ETC. The Company shall, and shall
cause each of the Subsidiaries to:
(a) preserve and maintain its corporate existence and all
of its material rights, privileges and franchises;
(b) comply with the requirements of all applicable laws,
rules, regulations and orders of governmental or regulatory
authorities or agencies if failure to comply with such
requirements would materially and adversely affect the
<PAGE>
assets, prospects, business, operations, financial condition,
liabilities or capitalization of the Company, and/or its
Subsidiaries, or the timely payment of the principal of or
interest on the Loan or the enforceability of this Agreement, the
Note or any of the other Credit Documents, or the rights and
remedies of the Bank hereunder or thereunder;
(c) pay and discharge all taxes, assessments and govern-
mental charges or levies imposed on it or on its income or
profits or on any of its property prior to the date on which
penalties attach thereto, except for any such tax, assessment
charge or levy the payment of which is being contested in good
faith and by proper proceedings and against which adequate
reserves are being maintained;
(d) maintain all of its properties used or useful in its
business in good working order and condition, ordinary wear and
tear excepted;
(e) permit representatives of the Bank, during normal
business hours, to examine, copy and make extracts from its books
and records, to inspect its properties, and to discuss its
business and affairs with its officers, all to the extent
reasonably requested by the Bank; and
(f) keep insured by financially sound and reputable
insurers all property of a character usually insured by
corporations engaged in the same or similar business similarly
situated against loss or damage of the kinds and in the amounts
customarily insured against by such corporations and carry such
other insurance as is usually carried by such corporations.
6.4 Minimum Consolidated Net Worth. The Company shall
not permit Consolidated Net Worth (based on GAAP) on any date to
be less than four hundred percent (400%) of the outstanding
balance of the Note.
6.5 CAPITAL AND SURPLUS.
(a) The Company shall not permit the Statutory Capital and
Surplus of Universal and its Subsidiaries to be less than Six
Million Five Hundred Thousand and No/100 Dollars ($6,500,000) on
any date.
(b) The Company shall not permit the sum of its cash or
cash equivalents plus Adjusted Statutory Capital and Surplus of
Universal to be less than Fifteen Million and No/100 Dollars
($15,000,000) on any date.
6.6 INDEBTEDNESS. The Company shall not, and shall not
permit any of its Subsidiaries to, create, assume, incur or
suffer to exist any Indebtedness except:
(a) Indebtedness of the Company under this Agreement, the
Note and the other Credit Documents;
(b) Indebtedness of the Company and its Subsidiaries not
exceeding an aggregate principal amount of one hundred fifty
thousand and No/100 Dollars ($150,000) at any one time
outstanding, other than Indebtedness described in Sections
6.6(a), 6.6(c), 6.6(d) and 6.6(e);
(c) Indebtedness owing by any Subsidiary or Affiliate of
the Company to the Company, or by any such Subsidiary or
Affiliate to any other such Subsidiary or Affiliate.
(d) Indebtedness evidenced by the FCC Notes; and
(e) Indebtedness evidenced by the Other Notes.
6.7 CAPITAL EXPENDITURES. The Company shall not, and
shall not permit any of its Subsidiaries to, make Capital
Expenditures for any fiscal year in an aggregate amount exceeding
two hundred fifty thousand and No/100 Dollars ($250,000).
<PAGE>
6.8 MERGERS, ACQUISITIONS SALE OF ASSETS ETC. Without
the prior written consent of the Bank, the Company shall not, and
shall not permit any of its Subsidiaries to, consolidate or merge
with, or sell, lease, assign, transfer or otherwise dispose of
all or any part of its business or assets to or be a party to any
Acquisition of any other Person, other than:
(a) sales of assets in the ordinary course of the business
of the Company, and/or its Subsidiaries or Affiliates; and
(b) the disposition of obsolete or worn-out fixed assets,
plant, equipment or other property no longer required by or
useful to the Company, and/or its Subsidiaries or Affiliates in
connection with the operation of its business.
6.9 RESTRICTED PAYMENTS. The Company shall not, and
shall not permit any of its Subsidiaries or Affiliates to, make
any Restricted Payment, except (i) payments of dividends by any
Subsidiary of the Company to the Company or any other Subsidiary
of the Company; and (ii) so long as no Event of Default exists
under this Agreement, the Company may make payment under the FCC
Notes as and when required, but not more than ten (10) days in
advance of the date payment is due; and (iii) so long as no Event
of Default exists under this Agreement, the Company may make
payments of interest only under the Other Notes as and when
required by the terms thereof.
6.10 AMENDMENTS TO DOCUMENTS; PREPAYMENT OF INDEBTEDNESS.
(a) The Company shall not amend or otherwise modify any
provision of the Other Debt Documents.
(b) The Company shall not at any time exercise any option
or right under the Other Debt Documents to prepay, redeem,
defease or make any payment the effect of which is to prepay,
redeem or defease any of the FCC Notes or Other Notes.
6.11 LIENS. The Company shall not, and shall not permit
any of its Subsidiaries to, create, incur or permit to exist any
Lien on or in respect of any of its properties, assets or
revenues, now or hereafter acquired, securing Indebtedness or
other obligations, except (a) Permitted Liens and (b) the Liens
created pursuant to the Security Documents.
6.12 ISSUANCE OF CAPITAL STOCK. The Company shall not,
and shall not permit any of its Subsidiaries to, issue any
additional shares of capital stock or any options, warrants or
other rights therefor.
6.13 INVESTMENT AND JOINT VENTURES.
(a) Without the prior written consent of the Bank, which
consent may be withheld by the Bank in its sole discretion, the
Company shall not and shall not permit Appalachian, Lincoln,
Universal or United Security to (i) alter the Investment
Strategy, or (ii) after the date hereof, invest in real estate
mortgages, the amount of which when aggregated with the amount
mortgages invested in after the date hereof by Appalachian,
Lincoln, Universal and United Security exceeds Five Million and
No/100 Dollars ($5,000,000) at any one time; or (iii) invest in
the aggregate more than Seven Hundred Fifty Thousand and No/100
Dollars ($750,000) in any other investments permitted by
applicable state insurance laws.
6.14 ADDITIONAL SECURITY DOCUMENTS. Promptly upon any
Person becoming a direct Subsidiary of the Company, the Company
shall promptly notify the Bank thereof and, if requested by the
Bank, pledge the shares of capital stock of such Person pursuant
to a Security Agreement-Pledge in form and substance satisfactory
to the Bank; and the Company agrees to cause such Person to
execute and deliver such other documentation as the Bank may
reasonably require, including without limitation favorable
opinions of counsel to such Person (which shall cover, among
other things, the legality, validity, binding effect and
enforceability of the documentation referred to above, subject to
customary exceptions).
<PAGE>
6.15 TRANSACTIONS WITH AFFILIATES. The Company shall not, at
any time hereafter, and shall not permit any of its Subsidiaries
at any time hereafter to, directly or indirectly, (a) make any
Investment in an Affiliate, (b) transfer, sell, lease, assign or
otherwise dispose of any assets to an Affiliate other than as
expressly permitted herein, (c) merge or consolidate with or
purchase or acquire any assets from an Affiliate, (d) guarantee
or assume any obligations of an Affiliate, or (e) enter into any
other transaction directly or indirectly with or for the benefit
of an Affiliate; provided that (i) any Affiliate who is an indi-
vidual may serve as a director, officer or employee of the
Company, or any of its Subsidiaries and receive compensation or
indemnification in connection with his or her services in such
capacity, (ii) the Company and any of its Subsidiaries may enter
into any sale, lease or similar transaction with an Affiliate in
the ordinary course of business if the monetary or business con-
sideration arising therefrom would be substantially as advanta-
geous to the Company, or such Subsidiary as the monetary or
business consideration which would obtain in a comparable arm's
length transaction with a Person not an Affiliate.
6.16 FURTHER ASSURANCES. The Company shall do all things as
may be reasonably required by the Bank and execute and deliver to
the Bank such documents and other instruments ("Supplemental
Instruments") in form and substance reasonably satisfactory to
the Bank, as may be required in order to create and maintain the
validity and priority of the Lien of any of the Security
Documents. The Company shall cause any such Supplemental
Instrument to be recorded or filed in the appropriate office,
shall pay any recording taxes, charges or fees incurred in
connection therewith, and shall reimburse the Bank for all
reasonable out-of-pocket costs, fees and expenses incurred by the
Bank in connection with the execution and delivery of any such
Supplemental Instrument.
6.17 COMPENSATION. In any calendar year, the Company shall
not increase the aggregate Base Compensation of its executive
officers by greater than one hundred fifteen percent (115%) over
the Base Compensation paid to those officers in the aggregate in
the immediately preceding calendar year.
6.18 SENIOR LENDER STATUS
(a) Within sixty (60) days after the date hereof, the
Company shall deliver to the Bank the written acknowledgement of
Lenders acknowledging that the Bank is a Senior Lender and that
the security interest of the Lenders in the Collateral is subject
to the Lien of the Bank.
(b) Capitalized terms used in this Section 6.18 but not
defined in this Agreement shall have the meaning given to them in
the UTG Security Agreement.
6.19 EARNINGS COVENANTS. The Company shall not permit:
(a) The sum of (i) pre-tax earnings of Universal and its
Subsidiaries (based on Statutory Accounting Practices) and (ii)
the pre-tax earnings of the Company, before interest expense and
non-cash charges (based on parent only GAAP practices) shall not
be less than two hundred percent (200%) of the Company's interest
expense on all of its debt service; and
(b) The sum of (i) the combined after-tax earnings of
Universal and its Subsidiaries (based on Statutory Accounting
Practices) and (ii) the after-tax earnings plus non-cash charges
of the Company (based on parent only GAAP practices) shall not be
less than two hundred percent (200%) of the Company's principal
payments due during the year on all of its debt service;
provided, however, that so long as no Event of Default exists
under the Credit Documents and Universal's Risk Based Capital
Ratio shall not be less than 2.5 to 1.0, the Bank shall waive the
Company's compliance with this covenant.
6.20 MANAGEMENT AGREEMENTS. After the occurrence of an
Event of Default, the Subsidiaries shall make no payment to each
other or to the Company pursuant to the Management Agreements
which is in the aggregate in excess of the amount needed by the
Company to service the Note and make other payments to the Bank
required by the Credit Documents.
<PAGE>
6.21 RISK BASED CAPITAL RATIO. The Company shall not
permit Universal's ratio of Risk Based Capital Ratio to be less
than 2.5 to 1.0 at December 31, 1996, 2.75 to 1.0 at December 31,
1997 and 3.0 to 1.0 at December 31, 1998 and at all times
thereafter. Compliance with this covenant shall be evidenced by
quarterly certification from the Company's chief financial
officer.
6.22 SURPLUS RELIEF REINSURANCE. The Company shall not
permit any Subsidiary to enter into any Surplus Relief treaty.
6.23 METHODS OF CALCULATION. The Company shall not, and
shall not permit any Subsidiary, without the prior written
consent of the Bank, to change the methods or assumptions used to
calculate statutory reserves and for statutory reporting
purposes. If the use of practices of accounting otherwise
permitted by applicable law (the "Other Practices") but not used
by the Company or the Subsidiaries on the date hereof, are later
used, such Other Practices shall not be permissible if the result
of their use causes compliance with Sections 6.5(b) or 6.21.
SECTION 7. EVENTS OF DEFAULT.
If one or more of the following events (herein called
"Events of Default") shall occur and be continuing:
(a) Within seven (7) days following written notice from the
Bank, the Company shall default in the payment of any principal
of the Loan; or the Company shall default in the payment of
interest on the Loan or any fee or other amount payable by it
hereunder; or
(b) The Company, and/or its Subsidiaries shall default in
the payment when due of any principal of or interest on any of
its or their other Indebtedness beyond any applicable grace
periods; or any other event specified in any note, agreement,
indenture or other document evidencing or relating to any such
Indebtedness shall occur if the effect of such event is to cause,
or to permit the holder or holders of such Indebtedness (or a
trustee or agent on behalf of such holder or holders) to cause,
such Indebtedness to become due prior to its stated maturity; or
(c) Any representation, warranty or certification made or
deemed made in this Agreement or in any of the other Credit
Documents by the Company, and/or its Subsidiaries, or any
certificate furnished to the Bank pursuant to the provisions
hereof or thereof, shall prove to have been false or misleading
as of the time made or furnished in any material respect; or
(d) Within thirty (30) days following written notice from
the Bank, the Company shall default in the performance or
observance of any term, covenant, agreement or obligation
hereunder or under any of the other Credit Documents; or
(e) The Company or any of its Subsidiaries (each a
"Specified Party") shall admit in writing its inability to, or be
generally unable to, pay its debts as such debts become due; or
(f) Any Specified Party shall (i) apply for or consent in
writing to the appointment of, or the taking of possession by, a
receiver, custodian, trustee or liquidator of itself or of all or
a substantial part of its property, (ii) make a general assign-
ment for the benefit of its creditors, (iii) commence a voluntary
case under the Bankruptcy Code (as now or hereafter in effect),
(iv) file a petition seeking to take advantage of any other law
relating to bankruptcy, insolvency, reorganization, winding-up,
or composition or readjustment of debts, (v) fail to controvert
in a timely and appropriate manner, or acquiesce in writing to,
any petition filed against it in an involuntary case under the
Bankruptcy Code or (vi) take any action for the purpose of
effecting any of the foregoing; or
(g) A proceeding or case shall be commenced, without the
application or consent of any Specified Party, in any court of
competent jurisdiction, seeking (i) its liquidation,
reorganization, dissolution or winding-up, for the composition or
readjustment of its debts, (ii) the appointment of a trustee,
receiver, custodian, liquidator or the like of such Specified
Party
<PAGE>
or of all or any substantial part of its assets, or (iii) similar
relief in respect of such Specified Party under any law relating
to bankruptcy, insolvency, reorganization, winding-up, or
composition or adjustment of debts, and such proceeding or case
shall continue undismissed, or an order, judgment or decree
approving or ordering any of the foregoing shall be entered and
continue unstayed and in effect, for a period of 60 days; or an
order for relief against any Specified Party shall be entered in
an involuntary case under the Bankruptcy Code; or
(h) A final judgment or judgments for the payment of money
in excess of $100,000.00 in the aggregate shall be rendered by a
court or courts against any Specified Party and the same shall
not be discharged (or provision shall not be made for such dis-
charge), or a stay of execution thereof shall not be procured,
within 45 days from the date of entry thereof and such Specified
Party shall not, within said period of 45 days, or such longer
period during which execution of the same shall have been stayed,
appeal therefrom and cause the execution thereof to be stayed
during such appeal; except for policyholder suits for which
adequate provision has been made on the books of the Specified
Party; or
(i) An event or condition specified in Section 6.1(e)
hereof shall occur or exist with respect to any Plan or Multi--
Employer Plan and, as a result of such event or condition,
together with all other such events or conditions, the Company or
any ERISA Affiliate shall incur a liability to a Plan, a Multi-
Employer Plan or PBGC (or any combination of the foregoing) in
excess of $25,000.00; or
(j) One or more of the Security Documents shall cease to be
in full force and effect, or shall cease to give the Bank the
Liens, rights, powers and privileges purported to be created
thereby (including without limitation a first priority perfected
security interest in and Lien on all of the properties covered
thereby), in favor of the Bank, subject to no equal or prior
Liens (other than Permitted Liens); or
(k) Any material adverse change occurs in the condition
(financial or otherwise) of the Company, and/or its Subsidiaries;
or
(l) Any governmental authority or agency shall determine or
declare that the Company or any of its Subsidiaries is insolvent;
or any governmental authority or agency shall intervene in the
affairs of the Company, or the Subsidiaries in a manner which has
a material adverse effect upon the financial conditions of the
Company or the Subsidiaries or their ability to conduct their
business, including, but not limited to issuance of a consent
order or an order of impairment covering the Company or any
Subsidiaries; or any governmental authority or agency shall take
possession of any of the assets, property or business of the
Company or any of its Subsidiaries; or any governmental authority
or agency shall take any action to vacate or revoke any charter,
license or other authorization to engage in the insurance
business of the Company or any of its Subsidiaries, or gives any
notice of its intent to terminate the status of any Subsidiary of
the Company as a licensed insurance company; or any governmental
authority or agency shall appoint a liquidator or receiver to
take charge of the affairs, assets and/or business of the Company
or its Subsidiaries if the declaration, intervention or action is
not vacated or dismissed within sixty (60) days after it is made
or taken by the governmental authority or agency; or
(m) Any of the authorized Capital Stock of Appalachian,
United Security or Lincoln shall be mortgaged, pledged, assigned,
charged, encumbered or subject to a security interest of any
kind; or
(n) An event of default shall occur under the FCC Notes,
the UTG Security Agreement or the Other Notes; or
(o) A Change in Control; or
(p) Without the prior written consent of the Bank, which
consent may be withheld in the sole discretion of the Bank, the
occurrence of any transaction or series of transactions by which
a majority (in number of votes) of the capital stock or
substantially all of the assets of any Senior Affiliate shall be
acquired, whether through purchase of assets, merger or
otherwise, by any other Senior Affiliate or any Person.
<PAGE>
THEREUPON: (i) in the case of an Event of Default other than an
Event of Default referred to in clause (f), (g) or (l) of this
Section 7, the Bank may, at its option, declare the principal
amount then outstanding under the Note, all accrued unpaid
interest thereon, and all other amounts payable by the Company
under this Agreement and the Note to be forthwith due and
payable, whereupon such amounts shall be immediately due and
payable without presentment, demand, protest, notice of protest,
notice of acceleration, notice of intention to accelerate or
other formalities or notices of any kind, all of which are hereby
expressly waived by the Company, except as provided above, and
(ii) in the case of the occurrence of an Event of Default
referred to in clause (f), (g) or (l) of this Section 7, the
principal amount then outstanding under the Note, all accrued
unpaid interest thereon, and all other amounts payable by the
Company under this Agreement and the Note shall become
automatically immediately due and payable without presentment,
demand, protest, notice of protest, notice of acceleration,
notice of intention to accelerate or other formalities or notices
of any kind, all of which are hereby expressly waived by the
Company.
SECTION 8. MISCELLANEOUS.
8.1 WAIVER. No failure on the part of the Bank to
exercise and no delay in exercising, and no course of dealing
with respect to, any right, power or privilege under this
Agreement or any of the other Credit Documents shall operate as a
waiver thereof nor shall any single or partial exercise of any
right, power or privilege under this Agreement or any of the
other Credit Documents preclude any other or further exercise
thereof or the exercise of any other right, power or privilege.
The remedies provided herein are cumulative and not exclusive of
any remedies provided by law or equity.
8.2 NOTICES. All notices and other communications provided
for herein (including, without limitation, any waivers or
consents under this Agreement) shall be given or made by Federal
Express or other national overnight courier, messenger delivery
or certified mail, return receipt requested (each communication
given by any of such means to be deemed to be "in writing" for
purposes of this Agreement) to the intended recipient at the
"Address for Notices" specified below its name on the signature
pages hereof or, as to any party, at such other address as shall
be designated by such party in a written notice to the other
parties hereto. Except as otherwise provided in this Agreement,
all such communications shall be deemed to have been duly given
when transmitted by Federal Express or other national overnight
courier, messenger delivery or certified mail, return receipt
requested, or when personally delivered or, in the case of a
mailed notice, upon deposit with the United States Postal
Service, postage prepaid, in each case given or addressed as
aforesaid.
8.3 EXPENSES, ETC. The Company agrees (a) to pay or reim-
burse the Bank on demand for the reasonable out-of-pocket costs
and expenses of the Bank (including without limitation the
reasonable fees and expenses of Howard & Howard in connection
with (i) the negotiation, preparation, execution and delivery of
this Agreement, the Note and any of the other Credit Documents,
and the making of the Loan hereunder and (ii) any amendment,
modification, waiver or extension of any of the terms of this
Agreement, the Note or any of the other Credit Documents, (b) to
pay or reimburse the Bank for all reasonable out-of-pocket costs
and expenses of the Bank (including reasonable counsels' fees and
expenses) in connection with the enforcement of this Agreement,
the Note or any of the other Credit Documents or any rights or
remedies of the Bank thereunder, or at law, or in equity, and all
transfer, stamp, documentary or other similar taxes, assessments
or charges levied by any governmental or revenue authority in
respect of this Agreement, the Note or any of the other Credit
Documents and (c) to pay filing and recording fees relating to,
and taxes and other charges incurred in connection with
perfecting, maintaining and protecting, the Liens created or
contemplated to be created pursuant to the Security Documents.
The Company hereby indemnifies the Bank and its directors,
officers, employees, agents and affiliates from, and agrees to
hold each of them harmless against any and all losses, claims,
damages, liabilities (or actions or other proceedings commenced
or threatened in respect thereof) and reasonable expenses that
arise out of or in any way relate to or result from the making of
the Loan hereunder or the other transactions contemplated hereby
or thereby, including, without limitation, any investigation or
litigation or other proceedings (whether or not such indemnified
person is a party to any action or proceeding out of which any of
the foregoing arise), other than any of the foregoing to the
extent incurred by reason of the gross negligence or wilful
misconduct of the person to be indemnified. The Bank shall not be
responsible or liable to the Company or any other
<PAGE>
Person for any consequential damages which may be alleged as a
result of this Agreement or any action or omission by the Bank
in connection therewith or the transactions contemplated thereby.
8.4 AMENDMENTS ETC. Except as otherwise expressly
provided in this Agreement, any provision of this Agreement or
any of the other Credit Documents may be amended only by an
instrument in writing signed by the Company, and the Bank.
8.5 SUCCESSORS AND ASSIGNS. This Agreement shall be
binding upon and inure to the benefit of the parties hereto and its-
legal representatives, successors and permitted assigns.
8.6 ASSIGNMENTS AND PARTICIPATIONS.
(a) The Company may not assign its rights or obligations
hereunder or under any of the other Credit Documents without the
prior written consent of the Bank.
(b) The Bank may assign the Loan, the Note or any other
Credit Document, without the prior consent of the Company. Upon
notice to the Company of any assignment permitted hereunder, the
assignee shall have, to the extent of such assignment, the
obligations, rights and benefits of the Bank assigned to it and
the Bank shall, to the extent of such assignment, be released
from any obligation under the Loan, this Agreement or any of the
other Credit Documents so assigned.
(c) The Bank may sell to one or more other Persons
("Participants") a participation in all or any part of the Loan.
All amounts payable by the Company to the Bank hereunder
(including without limitation under Section 3 hereof) shall be
determined as if the Bank had not sold any participations and as
if the Bank were funding the Loan in which participations have
been sold in the same way that it is funding the portion of the
Loan in which no participations have been sold. In no event shall
the Bank be obligated to the participant under the participation
agreement to take or refrain from taking any action hereunder or
under any of the other Credit Documents (including without
limitation granting approval of any amendment or waiver) except
that the Bank may agree in the participation agreement that it
will not, without the consent of the participant, agree to (i)
the extension of any date fixed for the payment of principal of
or interest on the Loan, (ii) the reduction of any payment of
principal thereof, (iii) the reduction of the rate at which
interest is payable thereon or (iv) the release or termination of
any Lien created by any of the Security Documents (except as
expressly provided for therein).
(d) The Bank may furnish any information concerning the
Company or any of its Subsidiaries in the possession of the Bank
from time to time to assignees and participants (including
prospective assignees and participants).
8.7 SURVIVAL. The obligations of the Company under Section
8.3 hereof shall survive the repayment of the Loan.
8.8 CAPTIONS. Captions and section headings appearing
herein are included solely for convenience of reference and are
not intended to affect the interpretation of any provision of
this Agreement.
8.9 COUNTERPARTS. This Agreement may be executed in any
number of counterparts, all of which taken together shall
constitute one and the same instrument and any of the parties
hereto may execute this Agreement by signing any such
counterpart.
8.10 INTEGRATION; SEVERABILITY. This Agreement, together
with the Note, the Security Documents, and all other Credit
Documents, constitutes the entire agreement of the parties
thereto, and supersedes all prior agreements and understandings,
both written and oral. No course of dealing between the parties,
no course of performance, no usage of trade, and no parol
evidence of any nature shall be used to supplement or modify any
term of this Agreement, the Note, the Security Documents, or any
of the other Credit Documents. If any clause, provision or
section of this
<PAGE>
Agreement, the Note, any of the Security Documents or any
of the other Credit Documents shall be held illegal or invalid
by any court, the validity of such clause, provision or section
shall not effect any of the remaining clauses, provisions or
sections of this Agreement, the Note, any of the Security
Documents, or any of the other Credit Documents, and the same
shall be construed and enforced as if such illegal or invalid
clause, provision or section had not been contained herein or
therein. In case any agreement or obligation contained this
Agreement, the Note, any of the Security Documents or any of the
other Credit Documents shall be held to be in part a
violation of law, then such agreement or obligation shall be
enforced to the fullest extent permitted by law.
8.11 GOVERNING LAW; SUBMISSION TO JURISDICTION; ETC. THIS
AGREEMENT, THE NOTE AND THE OTHER CREDIT DOCUMENTS SHALL BE
GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAW OF THE
STATE OF ILLINOIS. THE COMPANY HEREBY IRREVOCABLY SUBMITS TO THE
JURISDICTION OF ANY ILLINOIS STATE OR UNITED STATES FEDERAL COURT
SITTING IN SPRINGFIELD, ILLINOIS OVER ANY ACTION OR PROCEEDING
ARISING OUT OF OR RELATING TO THIS AGREEMENT, THE NOTE, OR ANY OF
THE OTHER CREDIT DOCUMENTS, AND THE COMPANY HEREBY IRREVOCABLY
AGREES THAT ALL CLAIMS IN RESPECT OF SUCH ACTION OR PROCEEDING
MAY BE HEARD AND DETERMINED IN SUCH ILLINOIS STATE OR FEDERAL
COURT. THE COMPANY WAIVES ANY OBJECTION TO VENUE IN SUCH STATE
AND ANY OBJECTION TO ANY ACTION OR PROCEEDING IN SUCH STATE ON
THE BASIS OF FORUM NON CONVENIENS. NOTHING IN THIS SECTION 8.11
SHALL AFFECT THE RIGHT OF THE BANK TO SERVE LEGAL PROCESS IN ANY
MANNER PERMITTED BY LAW OR AFFECT THE RIGHT OF THE BANK TO BRING
ANY ACTION OR PROCEEDING AGAINST THE COMPANY OR ITS PROPERTY IN
THE COURTS OF ANY OTHER JURISDICTION.
8.12 Waiver of Trial by Jury. THE COMPANY HEREBY WAIVES
TRIAL BY JURY IN ANY LAWSUIT, ACTION, PROCEEDING, COUNTERCLAIM,
OR CROSSCLAIM ON ANY MATTER WHATSOEVER ARISING OUT OF OR IN ANY
WAY RELATED TO THIS AGREEMENT OR ANY OF THE OTHER CREDIT
DOCUMENTS.
IN WITNESS WHEREOF, the parties hereto have caused this
Credit Agreement to be duly executed as of the day and year first
above written.
The rest of this page is intentionally left blank.
rfm\foa-ill\first.cmw\credagr.cln
<PAGE>
SIGNATURE PAGE TO CREDIT AGREEMENT
THE COMPANY:
FIRST COMMONWEALTH CORPORATION
James E. Melville
By:_____________________________________
James E. Melville
Its: Senior Executive Vice President
Attest: Address for Notices:
George E. Francis
_____________________________ 5250 South Sixth Street Road
George E. Francis, Secretary Springfield, Illinois 62705
rfm\foa-ill\first.cmw\credagr.cln
<PAGE>
SIGNATURE PAGE TO CREDIT AGREEMENT
THE BANK:
FIRST OF AMERICA BANK-ILLINOIS, N.A.
Michael L. McGlasson
By:__________________________________
Michael L. McGlasson
Its: Senior Vice President
Address for Notices:_________________
_________________
_________________
rfm\foa-ill\first.cmw\credagr.cln
<PAGE>
TERM NOTE
Springfield, Illinois
As of May 8, 1996 $8,900,000.00
FOR VALUE RECEIVED, the undersigned, FIRST COMMONWEALTH
CORPORATION, a Virginia corporation (herein called "Maker"),
promises to pay to the order of FIRST OF AMERICA BANK-ILLINOIS,
N.A. (herein called "Payee," which term herein in every instance
shall refer to any owner or holder of this note) the sum of EIGHT
MILLION NINE HUNDRED THOUSAND AND NO/100 DOLLARS ($8,900,000.00),
together with interest on the principal hereof from time to time
outstanding from the date of advancement until maturity, at the
per annum rate hereinafter stated, said principal and interest
being payable in lawful money of the United States of America at
the banking office quarters of the Payee at One Old Capital Plaza
North, Springfield, Illinois 62794-9268, or at such other place
as Payee may designate hereafter in writing.
The principal balance hereof advanced and from time to time
remaining unpaid shall bear interest during each day of the term
of the loan evidenced hereby at a variable per annum rate equal
to the lesser of (a) a per annum rate that is equal to the sum
(herein called the "Basic Rate") of (i) nine-sixteenths of one
percent (9/16%) plus (ii) the Base Rate. "Base Rate" means the
floating daily, variable rate of interest determined and
announced by the Bank from time to time as its "Base Lending
Rate" (without reference to prime or base rate of any other
financial institution) which rate may not necessarily be the
lowest rate of interest charged by the Bank to any of its
customers. The Bank's Base Rate is an "Index" and the actual
rate charged to any borrower for a specific loan may be above or
below that "Index". The Basic Rate shall change when and as the
"Base Rate" shall change, effective on the date of such change or
(b) the Maximum Rate (hereinafter defined). Notwithstanding the
foregoing, if at any time the Basic Rate shall exceed the Maximum
Rate and thereafter the Basic Rate shall become less than the
Maximum Rate, the rate of interest payable hereunder shall be the
Maximum Rate until the Payee shall have received the amount of
interest it otherwise would have received if the interest payable
hereunder had not been limited by the Maximum Rate during the
period of time the Basic Rate exceeded the Maximum Rate.
All past due principal and interest of this note, whether
due as the result of acceleration of maturity or otherwise, shall
bear interest at the lesser of (1) a rate that is five percentage
points above the Base Rate, as it varies, or (2) the maximum
lawful rate of interest permitted by the applicable laws, now or
hereafter enacted, which interest rate (herein called the
"Maximum Rate") shall change when and as said laws shall change
to the extent permitted by said laws, effective on the day such
change in said laws becomes effective, from the date the payment
thereof shall have become due until the same have been fully
discharged by payment.
Interest on the principal balance of this note advanced and
from time to time outstanding shall be due and payable in
quarter-annual installments as it accrues, the first such
installment of interest to be due and payable three (3) months
from the date hereof and a subsequent
<PAGE>
installment of interest to be due and payable on the same day
of each succeeding third calendar month thereafter until May
8, 2005, when the then remaining unpaid principal balance
hereof and all accrued unpaid interest thereon shall be due and
payable in full.
The principal balance of the Note shall be due and payable
as follows: (i) an installment of principal in the amount of
$1,000,000 shall be due and payable on May 8, 1997, and (ii)
installments of principal in the amount of $1,000,000 shall be
payable on May 8 of each year thereafter until May 8, 2005, when
the then remaining unpaid balance of principal of the Note and
all accrued unpaid interest thereon shall be due and payable in
full.
Any other provisions of this Note or the Credit Documents
notwithstanding, and subject to the limitations provided below,
the Payee may require payment in full of this Note pursuant to
the Call Option provided in the Credit Agreement, as defined
below.
This note is issued pursuant to that certain Credit
Agreement of even date herewith (the "Credit Agreement"), by and
between Maker and the Payee. This Note is entitled to all the
benefits of the Credit Agreement, is secured as provided in the
Credit Agreement, and reference is hereby made to the Credit
Agreement for certain rights as to the prepayment and the
acceleration of the maturity hereof.
Except as expressly provided herein, in the Credit
Agreement, or in any of the other Credit Documents, Maker and any
and all sureties, guarantors and endorsers of this note and all
other parties now or hereafter liable hereon, severally waive
grace, demand, presentment for payment, protest, notice of any
kind (including, but not limited to, notice of dishonor, notice
of protest, notice of intention to accelerate and notice of
acceleration), all other formalities of any kind and diligence in
collecting and bringing suit against any party hereto, and agree
(a) to all extensions and partial payments, with or without
notice, before or after maturity, (b) to any substitution,
exchange or release of any security now or hereafter given for
this note, (c) to the release of any party primarily or
secondarily liable hereon, and (d) that it will not be necessary
for Payee, in order to enforce payment of this note, to first
institute or exhaust Payee's remedies against Maker or any other
party liable therefor or against any security for this note.
This note shall be governed by and construed under the laws
of the State of Illinois and applicable federal law.
Any check, draft, money order or other instrument given in
payment of all or any portion hereof may be accepted by Payee and
handled in collection in the customary manner, but the same shall
not constitute payment hereunder or diminish any rights of Payee
except to the extent that actual cash proceeds of such instrument
are unconditionally received by Payee.
Maker represents and warrants to Payee and to all other
owners and holders of any indebtedness evidenced hereby that the
loan evidenced by this note is for business, commercial,
investment or other similar purpose and not primarily for
personal, family, household or
<PAGE>
agricultural use, as such terms are used or defined in Regulation
Z promulgated by the Board of Governors of the Federal Reserve
System and under Title I and V of the Consumer Credit Protection
Act.
FIRST COMMONWEALTH CORPORATION,
a Virginia corporation
James E. Melville
Attest: By:____________________________________
James E. Melville
Its: Senior Executive Vice President
George E. Francis
______________________________
George E. Francis, Secretary
rfm\foa-ill\first.cmw\exhibitC.cln
<PAGE>
COINSURANCE AGREEMENT
between
UNIVERSAL GUARANTY LIFE INSURANCE COMPANY
and
FIRST INTERNATIONAL LIFE INSURANCE COMPANY
<PAGE>
TABLE OF CONTENTS
Page
ARTICLE I - DEFINITIONS 2
ARTICLE II - COVERAGE 5
ARTICLE III - GENERAL PROVISIONS 5
ARTICLE IV - REINSURANCE AND POLICY PREMIUMS 9
ARTICLE V - EXPENSE ALLOWANCE 11
ARTICLE VI - DEATH BENEFITS AND OTHER PAYMENTS 11
ARTICLE VII - DIVIDENDS 12
ARTICLE VIII - ACCOUNTING 12
ARTICLE IX - DURATION AND TERRITORY 13
ARTICLE X - INSOLVENCY 14
ARTICLE XI - ARBITRATION 14
ARTICLE XII - REINSURING CLAUSE AND CONTRACTUAL
CONDITIONS 16
ARTICLE XIII -EXECUTORY CONTRACT AND INSOLVENCY-SETOFF. 17
ARTICLE XIV - REPRESENTATIONS AND WARRANTIES 18
ARTICLE XV - CONDITIONS PRECEDENT 19
ARTICLE XVI - ASSUMPTION REINSURANCE 20
ARTICLE XVII - INDEMNIFICATION 21
ARTICLE XVIII - ESTABLISHMENT OF AN ASSET TRUST 21
ARTICLE XIX - MISCELLANEOUS PROVISIONS 22
SCHEDULE A - ADMINISTRATIVE SERVICE
AND STANDARDS A-1
SCHEDULE B - EXPENSE ALLOWANCE B-1
SCHEDULE C - INITIAL REINSURANCE REPORT C-1
SCHEDULE D - PART I - MONTHLY PERIOD REINSURANCE
REPORTS D-1
SCHEDULE D - PART II - QUARTERLY POLICY EXHIBIT D-2
SCHEDULE D - PART III - ANNUAL REPORTS D-3
SCHEDULE E - RECAPTURE PROVISIONS E-1
SCHEDULE F - DAC TAX ELECTION F-1
EXHIBIT 1 - ASSUMPTION REINSURANCE AGREEMENT [ ]
<PAGE>
COINSURANCE AGREEMENT
This Coinsurance Agreement (the "Agreement") is made and
entered into as of the 30th day of September, 1996 between UNIVERSAL
GUARANTY LIFE INSURANCE COMPANY, a life insurance company (the
"Company"), and FIRST INTERNATIONAL LIFE INSURANCE COMPANY, a
life insurance company (the "Reinsurer").
WHEREAS, the Company has agreed to cede to the Reinsurer,
and the Reinsurer has agreed to accept on a coinsurance basis, 100% of
the Reserves and Liabilities (as hereinafter defined) arising under or
with respect to the Reinsured Policies (as hereinafter defined) issued
by the Company on or before the Effective Date (as hereinafter
defined); and
WHEREAS, the Reinsurer, is simultaneously entering into an
Assumption Reinsurance Agreement (the "Assumption Reinsurance
Agreement") with the Company, pursuant to which, contingent upon
certain events specified in Article XVI below, the Reinsurer may elect
to assumption reinsure the Reinsured Policies, with a concurrent
novation and complete release of the Company from any liability under
such Reinsured Policies, on a state by state basis upon the receipt of
any and all applicable regulatory approvals and notice to relevant
Policyholders followed by expiration of the applicable period with no
opt out by such Policyholders or the obtaining of required consents
from such Policyholders, as the case may be; and
WHEREAS, should the Reinsurer elect to assumption reinsure
the Reinsured Policies pursuant to the Assumption Reinsurance
Agreement, certain of the Company's Policyholders may opt out of or not
consent to the assumption of their policies by the Reinsurer, in which
event the Company will remain primarily obligated to such Policyholders
under the Non-Assumed Policies (as hereinafter defined); and
WHEREAS, the Reinsurer acknowledges and agrees that it
shall be bound to perform its obligations as Reinsurer to the Company
as primary insurer under this Agreement with respect to the Non-Assumed
Policies subsequent to the Effective Date of the Assumption Reinsurance
Agreement;
WHEREAS, the Reinsurer acknowledges and agrees that it shall
be bound to perform its obligations as Reinsurer to the Company as
primary insurer under this Agreement with respect to the Non-Assumed
Policies Subsequent to the Effective Date of the Assumption
Reinsurance Agreement;
NOW, THEREFORE, in consideration of the foregoing the
Company and the Reinsurer mutually agree that they shall enter into
this Agreement under the terms and conditions stated herein.
This Coinsurance Agreement is between the Company and the
Reinsurer, or their assignees or successors, and the performance of the
obligations of each party under this Agreement shall be rendered solely
to the other party or parties. In no instance shall anyone other than
the Company or the Reinsurer, or their assignees or successors, have
any rights under this Agreement. Until the Reinsurer has reinsured a
Reinsured Policy on an assumption reinsurance basis pursuant to Article
XVI below, the Reinsurer shall not be liable to any insured, contract
owner, or beneficiary under any insurance policy or contract reinsured
hereunder.
ARTICLE I
DEFINITIONS
As used in this Agreement, the following capitalized terms
shall have the following meanings (definitions are applicable to both
the singular and the plural forms of each term defined in this
Article):
"Accounting Period" means the calendar month, except that
the first Accounting Period shall be the period commencing with the
Effective Date and ending with the last day of the then current
calendar month, and the final Accounting Period shall be the period
commencing with the first day of the calendar month that includes the
day on which the last Reinsured Policy terminates, and ending on such
day.
"Administration Cost" shall have the meaning set forth in
Section 3.01.
"Annual Report" means the report required to be prepared in
accordance with Section 8.05 and providing the data as shown on
Schedule D - Part III.
"Benefits" shall have the meaning set forth in Section
6.01.
"Business Day" means any day other than a Saturday, Sunday
or a day on which banking institutions in the States of New York, Ohio
and Delaware are permitted or obligated by law to be closed.
"Closing Date" shall be that date ten (10) Business Days
following receipt of notice from the Company to the Reinsurer that all
of the conditions in Article XV hereunder have been satisfied.
"Effective Date" means the date specified in Section 2.01.
"Expense Allowance" shall mean the ceding commission
payable in connection with the acquisition of the Reinsured Policies
and as described in Schedule B.
"Extra Contractual Liabilities" means all liabilities,
other than the express obligations set forth in the Reinsured Policies,
including, without limitation, any liability for consequential,
exemplary, punitive or similar damages, relating to the Reinsured
Policies, which liability arises from any act, error or omission by the
Company, its directors, officers, employees or agents prior to the
Effective Date, whether intentional or otherwise, or from any bad faith
prior to the Effective Date in connection with the handling of any
claim or obligation under any of the Reinsured Policies or in
connection with the issuance, delivery or cancellation of any of the
Reinsured Policies.
"Dividends" shall have the meaning set forth in Section
7.01.
"Gross Premiums" means the premiums collected on or after
the Effective Date from Policyholders for the Reinsured Policies.
"Initial Reinsurance Consideration" shall mean the
difference between the Initial Reinsurance Premium and the Expense
Allowance, as described in Schedule B.
"Initial Reinsurance Premium" shall have the meaning set
forth in Section 4.02.
"Initial Reinsurance Report" shall have the meaning set
forth in Section 8.02.
"Insolvency Proceedings" shall have the meaning set forth
in Section 13.05.
"Monthly Report" means the report required to be prepared
in accordance with Section 8.03 and providing the data as shown on
Schedule D - Part I.
"Monthly Settlement" means the net amount due and payable
to either party with respect to any Accounting Period.
"Non-Assumed Policies" means Reinsured Policies that shall
not have been novated to the Reinsurer under the terms of the
Assumption Reinsurance Agreement, and under which the Company retains
primary liability.
"Other Amounts" shall have the meaning set forth in Section
4.02.
"Policyholder" means the holder of any Reinsured Policy.
"Policy Loan" shall have the meaning set forth in Section
2.05.
"Policy Loan Interest or Repayments" shall have the
meaning set forth in Section 2.05.
"Quarterly Report" means the report required to be prepared
in accordance with Section 8.04 and providing the data as shown on
Schedule D - Part II.
"Reinsurance Agreement" means any reinsurance agreement
between the Company as cedent and any third party reinsurer under which
the Company's Reserves and Liabilities with respect to the Reinsured
Policies or some portion thereof are transferred, whether or not such
contract of reinsurance is also applicable to business other than the
Reinsured Policies.
"Reinsurance Premiums" shall have the meaning set forth in
Section 4.02.
"Reinsured Policies" means all paid-up insurance policies,
contracts, binders or certificates of insurance, and all riders,
endorsements and amendments thereto, whether written or oral, issued or
assumed by the Company, that are in force on the Effective Date, except
those offered in settlement to so called "HIV" policyholders and paid-up
business associated with the Company's Jr./Sr. Plan Single Premium
Interest Sensitive Whole Life policies, including, without limitation,
policy loans.
"Reserves and Liabilities" means the statutory reserves
required to be held by the Company as of the Effective Date (subject to
the provisions of Section 4.01 hereof)in support of the policy
liabilities arising under the Reinsured Policies and payable after the
Effective Date (determined by reference to lines 1, 5, 7 and 8 on page
3 of the 1995 Annual Statement Blank) less Policy Loans.
"Risk Based Capital" shall mean the National Association
of Insurance Commissioners Risk Based Capital Model Act as codified in
the Ohio Insurance Code at Sections 3903.81 to 3903.93.
ARTICLE II
COVERAGE
2.01. Coverage. As of September 30, 1996 (the
"Effective Date"), upon the terms and conditions, including, but not
limited to, the Company's satisfaction on or before the Closing Date of
all the conditions contained in Article XV hereunder, and for the
considerations hereinafter contained, the Company agrees to cede and
transfer to the Reinsurer, and the Reinsurer agrees to accept and
reinsure, 100% of the Reserves and Liabilities, which excludes all
claim liabilities, arising under the Reinsured Policies.
2.02. Conditions. The reinsurance hereunder is subject
to the same limitations, terms and conditions as the Reinsured
Policies, except as otherwise provided in this Agreement.
2.03. Exclusions. This Agreement does not apply to and
specifically excludes from coverage any Extra Contractual Liabilities.
2.04. Plan of Reinsurance. This reinsurance shall be on
the coinsurance basis.
2.05. Policy Loans. The Reinsurer shall participate in
any policy loan ("Policy Loan") effected by the Company with respect
to a Reinsured Policy, and shall receive all policy loan repayments and
interest ("Policy Loan Repayments and Interest") thereon.
2.06. Maintenance of Licenses. The Company shall use its
reasonable efforts to maintain its licenses and other approvals in all
jurisdictions to the extent necessary for the Company to insure and
cede the Reinsured Policies.
ARTICLE III
GENERAL PROVISIONS
3.01. Administration. (a) So long as this Agreement is
in effect, the Company shall remain responsible for the administration
of each and every Reinsured Policy reinsured hereunder. The Company
shall be compensated at the rate of $7.50 per Reinsured Policy per
calendar year (the "Administration Cost"), payable at the rate of
$0.625 per policy per month based upon the beginning of quarter in
force.
(b) Should the Reinsurer exercise its rights under Article
XVI to assumption reinsure the business reinsured hereunder, the
Reinsurer shall then be responsible for the administration and shall no
longer be obligated to pay the Administration Cost for such policies.
The Reinsurer reserves the right to appoint a subcontractor to perform
part or all of the services set forth above as the agent of the
Reinsurer.
(c) Notwithstanding 3.01(a), above, should service
standards not meet those specified in Schedule A, the Reinsurer shall
notify the Company as to which standards the Company has not satisfied.
The Company shall have thirty (30) days to meet standards specified in
such notice. Should any such standards not be met within the thirty
(30) day cure period, the administration fee shall be reduced to $7.00
per Reinsured Policy per year. If standards are not met for any three
(3) consecutive months in a calendar year or four (4) months in any
rolling twelve (12) month ending period the Reinsurer shall have the
right to take over administration.
(d) Notwithstanding any other provisions of this Section
3.01, the Reinsurer reserves the right to purchase the administrative
capabilities of the Company, for a price to be agreed upon by the
parties hereto, if the Reinsurer determines that administration of the
Reinsured Policies should be transferred from the Company.
3.02. Inspection. The Reinsurer or its designated
representative may inspect, at the offices of the Company where such
records are located, the papers and any and all other books or
documents of the Company reasonably relating to the Reinsured Policies,
during normal business hours for such period as this Agreement is in
effect or for as long thereafter as the Company seeks performance by
the Reinsurer pursuant to the terms of this Agreement. The information
obtained shall be used only for purposes relating to reinsurance under
this Agreement. The Reinsurer's rights under this Section shall
survive termination of this Agreement.
3.03. Misunderstandings and Oversights. If any delay,
omission, error or failure to pay amounts due or to perform any other
act required by this Agreement is unintentional and caused by
misunderstanding or oversight, the Company and the Reinsurer will
adjust the situation to what it would have been had the misunderstanding
or oversight not occurred. The party first discovering such
misunderstanding or oversight, or act resulting from the
misunderstanding or oversight, will notify the other party in writing
promptly upon discovery thereof, and the parties shall act to correct
such misunderstanding or oversight within twenty (20) Business Days of
receipt of such notice. However, this Section shall not be construed
as a waiver by either party of its right to enforce strictly the terms
of this Agreement.
3.04. Age, Sex and Other Adjustments. If the Company's
liability under any of the Reinsured Policies is changed because of a
misstatement of age or sex or any other material fact, the Reinsurer
will share in the change proportionately to the amount reinsured
hereunder.
3.05. Reinstatements. If a Reinsured Policy that is or
has been put on paid-up status is reinstated to a premium paying basis
while this Agreement is in force, the reinsurance for such Reinsured
Policy shall be recaptured under the terms specified in Schedule E
attached.
3.06. Non-Compete. The Company shall take no direct or
indirect action to induce any policyholder of a Reinsured Policy to
terminate, reinstate, lapse or exchange such policy.
3.07. Contract Changes or Reserve Assumption Changes.
The Company, on its own initiative, shall not change (i) the terms and
conditions of any Reinsured Policies or (ii) the assumptions, including
the statutory reserve accumulation rate assumption, used by the Company
to establish the Reserves and Liabilities with respect to such
Reinsured Policies. The Reinsurer shall share proportionately in any
change in contract or in Reserves and Liabilities required by any
regulatory authority having jurisdiction over the Company in the
ordinary course of exercising its powers or otherwise required by law
and in any such changes made by the Company and consented to by the
Reinsurer.
3.08. Compliance with Applicable Laws and Regulations.
(a) Intent of Parties. It is the intention of the
parties that this Agreement shall be interpreted in accordance with the
laws as of the date of execution hereof by both parties and comply with
all existing applicable state and federal laws and regulations, and as
from time to time are or may be in effect, in such a way that the
Reinsured Policies remain reinsured on the coinsurance plan.
(b) Procedures to Reflect Changes in Laws or
Regulations. In the event that it is determined by an insurance
regulatory authority or the Internal Revenue Service or by either party
upon the advice of an insurance regulatory authority or the Internal
Revenue Service that this Agreement fails to conform to the
requirements of existing applicable laws and regulations and that the
Agreement may be brought into conformity with said requirements only by
means of a material change to the Agreement, or in the event that such
laws or regulations are changed subsequent to the Effective Date and
such change has a material adverse affect on either party or requires a
material change to the Agreement in order for the Agreement to conform
with applicable laws and regulations, the parties shall exercise
reasonable efforts to reach an agreement to amend the Agreement so as
to return the parties to the economic position that they would have been
in had no such change occurred or so that both parties share the
economic position that they would have been in had no such change
occurred or so that both parties share the economic detriment of such
change equally. If the parties are unable to reach an agreement to
amend the Agreement, then the differences between the parties shall be
resolved through arbitration in accordance with the provisions of
Article XI. In the event that any change required to conform the
Agreement to the requirements of applicable law or regulation is not
material, the Agreement shall be amended accordingly. In no event,
however, shall this provision prevent either party from exercising any
right it otherwise has under this Agreement. For purposes of this
Section 3.08(b), the word "material" shall mean, when used with
respect to (i) any change in law or regulation, or any change into the
Agreement necessary to bring the Agreement into conformity with the
requirements of any law or regulation; or (ii) any delay, omission,
error or failure to pay amounts due or to perform any other act required
under this Agreement; or (iii) any default, that the effect or effects
of any of (i), (ii) or (iii) above (either individually or
cumulatively) results in a deviation from a projected return under
this Agreement (absent the occurrence of (i), (ii) or (III) above,
either individually or cumulatively) by at least five percent (5%),
measured from the first day that the occurrence of (i), (ii) or (iii)
above, or series thereof, taken into account on a cumulative basis,
occurred or becomes effective.
(c) Notification of Disapproval or Change in Law.
The Company shall promptly notify the Reinsurer of any disapprovals,
recommended changes or statements regarding the Agreement that are made
by any insurance regulatory or tax authorities and of any change in
law, regulation or rulings affecting the Agreement. The Reinsurer
shall be allowed to make its own defense of the Agreement with said
authorities.
3.09. Payments. All payments made pursuant to this
Agreement (other than the Initial Reinsurance Premium described in
Section 4.01 of this Agreement) shall be made in immediately available
funds.
3.10. Investigations. The Company shall notify the
Reinsurer immediately, in writing, of any and all investigations of the
Company or its principal officers or shareholders conducted by any
federal, state or local governmental or regulatory agency.
3.11. Conduct of Business. Between the Effective Date
and the Closing Date, the Company shall continue the operations of its
business with respect to the Reinsured Policies in accordance with
prior practices and will not engage in any additional Reinsurance
Agreements.
3.12. Duty of Cooperation. Each party hereto shall
cooperate fully with the other in all reasonable respects in order to
accomplish the objectives of, and consummate the transactions
contemplated under, this Agreement. This duty to cooperate shall
include, but not be limited to, making all necessary insurance
regulatory filings and obtaining all insurance regulatory approvals
required, making available any Reinsured Policy records which either
party subsequently may require to resolve issues related to claims or
Reserves and Liabilities.
3.13. Compliance. The Company covenants to maintain the
Reinsured Policies in compliance with all applicable requirements of
law and on forms approved in all material respects by the appropriate
governmental authorities except to the extent that such failure to be in
compliance therewith does not have a material adverse effect.
ARTICLE IV
REINSURANCE AND POLICY PREMIUMS
4.01. Initial Reinsurance Consideration. On the Closing
Date, as consideration for the assumption by the Reinsurer of the
Reserves and Liabilities under the Reinsured Policies, the Company
shall transfer to the Reinsurer assets ("Assets") with an aggregate
market value equal to one hundred percent (100%) of Reserves and
Liabilities as of the Effective Date, which excludes all claim
liabilities, (the "Initial Reinsurance Premium"), less the Expense
Allowance described in Article V below (such net amount being the
"Initial Reinsurance Consideration" as described in Schedule C
attached hereto). The Assets being transferred shall be based upon
valuations and estimates made three (3) Business Days prior to the
Closing Date. Both the Assets and the Initial Reinsurance Premium
(shown on Schedule C) shall be subject to further and final adjustment
as follows: (1) within 90 days after the Closing Date, the Reinsurer
shall send a notice to the Company advising the Company of the final
valuation of both the Assets (valued as of the Closing Date) and the
Initial Reinsurance Premium (valued as of the Effective Date), (2)
the Company shall then have five (5) Business Days from receipt of the
aforementioned notice to make an adjustment to the Assets, including
any additional transfers to the Reinsurer, in order to reflect the
final valuation of the Assets and Initial Reinsurance Consideration
pursuant to this Section 4.01.
4.02. Reinsurance Premium. As additional consideration
for the assumption by the Reinsurer of the Reserves and Liabilities
under the Reinsured Policies, the Reinsurer shall be entitled to
collect and retain 100% of all Gross Premiums, Policy Loan Interest or
Repayments and any other amounts ("Other Amounts") received from
Policyholders or others on and after the Effective Date with respect to
the Reinsured Policies less Dividends paid in cash, as described in
Article VII, less reinsurance premiums payable under the Reinsurance
Agreements, less Administration Costs, as described in Article III.
The Company will promptly remit to the Reinsurer all other amounts that
may be remitted to it by Policyholders or others with respect to the
Reinsured Policies. Furthermore, with respect to any such
remittances, the Company shall also promptly furnish the Reinsurer with
all pertinent information that the Company receives on and after the
Effective Date pertaining thereto (e.g., the nature of payment, source
of funds, policy number or agreement (as appropriate) and period(s) to
which it relates and any instructions accompanying same), in a form
acceptable to the Reinsurer.
4.03. Credit for Recoverables from Ceded Reinsurance.
From the Effective Date, in any Monthly Settlements, the computation
of Benefits paid on Reinsured Policies shall include a credit in favor
of the Reinsurer in the amount of reinsurance that is recoverable
pursuant to the terms of any Reinsurance Agreement for any payments
made to Policyholders pursuant to the terms of the Reinsured Policies.
The Company shall continue to pay any premiums or other charges for any
such Reinsurance Agreements until termination of this Agreement, and
the Company shall continue to collect reinsurance recoverables, if any,
made pursuant to such Reinsurance Agreements.
4.04. Reserves. The Reinsurer shall establish and
maintain appropriate reserves with respect to the Reinsured Policies.
ARTICLE V
EXPENSE ALLOWANCE
5.01. Expense Allowance. On the Closing Date, the
Reinsurer shall pay the Company an expense allowance (the "Expense
Allowance") in the amount as set forth in Schedule B.
ARTICLE VI
DEATH BENEFITS AND OTHER PAYMENTS
6.01. Death Benefits and Payments under Settlement
Options. The Reinsurer shall assume liability for, subject to Section
2.03, all death benefits, all periodic or lump sum payments on
settlement options or withdrawals from Dividends on deposit, and all
surrender and endorsement payments to Policyholders with respect to
Reinsured Policies (such death benefits and other payments are referred
to collectively as "Benefits"), and shall indemnify the Company with
respect to any such Benefits paid by the Company incurred after the
Effective Date.
6.02. Claims. The reinsurance claim and copies of
notification, claim papers, and proofs will be furnished by the Company
to the Reinsurer upon request.
6.03. Liability and Payment. The Reinsurer shall be
responsible for the handling of, and all costs and expenses relating
to, the contest, compromise or litigation of claims under the Reinsured
Policies which arise after the Effective Date. The Company will not
contest, compromise, or litigate a claim with respect to a Reinsured
Policy unless delegated to do so in writing by the Reinsurer.
Notwithstanding the foregoing, the Reinsurer shall have no liability
for costs and expenses for any litigation arising out of or based on any
bad faith claims practices, willful misconduct, fraud or gross
negligence of the Company (without attributing to the Company the
actions of the Reinsurer).
ARTICLE VII
DIVIDENDS AND COUPONS
7.01. Participation. The Reinsurer shall participate in
the dividend and coupon ("Dividends") scales in effect on the
Effective Date of this Agreement. Should the Company desire to change
said scales, it shall do so only upon the consent of the Reinsurer,
which shall not be unreasonably withheld. The Reinsurer shall only
reimburse those Dividends that are incurred after the Effective Date.
7.02. Options. The Reinsurer shall participate in all
Dividend options provided under Reinsured Policies.
ARTICLE VIII
ACCOUNTING
8.01. Amounts Due the Reinsurer or the Company. Except
as otherwise specifically provided herein, all amounts due the
Reinsurer or the Company under this Agreement shall be determined on a
net basis, giving full effect to Article XII hereof.
The Initial Reinsurance Premium, as described on the
Initial Insurance Report described below, is due on the Closing Date.
If positive the Initial Reinsurance Premium shall be paid to the
Reinsurer, and if negative it shall be paid to the Company. The
Initial Reinsurance Premium is subject to further and final adjustment
pursuant to the procedures set forth in Section 4.01 hereunder.
The Monthly Settlement shall be paid to the party to whom a
balance is owed within seven (7) days of receipt of the Monthly Report
described below.
8.02. Initial Reinsurance Report. The Company shall
deliver to the Reinsurer, on or before the Closing Date, a report (the
"Initial Reinsurance Report") that shall provide the data required in
Schedule C.
8.03. Monthly Reports. Within seven (7) Business Days
of the end of each Accounting Period the Company shall supply the
Reinsurer with a report that shall provide the data required in
Schedule D - Part I, attached hereto (the "Monthly Report").
8.04. Quarterly Reports. Within ten (10) Business Days
after the end of each calendar quarter the Company shall supply the
Reinsurer with a report that shall provide the data required in
Schedule D- Part II, attached hereto (the "Quarterly Report").
8.05. Annual Reports. Within ten (10) Business Days
after the end of each calendar year the Company shall supply the
Reinsurer with a report that shall provide the data required in
Schedule D - Part III, attached hereto (the "Annual Report").
8.06. Best Efforts to Supply Actual Data. In preparing
all Reports required in this Agreement, the Company shall make its best
efforts to supply the actual data. If the actual data cannot be
supplied with the appropriate Report, the Company shall produce best
estimates, and shall provide amended reports based on actual data no
more than twenty (20) Business Days after such Report was originally
due.
8.07. Survival of Article. This Article shall survive
termination of this Agreement.
ARTICLE IX
DURATION AND TERRITORY
9.01. Duration. Except as otherwise provided herein,
this Agreement shall be unlimited in duration.
9.02. The Reinsurer's Liability. The Reinsurer's
liability hereunder with respect to any Reinsured Policy will terminate
on the earlier of the date on which the Reinsured Policy is terminated
by death, recapture, surrender, lapse or expiry.
9.03. New Business. This Agreement shall not apply to
any business of the Company entered into after the Effective Date or
entering paid-up status after the Effective Date.
9.04. Novated Policies. This Agreement shall cease to
apply to any Reinsured Policy on the date that such Reissued Policy
becomes assumed by the Reinsurer by novation pursuant to the Assumption
Reinsurance Agreement.
9.05. Territory. This Agreement shall apply to Reinsured
Policies covering lives and risks wherever resident or situated.
9.06. Recapture. Upon a Reinsured Policy reinstating to
a premium paying basis, such Reinsured Policy shall be recaptured based
upon the terms in Schedule E.
ARTICLE X
INSOLVENCY
10.01. Payments by the Reinsurer. The Reinsurer hereby
agrees that, as to all reinsurance made, ceded or otherwise becoming
effective hereunder, the reinsurance shall be payable by the Reinsurer
on the basis of the liability of the Company under the Non-Assumed
Policies, without diminution because of the insolvency, liquidation or
rehabilitation of the Company or the appointment of a conservator,
receiver, liquidator or statutory successor of the Company, directly to
the Company or to its conservator, liquidator, receiver or other
statutory successor.
10.02. Claims. It is agreed that the conservator,
receiver, liquidator or statutory successor of the Company shall give
prompt written notice to the Reinsurer of the pendency or submission of
a claim under any Non-Assumed Policies. During the pendency of such
claim, the Reinsurer may investigate such claim and interpose, at its
own expense, in the proceeding where such claim is to be adjudicated
any defense available to the Company or its conservator, receiver,
liquidator or statutory successor. The expense thus incurred by the
Reinsurer is chargeable against the Company as a part of the expense of
insolvency, liquidation or rehabilitation to the extent of a
proportionate share of the benefit which accrues to the Company solely
as a result of the defense undertaken by the Reinsurer. If two or more
assuming reinsurers are involved in the same claim and a majority in
interest elect to interpose defenses to such claim, the expense shall
be apportioned in accordance with the terms of this Agreement as though
such expense had been incurred by the Company.
ARTICLE XI
ARBITRATION
11.01. Appointment of Arbitrators. In the event of any
disputes or differences arising under or relating in any way to this
Agreement as to which agreement between the parties hereto cannot be
reached, then either party can give notice, pursuant to Section 19.02
hereunder, to the other party that such dispute or difference shall be
decided by arbitration. Three arbitrators will decide any dispute or
difference. The arbitrators must be disinterested officers or retired
officers of life insurance or life reinsurance companies other than the
two parties to this Agreement or their affiliates. Each of the
contracting parties agrees to appoint one of the arbitrators with the
third, the "Umpire," to be chosen by the two party-appointed
arbitrators. In the event that either party should fail to choose its
arbitrator within twenty (20) Business Days following written
notification by the other party to do so, the requesting party may
choose the second arbitrator before entering upon arbitration. The two
arbitrators shall select a third arbitrator to act as "Umpire." In the
event that the two arbitrators shall not be able to agree on the choice
of the Umpire within twenty (20) Business Days following the
appointment of the second, each arbitrator shall nominate candidates
within the five (5) Business Days thereafter, four of whom the other
shall decline, and the Umpire shall be chosen from the two remaining
candidates by drawing lots. Should the chosen Umpire decline to serve,
the candidate whose lot was not drawn shall be appointed. This process
shall continue until a candidate has agreed to serve.
11.02. Decision. The arbitrators shall consider
customary and standard practices in the life reinsurance business.
They shall decide by a majority vote of the arbitrators. There shall
be no appeal from their written decision. Judgment may be entered on
the decision of the arbitrators by any court having jurisdiction.
11.03. Expenses of Arbitration. Each party shall bear
the expense of its own arbitrator (whether selected by that party, or
by the other party pursuant to the procedures set out in Section
11.01) and related outside attorneys' fees, and shall equally bear
with the other party the expenses of the third arbitrator and of the
arbitration.
11.04. Site and Applicable Rules of Arbitration. Any
arbitration instituted pursuant to this Article shall be held in New
York, New York and, to the extent applicable, the Federal Arbitration
Act shall govern the interpretation and application of this Article.
11.05. Survival of Article. This Article shall survive
termination of this Agreement.
ARTICLE XII
REINSURING CLAUSE AND CONTRACTUAL CONDITIONS
12.01. Reinsuring Clause. The amount owed the Company
for any accounting period shall be the excess, if any, of Benefits less
Reinsurance Premiums, and the amount owed the Reinsurer for any
accounting period shall be the excess, if any, of Reinsurance Premiums
over Benefits. If such amounts cannot be determined at such date on an
exact basis, such payments may be determined on an estimated basis and
any final adjustments are to be made within twenty (20) Business Days
after the end of the Accounting Period.
12.02. Consideration. The performance of all promises of
one party shall be deemed the consideration for the performance of all
the promises of the other party.
12.03. Conditions Precedent. It is a condition precedent
to the Reinsurer's liability to pay any amount for the current or
future Monthly Settlements that the Company shall pay all amounts due
the Reinsurer from prior Monthly Settlements.
12.04 Utmost Good Faith. Both parties promise "utmost
good faith" and each is under the affirmative duty to report any
adverse information with respect to its solvency or with respect to the
particular facts which relate to the Reinsured Policies.
12.05. Recoupment and Failure of Consideration. If
either party to this Agreement fails to perform this Agreement in full,
then the other party has the right to suspend performance, and if the
defaults cannot be cured, within one hundred and twenty (120) days
following delivery of written notice from the non-defaulting party to
the defaulting party, to terminate this Agreement. Alternatively, the
non-defaulting party can recoup damages (including, without limitation,
the amount owed plus interest from the date owed and calculated at the
Chase Bank prime rate plus two points) from future Monthly
Settlements.
12.06. Gain or Loss Clause. The various items of
account (e.g., Reinsurance Premium and Benefits) shall not be deemed
to be separate debts but shall be used to determine the Monthly
Settlements.
12.07. No Waiver. The acceptance of the net accounting
reports and the sums due under this Agreement shall never constitute a
waiver by either party with regard to fraud or other rights.
12.08. Limitations on Assignment. No assignment of
rights or delegation of duties of the Company shall be effective unless
approved by the other party in writing, signed in duplicate.
Furthermore, such assignment shall not operate as a novation, but
merely as a delegation of duties, and the assignor shall remain liable
to the other party as a surety and such other party shall have no duties
to the assignee beyond that as specified in this Agreement.
ARTICLE XIII
EXECUTORY CONTRACT AND INSOLVENCY-SETOFF
13.01. Insolvency-Setoff (or Offset). In the event
either party to the Agreement shall be the subject of insolvency
proceedings ("Insolvency Proceedings") all independent debts on
unrelated contracts between the parties shall be setoff to the extent:
(a) the debt from the creditor to the insolvent arose
pre-petition.
(b) the debt from the insolvent to the creditor arose
pre-petition.
(c) the debts are mutual, meaning they are between the two
parties to this Agreement, and in the same right and the same capacity.
The cash payment due on each reinsurance agreement between the parties
shall constitute the "debt" on such agreement.
13.02. Adequate Assurance. In the event of Insolvency
Proceedings involving the Company, the Reinsurer's future performance
is conditioned on receiving adequate assurance of future performance,
as defined in the Uniform Commercial Code, 2-206, and the Official
Comments thereunder.
13.03. Ipso Facto Clause. If the receiver, including
any liquidator or rehabilitator, of one of the parties assigns the
rights or delegates the duties of this Agreement, and the assignee is
the subject of Insolvency Proceedings then the other party may
immediately terminate the Agreement without further performance.
13.04. Executory Contract. In the event either party to
the Agreement is the subject of Insolvency Proceedings, the receiver of
the insolvent, with respect to future Monthly Settlements, may affirm
or reject the Agreement, but not affirm the rewards and reject the
burdens. If this Agreement is neither affirmed nor rejected within one
hundred and twenty (120) days after a party becomes the subject of
Insolvency Proceedings, then the Agreement shall be deemed to be
rejected.
If either party is the subject of Insolvency Proceedings
other than liquidation proceedings, then the other party may request
adequate assurance of continued performance and the first priority
administrative expense with respect to future performance prior to the
time the Agreement is either affirmed or rejected, and if such is not
provided, then, after one hundred and twenty (120) days, the other
party may treat its future performance as terminated.
13.05. Insolvency Proceedings. For purposes of this
Agreement the term "Insolvency Proceedings" shall include, but not be
limited to, any action by a state insurance regulatory authority to
place a party in, or the actual commencement of, delinquency
proceedings, including conservatorship, receivership, rehabilitation,
reorganization, "adjustment of debts," "voluntary supervision," or
liquidation.
ARTICLE XIV
REPRESENTATIONS AND WARRANTIES
14.1. Representations and Warranties of the Company. The
Company hereby represents and warrants to the Reinsurer that:
14.1.a. The Company has made available to the
Reinsurer copies of all forms, applications, rates, and values with
respect to the policies and shall keep the Reinsurer promptly informed
with respect to any changes or modifications to such forms,
applications, or rates;
14.1.b. The Company is licensed in good standing in
all jurisdictions in which Reinsured Policies were issued or assumed
and all Policies are in full compliance with applicable laws,
regulations and rules. The Company has not been placed in, nor does it
have any reason to believe that it is about to be placed in
supervision, rehabilitation, receivership, revocation, suspension or
liquidation by any insurance department;
14.1.c. The Company is duly organized, validly
existing and in good standing under the laws of the State of Ohio, and
has all necessary corporate power and authority to entitle it to use its
name, to own, lease or otherwise hold its properties and assets, to
carry on its business as currently conducted, and to perform its
obligations;
14.1.d. The Reinsured Policies are in compliance
with all applicable requirements of law and are on forms approved in all
material respects by the appropriate governmental authorities except to
the extent that failure to be in compliance therewith does not have a
material adverse effect; and
14.1.e. Appropriate, reasonable and adequate
statutory reserves are being held by the Company in support of the
Reinsured Policies.
14.2. Representations and Warranties of the Reinsurer.
The Reinsurer hereby represents and warrants to the Company that:
14.2.a. The Reinsurer is duly organized, validly
existing and in good standing under the laws of its state of domicile,
and has all necessary corporate power and authority to entitle it to use
its name, to own, lease or otherwise hold its properties and assets, to
carry on its business as currently conducted, and to perform its
obligations; and
14.2.b. The Reinsurer is an authorized reinsurer in
the State of Ohio.
ARTICLE XV
CONDITIONS PRECEDENT
15.1. Conditions. The obligations of the Company and the
Reinsurer to consummate the transactions described hereunder are
expressly subject to:
15.1.a. On or before the Closing Date, except for
the assumption reinsurance contemplated under Article XVI hereunder,
the approvals of the insurance commissioners, directors, or
superintendents, as the case may be, of the insurance regulatory
authorities necessary for the consummation of the transactions
contemplated by the Agreement, and such approvals shall be in full
force and effect, and shall not impose upon either the Company or the
Reinsurer any material conditions or the requirements that would impose
upon either party any material additional costs;
15.1.b. On or before the Closing Date, the
Reinsurer having discovered no material errors, omissions or
liabilities previously undisclosed to it in the due diligence
investigation and documentation provided the Reinsurer by the Company
prior to the date hereof;
15.1.c. All of the representations and warranties
made by the parties hereto in Article XIV hereunder shall be true and
correct in all material respects on the date hereof and on the Closing
Date as if made on such date; and
15.1.d. On or before the Closing Date, each of the
parties obtaining full corporate power and authority to execute,
deliver and perform their respective obligations under this Agreement
and taking all necessary corporate and other action to authorize the
reinsurance of the Reinsured Policies under the terms of this
Agreement.
ARTICLE XVI
ASSUMPTION REINSURANCE
16.1. Conditions. Should any of the conditions outlined
below occur, the Reinsurer reserves the right to assumption reinsure
all covered policies. Such assumption shall take effect subject to the
terms of the Assumption Reinsurance Agreement executed and attached
hereto as Exhibit I:
16.1.a. The Company's total adjusted Risk Based
Capital becomes lower than 225% of the Company's authorized control
level and remains so for more than sixty (60) days;
16.1.b. Any state regulatory authority initiates
any proceeding against the Company on the ground that the Company is
impaired or insolvent or in hazardous financial condition;
16.1.c. The Company defaults on any obligation set
forth in this Agreement or any other contract or agreement to which it
is a party and fails to cure within ten (10) Business Days of receipt
of notice of such default;
16.1.d. The Company fails three (3) or more IRIS
ratios developed by the National Association of Insurance Commissioners
and utilized by any insurance regulatory authority;
16.1.e. The senior management team in place on the
Effective Date of this Agreement changes; or
16.1.f. The Company is technically insolvent or
admits in writing its inability to pay its debts as they mature.
ARTICLE XVII
INDEMNIFICATION
17.01. The Reinsurer. The Reinsurer hereby agrees on
demand to indemnify and hold harmless the Company and its respective
officers, directors and employees from and against any and all demands,
actions, proceedings, suits (by any person, entity or group,
including, without limitation, any governmental entity) and
liabilities, paid or incurred (including reasonable attorneys' fees),
resulting from or arising out of the breach of or failure to perform any
of the duties, obligations, covenants or agreements of the Reinsurer
contained in this Agreement.
17.02. The Company. The Company hereby agrees on
demand to indemnify and hold harmless the Reinsurer and its officers,
directors and employees from and against any and all demands, actions,
proceedings, suits (by any person, entity or group, including, without
limitation, any governmental entity) and liabilities, paid or incurred
(including reasonable attorneys' fees), resulting from or arising out
of the breach of or failure to perform any of the duties, obligations,
covenants or agreements of the Company contained in this Agreement.
17.03. Survival of Article. This Article shall survive
termination of this Agreement.
ARTICLE XVIII
ESTABLISHMENT OF AN ASSET TRUST
18.01. Asset Trust. If for any reason the Reinsurer
shall cease to be an authorized reinsurer in the Company's state of
domicile, or, if for any reason the Company is unable to offset its
primary reserve liability for the liabilities assumed by the Reinsurer
hereunder, then the Reinsurer shall place assets equal to the
liabilities assumed hereunder into a trust with provisions satisfactory
to the insurance regulators of the Company's state of domicile. Such
assets shall be satisfactory to such regulators.
ARTICLE XIX
MISCELLANEOUS PROVISIONS
19.01. Headings and Schedules. Headings used herein are
not a part of this Agreement and shall not affect the terms hereof.
The attached Schedules are a part of this Agreement.
19.02. Notices. All notices and communications hereunder
shall be in writing and shall be deemed to have been received three (3)
Business Days after mailing, or if by telefax or by hand, when
received, and if by overnight mail, on the next Business Day. Any
written notice shall be by either certified or registered mail, return
receipt requested, or overnight delivery service (providing for
delivery receipt) or delivered by hand. All notices or communications
with the Reinsurer under this Agreement shall be addressed as follows:
First International Life Insurance Company
c/o The Guardian Life Insurance Company of America
201 Park Avenue South
New York, New York 10003
Attention: Jeremy Starr
Telefax No.: (212) 598-8659
All notices and communications with the Company under this
Agreement shall be directed to:
Universal Guaranty Life Insurance Company
5250 South Sixth Street
Springfield, Illinois 62705-5147
Attention: James Melville
Telefax No.: (217) 786-4372
19.03. Severability. If any term or provision of this
Agreement shall be held void, illegal, or unenforceable, the validity
of the remaining portions or provisions shall not be affected thereby;
provided, however, that to the extent that such remaining portions or
provisions affect the economic positions of the parties hereunder, this
Agreement shall be amended by the parties so as to return the parties
to the economic positions that they would have been in had no such
severance occurred or so that both parties share the economic detriment
of such severance equally.
19.04. Successors and Assigns. This Agreement may not
be assigned by either party without the prior written consent of the
other. The provisions of this Agreement shall be binding upon and
inure to the benefit of and be enforceable by the parties hereto and
their respective successors and assigns as permitted herein.
19.05. Execution in Counterpart. This Agreement may be
executed by the parties hereto in any number of counterparts, and by
each of the parties hereto in separate counterparts, each of which
counterparts, when so executed and delivered, shall be deemed to be an
original, but all such counterparts shall together constitute but one
and the same instrument.
19.06. Currency. All payments and accounts shall be made
in United States Dollars, and all fractional amounts shall be rounded
to the nearest whole dollar. For the purposes of this Agreement, if
the Company receives premiums or pays Benefits in currencies other than
United States Dollars, such premiums and Benefits shall be converted
into United States Dollars at the actual rates of exchange at which
such premiums and Benefits are entered in the Company's books.
19.07. Amendments; Entire Agreement. This Agreement may
be amended only by written agreement of the parties. This Agreement,
the annexed Exhibit 1 and the Schedules, supersede all prior
discussions and written and oral agreements and constitute the sole and
entire agreement between the parties with respect to the subject matter
hereof.
19.08. Investigations. The Company will notify the
Reinsurer immediately, in writing, of any and all investigations of the
Company or its directors, principal officers or shareholders conducted
by any Federal, state or local governmental or regulatory agency other
than routine state insurance department examinations.
19.09. Governing Law and Forum. This Agreement shall be
governed by the laws of the State of New York, without giving effect to
the principles of conflicts of law thereof. Both parties hereunder
hereby irrevocably and unconditionally submit themselves to the
exclusive jurisdiction of the courts of the State of New York for any
actions, suits or proceedings of or relating to this Agreement and the
transactions contemplated thereby that cannot be resolved pursuant to
the provisions of Article XI hereof.
19.10. Interpretation. No provision of this Agreement
shall be construed against any party on the ground that such party
drafted the provision or caused it to be drafted.
19.11. Confidentiality. Except as required by law or
regulatory authority, neither the Company nor the Reinsurer shall
publicly disclose the purchase price or other terms of the transfer
proposed herein, but this restriction shall terminate if such price and
terms shall otherwise become public knowledge. In the event that the
Reinsurer or its representatives are requested or required by oral
questions, interrogatories, requests for information or documents,
subpoena, civil investigation, demand or similar process to disclose
any terms or information regarding the herein transfer it may disclose
any terms or information regarding such transfer provided, however,
that to the extent practicable under the circumstances the Reinsurer
shall give the Company reasonable notice of the order or request before
making the disclosure provided that such notice can be provided without
cost to the Reinsurer. The provisions of this Section 19.11 shall
survive termination of this Agreement.
IN WITNESS WHEREOF, the parties hereto have caused this
Agreement to be executed by their duly authorized representatives on
the date first above written.
UNIVERSAL GUARANTY LIFE
INSURANCE COMPANY
By: James E. Melville
Title: President
Date: 10/18/96
Attest:
By: Theodore C. Miller
Title: Vice President
Date: 10/18/96
FIRST INTERNATIONAL LIFE
INSURANCE COMPANY
By: Jeremy Starr
Title: Vice President, Reinsurance
Date: October 18, 1996
Attest:
By: Benjamin H. Mitchell
Title: Actuary
Date: October 18, 1996
<PAGE>
SCHEDULE A
ADMINISTRATIVE SERVICE AND STANDARDS
On and after the date hereof, the Company will continue to service
the Reinsured Policies by providing the following functions which shall
be performed by the Company in the same timely manner as currently
being performed and with the same diligence provided to the Company's
other policies:
Policy Service, Cash Loans and Cash Dividends, Change Dividend Option,
Address Change, Ownership Change, Assignment, Benefits Change,
Correspondence (to Policyholders), Coverage Changes and Conversions
(No Underwriting Required), Reinstatements, Cash Surrenders/Partial
Withdrawals, Coverage Changes and Conversions (Underwriting
Required), Claims, Noncontestable Life.
<PAGE>
A. Policy Service
1. Receipt and processing of Reinsured Policy service requests within
the Service Standards specified herein.
2. Updating of computer record and other files as needed to reflect
requested changes.
3. Preparation and mailing of Reinsured Policy annual statement to
Policyholder for applicable plans of insurance.
B. Policy Loan and Surrender Processing
1. Receipt and processing of loan and surrender requests.
2. Updating of computer record and other files as needed to reflect the
change.
3. Preparation and mailing of checks to Policyholders.
4. Generation and mailing of IRS 1099 forms to Policyholders when
applicable.
C. Claims Adjudication/Complaints
1. Adherence to applicable state fair claims settlement regulations.
2. Receipt, review, and processing of all complaints filed with respect
to the Reinsured Policies with the various Departments of
Insurance.
3. Oversee appropriate action to be taken with regard to a complaint
within guidelines established by the Reinsurer.
D. Accounting/Banking/Auditing
1. Providing of all accounting functions related to Reinsured Policy
administration for the Reinsured Policies being serviced.
2. Processing of all receipts, disbursements, and associated Reinsured
Policy related accounting transactions.
3. Preparation of daily accounting reports reflecting monetary
transactions (checks received, checks paid, monies deposited,
etc.).
4. Managing the appropriate bank accounts, including balancing and
editing of daily bank deposits.
5. Retention of system generated accounting and Reinsured Policy
transaction data and reports on a mutually agreed upon schedule.
6. Access to Reinsured Policy, and payment information as needed to
support the Reinsurer's and regulatory audits.
7. Providing of information of annual statement schedules in annual
statement format (for the information to which the Company has
access).
8. Providing of information with respect to state business pages of
Annual Statement, and any other information required to prepare
premium tax returns.
9. Prepare cash trial balances and accrual trial balances on business
assumed.
E. Financial Reporting
1. Performance of all functions necessary to support statutory
reporting. Preparation of accounting reports on Policies in blue
book format to be used by the Reinsurer.
2. Performance of all functions necessary to support other regulatory
reporting requirements on the Policies to include:
. IRS Form 1099 (Reinsured Policy related)
. Other Policyholders IRS reporting requirements.
3. Performance of all reasonable analyses to assure accuracy of reported
information at monthly, quarterly, and year-end periods.
4. Assist the Reinsurer in interfacing with the Company systems and
processing to allow the Reinsurer to consolidate reported
results.
5. Capacity to download certain information (to be defined by mutual
agreement of the parties) into a personal computer to allow the
Reinsurer to perform forecasting of future experience.
6. Provide necessary support for GAAP reporting purposes.
F. Actuarial
1. Determination of statutory reserves on a quarterly basis for the
Policies.
2. Determination of tax reserves quarterly in accordance with factors
determined by the Reinsurer. On an annual basis, the Company
will provide the required reserve reporting with appropriate
reserve schedules summarized for tax returns.
3. Preparation of the agreed upon annual statement schedules in annual
statement format (for the information to which the Company has
access).
4. General support of Policyholder administration.
G. Reinsurance Processing
1. Maintenance of required reinsurance records on Reinsured Policies.
2. Receipt, reconciliation, and payment of invoices from reinsurers
assuming risk on Policies.
H. Compliance
1. Monitoring statutes and regulations of the Departments of Insurance
in the various states in which the owners of Reinsured Policies
are located to ensure continued compliance.
2. Monitoring the statutes and regulations of the Department of
Insurance in the various states in which the owners of Reinsured
Policies are located to ensure that any communications required
by such regulations or statutes are implemented.
3. Responding to inquiries from the Departments of Insurance of the
various states in which the owners of Reinsured Policies are
located.
SCHEDULE B
EXPENSE ALLOWANCE
Expense Allowance = Base Allowance - Closing Interest
Base Allowance = P x Reserves and Liabilities +
Interest Adjustment Factor
Interest Adjustment Factor = $1,600,000 x (A - B)
Closing Interest = (Reserves and Liabilities - Policy Loans
on the Effective Date - Base Allowance)
x D x B/365
Where:
P = 23.7% for Paid-up permanent policies
43.4% for Paid-up term policies
23.0% for Dividends on deposit, endowments
on deposit and reserves on Paid-up
additions bought by Dividends
0.0% for provisions for policyholder
Dividends payable in the following year
100.0% for immediate payment of claim
reserves
A = 30 Year Treasury Rate on the Closing Date
B = 30 Year Treasury Rate on September 6, 1996
(which is 7.12%)
D = Calendar Days between Closing Date and
Effective Date
Records with:
First Character In-Force
"class base" Code
Paid-up Term
ETI A,N,T D
Other Term 4,5,8 B or C
Paid-up Permanent 1,2,3 B or C
Dividend Options amounts in any record
<PAGE>
SCHEDULE C
INITIAL REINSURANCE REPORT
1. In Force by Policy Form
i. Policy Count
ii. Amount Ceded
iii. Reserves
iv. Loans
2. Accounting Transaction - Initial Reinsurance
Consideration equals net of:
i. Due First International Life Insurance Company
Initial Reinsurance Premium
ii. Due Universal Guaranty Life Insurance Company
Expense Allowance
iii. Initial Reinsurance Consideration
= (i) - (ii)
<PAGE>
SCHEDULE D - PART I
MONTHLY PERIOD REINSURANCE REPORT
From First International Life Insurance Company
to Universal Guaranty Life Insurance Company
for the Month ending .
REINSURANCE PREMIUMS
1. Gross Premiums
2. a. Policy Loan Interest
b. Policy Loan Repayments
c. Other Amounts
d. YRT Premiums Payable
Subtotal (a + b + c - d)
3. Dividends
4. Administration Costs
5. Reinsurance Premiums
(1)+(2)-(3)-(4)
BENEFITS
1. Death Benefits (net of reinsurance)
2. Other Benefits under Death
Benefit Settlement Options
3. Surrender and Endowment
Payments to Policyholders
4. Policy Loans Made
5. Dividend withdrawals ( = 2c + 2d
from Schedule D - Part I (Continued))
6. Benefits = (1) + (2) + (3) + (4) + (5)
MONTHLY SETTLEMENT
Reinsurance Premiums received by the
Company - Benefits paid by the
Company
NOTE: If Positive, payment to the Reinsurer
If Negative, payment to the Company
<PAGE>
SCHEDULE D - PART I (Continued)
MONTHLY PERIOD REINSURANCE REPORT
1. Policy loans in force
2. a. Dividends on Deposit
Beginning of Period
b. Deposits made during
period
c. Withdrawal of
principle
d. Withdrawal of
interest
e. Dividends on Deposit
End of Period
3. Risk Based Capital
4. Number of IRIS Audits
failed (attach details)
<PAGE>
SCHEDULE D - PART II
QUARTERLY POLICY EXHIBIT
Policies
a. In force beginning of year
b. Increases
c. Deaths
d. Surrenders
e. Maturities
f. Lapse
g. Expirations
h. Decreases
i. In force end of period
j. Reserves (attach details by basis)
<PAGE>
SCHEDULE D - PART III
ANNUAL REPORTS
Analysis of Increase in Reserves
1. Reserve December 31 of prior year
2. Total Net Premiums
4. Tabular Interest
5. Tabular less Actual Reserves Released
11. Reserves Released by Other Termination (net)
12. Annuity, Supplementary contract, disability and accumulated
dividend payments
15. Reserves December 31 of current year
New York State Analysis of Reserves (Exhibit 8 with face amounts)
Total Industrial Ordinary Group
I. Annuities Res No. of Res. No. of Res. No. of Res. No. of
Pol. Pol. Pol. Pol.
A. Other than Co. Retirement Plan
B. Co. Retirement Plan
II. Supplemental Contracts
III. Deficiency and Miscellaneous Reserves
Tabular detail by Reinsured Policy showing age, sex, Reinsured Policy
number, annual income, reserve factor and reserves for all reserves
ceded on a coinsurance plan. Such detail shall be supplied in
duplicate in either paper, microfiche or machine readable. If the
latter is chosen, it must be formatted according to New York State
requirements.
Tax Reserves by Plan and Reserve Basis
DAC Charge Premiums by Plan
<PAGE>
SCHEDULE E
RECAPTURE PROVISIONS
Should the provisions of Section 9.06 be invoked, the following
accounting would transpire for policies being recaptured:
Due to Company:
A. Reserves on Recaptured
Policies on the Effective Date
Due to Reinsurer:
B. Recapture fee
Net Due
(A - B)
Where:
B = A x C
C = Appropriate percentage from chart below:
Years from
Effective Date* Permanent Dividend Option Term
0 23.7% 23% 43.4%
1 21 20 35
2 18 18 29
3 15 15 23
4 13 13 19
5 11 11 15
6 9 9 12
7 7 7 9
8 5 5 6
9 3 3 3
10 0 0 0
* Years from Effective Date represents the integral number of years
since September 30, 1996. Thus, any recapture occurring before
September 30, 1997 will use the factor from the row marked 0.
<PAGE>
SCHEDULE F
DAC TAX ELECTION
The Company and the Reinsurer hereby agree to the following pursuant to
Section 1.848-2(g)(8) of the Income Tax Regulations issued December
29, 1992, under Section 848 of the Internal Revenue Code 1986, as
amended. This election shall be effective for 1991 and all subsequent
taxable years for which this Agreement remains in effect.
a. The term "party" will refer to either the Company or the
Reinsurer as appropriate.
b. The terms used in this Schedule F are defined by
reference to Treasury Regulations Section 1.848-2 in
effect as of December 29, 1992.
c. The party with the net positive consideration for this
Agreement for each taxable year will capitalize
specified policy acquisition expenses with respect to
this Agreement without regard to the general deductions
limitation of IRC Section 848(c)(1).
d. Both parties agree to exchange information pertaining to
the amount of net consideration under this Agreement
each year to ensure consistency. The parties also agree
to exchange information which may be otherwise required
by the IRS.
e. The Company will submit a schedule to the Reinsurer by
April 1 of each year of its calculation of the net
consideration of the preceding calendar year. This
schedule will be accompanied by a statement signed by an
officer of the Company stating that the Company will
report such net consideration in its tax return for the
preceding calendar year.
f. The Reinsurer may contest such calculation by providing
an alternate calculation to the Company in writing
within 30 days of the Reinsurer's receipt of the
Company's calculation. If the Reinsurer does not so
notify the Company, the Reinsurer will report the net
consideration as determined by the Company in the
Reinsurer's tax return for the previous calendar year.
F-1
<PAGE>
g. If the Reinsurer contests the Company's calculation of
the net consideration, the parties will act in good
faith to reach an agreement as to the correct amount
within 30 days of the date the Reinsurer submits its
alternate calculation. If the Reinsurer and the Company
reach an agreement on an amount of net consideration,
each party shall report such amount in their respective
tax returns for the previous calendar year.
h. If the Company and the Reinsurer both disagree upon the
final net consideration then the parties shall seek a
remedy as set forth in Article XI of this Agreement.
F-2
<PAGE>
ASSUMPTION REINSURANCE AGREEMENT
between
UNIVERSAL GUARANTY LIFE INSURANCE COMPANY
and
FIRST INTERNATIONAL LIFE INSURANCE COMPANY
<PAGE>
TABLE OF CONTENTS
Page
ARTICLE I DEFINITIONS 1
ARTICLE II BUSINESS ASSUMED 3
ARTICLE III ASSUMPTION CERTIFICATES 5
ARTICLE IV GENERAL PROVISIONS 7
ARTICLE V CONSIDERATION FOR ASSUMPTION
REINSURANCE 10
ARTICLE VI DUTY OF COOPERATION 10
ARTICLE VII ARBITRATION 11
ARTICLE VIII INDEMNIFICATION 11
ARTICLE IX EXECUTORY CONTRACT AND INSOLVENCY-
SETOFF 12
ARTICLE X MISCELLANEOUS PROVISIONS 13
EXHIBITS
A Policyholder Notice
B Certificate of Assumption
C Notice of Objection to Assumption
<PAGE>
ASSUMPTION REINSURANCE AGREEMENT
This Assumption Reinsurance Agreement (the
"Assumption Agreement"), is made and entered into as of
September 30, 1996, by and between Universal Guaranty Life
Insurance Company, a life insurance company (the "Company"),
and First International Life Insurance Company, a life insurance
company (the "Reinsurer").
WHEREAS, the Company and the Reinsurer have
entered into a Coinsurance Agreement, as of the date hereof
(the "Coinsurance Agreement"), pursuant to which the Company
has agreed to cede to the Reinsurer, and the Reinsurer has
agreed to accept and indemnity reinsure, on a 100%
coinsurance basis, all of the Reserves and Liabilities (as
hereinafter defined), but not reserves for incurred but not
reported claims and immediate payment of claims, arising
under or with respect to the Reinsured Policies (as
hereinafter defined); and
WHEREAS, the Coinsurance Agreement provides that,
upon the occurrence of certain events as specified in
Article XVI therein, the Reinsurer shall have the right, in
its sole discretion, to elect to assumption reinsure the
Reinsured Policies, with a concurrent novation and complete
release of the Company from any liability under such
Reinsured Policies, on a state by state basis after the
Effective Date upon the receipt of any and all applicable
regulatory approvals and notice to relevant Policyholders
followed by expiration of the applicable period with no opt
out by such Policyholders or the obtaining of required
consents from such Policyholders, as the case may be, under
the terms and conditions set forth herein;
NOW THEREFORE, in consideration of the foregoing
and the mutual agreements set forth herein, the Company and
the Reinsurer mutually agree as follows:
ARTICLE I
DEFINITIONS
As used in this Assumption Agreement, the
following capitalized terms shall have the following
meanings (definitions are applicable to both the singular
and the plural forms of each term defined in this
Article I):
"ASSUMPTION DATE" shall have the meaning set forth
in Section 2.4.
"BUSINESS DAY" means any day other than a Saturday
or Sunday or a day on which banking institutions in the
States of New York, Ohio and Delaware are permitted or
obligated by law to be closed.
"CERTIFICATE OF ASSUMPTION" shall have the meaning
set forth in Section 3.1.
"COINSURANCE AGREEMENT" shall have the meaning set
forth in the first recital hereof.
"EFFECTIVE DATE" shall have the same meaning as in
the Coinsurance Agreement.
"EXTRA CONTRACTUAL LIABILITIES" shall have the
same meaning as in the Coinsurance Agreement.
"INSOLVENCY PROCEEDINGS" shall have the meaning
set forth in Section 9.5.
"NOTICE OF OBJECTION" shall have the meaning set
forth in Section 3.1.
"NOVATED POLICIES" means the Reinsured Policies
with respect to which no rejection of assumption has been
filed by a Policyholder pursuant to the terms of Section 3.2
of this Assumption Agreement (or with respect to which other
applicable regulatory requirements have been met), and with
respect to which the terms of Section 3.4 apply.
"PERSON" means any corporation, individual, joint
stock company, joint venture, partnership, unincorporated
association, governmental regulatory entity, country, state
or political subdivision thereof, trust or other entity.
"POLICYHOLDER" means a holder of a Reinsured
Policy.
"POLICYHOLDER NOTICE" shall have the meaning set
forth in Section 3.1.
"POLICY LOANS" shall have the same meaning as set
forth in the Coinsurance Agreement.
<PAGE>
"REINSURED POLICIES" means all paid-up insurance
policies, issued by the Company, that are in force on the
Effective Date, except policies offered in settlement to so
called "HIV" policyholders and paid-up business associated
with the Company's Jr./Sr. Plan Single Premium Interest
Sensitive Whole Life Policies, including, without
limitation, policy loans.
"RESERVES AND LIABILITIES" means the statutory
reserves held by the Company as of the Effective Date in
support of the policy liabilities arising under the
Reinsured Policies and payable after the Effective Date
(determined by reference to lines 1, 5, 7 and 8 on page 3 of
its 1995 Annual Statement Blank) less Policy Loans.
"REINSURANCE AGREEMENT" shall have the same
meaning as in the Coinsurance Agreement.
ARTICLE II
BUSINESS ASSUMED
2.1. COVERAGE. After the Effective Date and upon
the terms and subject to the conditions, including Section
XVI of the Coinsurance Agreement, and other provisions of
this Assumption Agreement and any required governmental and
regulatory consents and approvals, the Company, if requested
to do so by the Reinsurer, hereby agrees to cede to the
Reinsurer and the Reinsurer hereby agrees to accept and
reinsure, on an assumption basis, any Reinsured Policy.
Reinsurance pursuant to this Section 2.1 shall occur no less
frequently than on a monthly basis until all Reinsured
Policies have been assumed pursuant to the provisions of
Article III hereunder; provided, however, that reinsurance
may occur more frequently if the parties hereto agree.
2.2. EXCLUSIONS. This Assumption Agreement does
not apply to and specifically excludes from coverage any
Extra Contractual Liabilities. In addition, the Reinsurer
shall not assume, and shall be indemnified by the Company
for, all guaranty fund assessments and premium taxes or
similar charges imposed on or with respect to the Reinsured
Policies to the extent that such assessments, taxes or
charges are based on premiums remitted prior to the
Effective Date.
2.3. TRANSFER OF RESERVES. Notwithstanding the
provisions of Section 2.1 hereof, the Reinsurer will not be
<PAGE>
deemed to have accepted and reinsured, on an assumption
basis, any Reinsured Policy unless the Reserves and
Liabilities underlying such Reinsured Policy shall have been
ceded by the Company to the Reinsurer, and accepted by the
Reinsurer, pursuant to Article II of the Coinsurance
Agreement, effective as of the Effective Date.
2.4. ASSIGNMENT OF CEDED REINSURANCE.
(a) Regardless of whether reinsurance
novation agreements are entered into between the Reinsurer
and any reinsurer, the Reinsurer shall be substituted for
and succeed to all of the rights and liabilities of the
Company, and shall, as between the parties hereto, be
recognized for all purposes as the "Company" thereunder in
substitution for the Company, under any Reinsurance
Agreements in effect as of the date that the provisions of
Section 2.1 hereunder take effect (the "Assumption Date")
with any reinsurer relating to the Reinsured Policies. For
consideration which has already been provided for in Article
IV of the Coinsurance Agreement, as of the Assumption Date,
the Company shall assign, transfer and convey, and the
Reinsurer shall be bound by and assume, any and all rights
and obligations of the Company under any Reinsurance
Agreement including amounts held by or which may become due
from reinsurers for policy liabilities under the Reinsured
Policies or for benefits or other amounts paid by the
Company prior to the Assumption Date. The Company and the
Reinsurer shall use their best efforts to effect, as
promptly as possible, an endorsement to each Reinsurance
Agreement substituting the Reinsurer for the Company and to
amend the Ceded Reinsurance Agreement to comply with the
credit for reinsurance provisions of (i) the Delaware
Insurance Law and (ii) any other statute or regulation
applicable to the cession of reinsurance by foreign life
insurance companies. The Company agrees to enter into such
endorsements and, if reasonably requested by the Reinsurer,
aid the Reinsurer, at the Reinsurer's expense, in obtaining
any such endorsement.
(b) From the Assumption Date, the Company
hereby agrees that all amounts due the Reinsurer hereunder
pursuant to the Reinsurance Agreements shall be paid
directly to the Reinsurer by reinsurers and reinsurance
brokers. The Company shall, if reasonably requested by the
Reinsurer, aid the Reinsurer, at the Reinsurer's expense, in
collection of all amounts due from reinsurers. From the
Assumption Date, the collectibility of such reinsurance
<PAGE>
shall be the ultimate responsibility of the Reinsurer and
shall be at the risk and for the account of the Reinsurer in
the event such reinsurance is not collected.
(c) From the Assumption Date, the Reinsurer
shall have full power and authority as attorney-in-fact for
the Company to act for and on behalf of the Company with
respect to any and all letters of credit and trust funds
outstanding for the benefit of the Company pursuant to the
terms of any of the Reinsurance Agreements. The Company and
the Reinsurer shall, at the expense of the Reinsurer, each
use their best efforts to the extent mutually agreed to be
necessary, to cause the reinsurers of the Company under the
Reinsurance Agreements to post replacement letters of credit
or establish replacement trust funds to be issued or
established directly in favor and for the benefit of the
Reinsurer in the same or a greater amount and on terms
equally as favorable to the Reinsurer, unless the Reinsurer
shall otherwise consent. The Company agrees to transfer to
the Reinsurer all funds withheld from reinsurers under the
Reinsurance Agreements.
ARTICLE III
ASSUMPTION CERTIFICATES
3.1. POLICYHOLDER NOTICES. Upon the request of
the Reinsurer to reinsure, on an assumption basis, a
Reinsured Policy pursuant to Section 2.1 hereof, and to the
extent that the reinsurance of such Reinsured Policy is
permitted or approval therefore has been granted under
applicable laws, rules or regulations or positions of
insurance regulatory authorities, the Reinsurer shall
prepare, with the cooperation of the Company, a Policyholder
notice ("Policyholder Notice"), certificate of assumption
("Certificate of Assumption") and objection form ("Objection
Form"), and mail them to the Policyholder of such Reinsured
Policy. Subject to regulatory requirements of the various
states, the Policyholder Notices, Certificates of Assumption
and Objection Forms to be delivered to Policyholders
pursuant to this Section 3.1 shall be substantially in the
forms attached hereto as Exhibits A, B and C, respectively.
3.2. RIGHT TO OBJECT. Subject to regulatory
requirements of the various states, the Company and the
Reinsurer agree that a Policyholder will be allowed to
remain a Policyholder of the Company if such Policyholder
<PAGE>
refuses to effect the assumption of its Reinsured Policy in
accordance with this Article III during the applicable
period set forth in the Policyholder notice, and all of the
rights and obligations of the Company and the Policyholder
under such Reinsured Policy and of the Company and the
Reinsurer under the Coinsurance Agreement with respect to
such Reinsured Policy, shall remain the same.
3.3. NOVATED POLICIES. In the event that a
Reinsured Policy defined herein as a Novated Policy is
determined by applicable regulatory authorities or by
judicial decision (in either case, following the exhaustion
of all rights of appeal) not to have been novated, such
Reinsured Policy shall, for all purposes of this Assumption
Agreement, be deemed never to have been a Novated Policy.
Notwithstanding the foregoing, the fact that a Reinsured
Policy has not been or cannot be assumed and novated by the
Reinsurer pursuant to the terms and conditions of this
Assumption Agreement, for whatever reason, shall in no event
cause it not to be a Reinsured Policy under the Coinsurance
Agreement.
3.4. DIRECT OBLIGATIONS. The Reinsurer shall be
the successor to the Company under the Novated Policies as
if the Novated Policies were direct obligations originally
issued by the Reinsurer. The Reinsurer shall be substituted
in the place and stead of the Company, and each
Policyholder, insured or beneficiary under a Novated Policy
shall disregard the Company as a party thereto and treat the
Reinsurer as if it had been originally obligated thereunder.
Such Persons shall have the right to file claims or take
other actions under the Novated Policies on or after the
effective date of such novation directly with the Reinsurer,
and shall have a direct right of action for insurance
liabilities reinsured thereunder against the Reinsurer, and
the Reinsurer hereby consents to be subject to direct action
taken by any such Persons under a Novated Policy. The
Reinsurer accepts and assumes the Novated Policies subject
to any and all defenses, setoffs and counterclaims to which
the Company would be entitled with respect to such insurance
liabilities, it being expressly understood and agreed by the
parties hereto that no such defenses, setoffs or
counterclaims are waived by the execution of this Assumption
Agreement or the consummation of the transactions
contemplated hereby and that the Reinsurer shall be fully
subrogated to all such defenses, setoffs and counterclaims.
<PAGE>
3.5. RELEASE OF COMPANY; INDEMNITY. Upon the
consummation of the assumption reinsurance of a Reinsured
Policy from the Company to the Reinsurer under this
Reinsurance Agreement, the Company shall be released from
any and all liability, except for Extra Contractual
Liabilities, with respect to such Reinsured Policy. From
and after the consummation of the assumption reinsurance of
a Reinsured Policy pursuant to this Assumption Agreement,
the Reinsurer agrees to indemnify the Company for any and
all damages, costs and expenses, including reasonable legal
counsel fees and disbursements, arising out of, based upon
or relating to such Novated Policy; provided, however, that
the Reinsurer shall be under no obligation to indemnify the
Company for any Extra Contractual Liabilities.
ARTICLE IV
GENERAL PROVISIONS
4.1. POLICY ADMINISTRATION. To the extent that
such transfers have not already taken place pursuant to the
terms and conditions of the Coinsurance Agreement, the
Company agrees to cooperate fully with the Reinsurer in the
transfer of all books, records, papers or any other
documents relating to such Novated Policies.
4.2. BILLING AND COLLECTIONS. Effective on the
respective dates on which the novation of any Reinsured
Policy is effective, the Reinsurer shall have sole
responsibility for billing and collecting policy loan
repayments, interest and the making of payments of dividends
in respect of the Novated Policies, subject to the terms of
any administrative or other agreements between the parties
hereto that have been or heretofore may be entered into and
the terms of agreements between the Reinsurer and its agents
or subcontractors.
4.3. MISUNDERSTANDINGS AND OVERSIGHTS. If any
delay, omission, error or failure to pay amounts due or to
perform any other act required by this Assumption Agreement
is unintentional and caused by misunderstanding or
oversight, the Company and the Reinsurer will adjust the
situation to what it would have been had the
misunderstanding or oversight not occurred. The party first
discovering such misunderstanding or oversight, or act
resulting from the misunderstanding or oversight, will
notify the other party in writing promptly upon discovery
<PAGE>
thereof, and the parties shall act to correct such
misunderstanding or oversight within thirty (30) Business
Days of receipt of such notice. However, this Section shall
not be construed as a waiver by either party of its right to
enforce strictly the terms of this Assumption Agreement.
4.4. LITIGATION; CLAIMS. The Reinsurer shall be
responsible for the handling of, and all costs and expenses,
including legal fees, relating to, litigation or other
claims under the Novated Policies. Notwithstanding the
foregoing, the Reinsurer shall have no liability for such
costs and expenses to the extent they arise out of or are
based on any Extra Contractual Liabilities, and to the
extent that the Reinsurer incurs any such costs or expenses,
the Reinsurer shall be indemnified by the Company.
4.5. NON-COMPETE. The Company shall take no
action directly or indirectly to induce any Policyholder of
a Novated Policy to terminate, reinstate, lapse or exchange
such policy.
4.6. COMPLIANCE WITH APPLICABLE LAWS AND
REGULATIONS.
(a) INTENT OF PARTIES. It is the intention
of the parties that this Assumption Agreement shall be
interpreted in accordance with the laws as of the date of
execution hereof by both parties and comply with all
existing applicable state and federal laws and regulations,
and as from time to time are or may be in effect, in such a
way that the Reinsured Policies remain reinsured on the
coinsurance plan and contingent assumption plan.
(b) PROCEDURES TO REFLECT CHANGES IN LAWS OR
REGULATIONS. In the event that it is determined by an
insurance regulatory authority or the Internal Revenue
Service or by either party upon the advice of an insurance
regulatory authority or the Internal Revenue Service that
this Assumption Agreement fails to conform to the
requirements of existing applicable laws and regulations and
that the Assumption Agreement may be brought into conformity
with said requirements only by means of a material change to
the Assumption Agreement, or in the event that such laws or
regulations are changed subsequent to the Effective Date and
such change has a material adverse affect on either party or
requires a material change to the Assumption Agreement in
order for the Assumption Agreement to conform with
applicable laws and regulations, the parties shall exercise
<PAGE>
reasonable efforts to reach an agreement to amend the
Assumption Agreement so as to return the parties to the
economic position that they would have been in had no such
change occurred or so that both parties share the economic
position that they would have been in had no such change
occurred or so that both parties share the economic
detriment of such change equally. If the parties are unable
to reach an agreement to amend the Assumption Agreement,
then the differences between the parties shall be resolved
through arbitration in accordance with the provisions of
Article VII. In the event that any change required to
conform the Assumption Agreement to the requirements of
applicable law or regulation is not material, the Assumption
Agreement shall be amended accordingly. In no event,
however, shall this provision prevent either party from
exercising any right it otherwise has under this Assumption
Agreement. For purposes of this Section 4.6(b), the word
"material" shall mean, when used with respect to (i) any
change in law or regulation, or any change into the
Assumption Agreement necessary to bring the Assumption
Agreement into conformity with the requirements of any law
or regulation; or (ii) any delay, omission, error or failure
to pay amounts due or to perform any other act required
under this Assumption Agreement; or (iii) any default, that
the effect or effects of any of (i), (ii) or (iii) above
(either individually or cumulatively) results in a deviation
from a projected return under this Assumption Agreement
(absent the occurrence of (i), (ii) or (III) above, either
individually or cumulatively) by at least five percent (5%),
measured from the first day that the occurrence of (i), (ii)
or (iii) above, or series thereof, taken into account on a
cumulative basis, occurred or becomes effective.
(c) NOTIFICATION OF DISAPPROVAL OR CHANGE IN
LAW. The Company shall promptly notify the Reinsurer of any
disapprovals, recommended changes or statements regarding
the Assumption Agreement that are made by any insurance or
tax regulatory authorities and of any change in law,
regulation or rulings affecting this Assumption Agreement.
The Reinsurer shall be allowed to make its own defense of
the Assumption Agreement with said authorities.
4.7. RECOUPMENT AND FAILURE OF CONSIDERATION. If
either party to this Assumption Agreement fails to perform
this Assumption Agreement in full, then the other party has
the right to suspend performance, and if the defaults cannot
be cured, within one hundred and twenty (120) days following
delivery of written notice from the non-defaulting party to
<PAGE>
the defaulting party, to terminate this Assumption
Agreement. Alternatively, the non-defaulting party can
recoup damages (including, without limitation, the amount
owed plus interest from the date owed and calculated at the
Chase Bank prime rate plus two points) from future
settlements between the parties.
ARTICLE V
CONSIDERATION FOR ASSUMPTION REINSURANCE
5.1 CONSIDERATION. The consideration provided
for in Article IV of the Coinsurance Agreement shall be the
consideration for the assumption of the Novated Policies (as
direct obligations) by the Reinsurer, and there shall be no
additional consideration or premium due or payable under
this Assumption Agreement.
ARTICLE VI
DUTY OF COOPERATION
6.1. DUTY OF COOPERATION. Each party hereto
shall cooperate fully with the other in all reasonable
respects in order to accomplish the objectives of this
Assumption Agreement. This duty to cooperate shall include
obtaining the governmental and regulatory consents and
approvals and taking the other steps necessary for the
assumption of the Reinsured Policies, as described in
Article III hereof. In addition, this duty to cooperate
shall include making available any Reinsured Policy records
which either party subsequently may require to resolve
issues related to claims or liabilities. The Company and
the Reinsurer agree to perform such additional acts and
execute such additional documents and agreements as may be
necessary or desirable to carry out the purposes and
objectives of this Assumption Agreement; provided however,
that Reinsurer shall reimburse the Company for reasonable
out-of-pocket expenses incurred by the Company.
<PAGE>
ARTICLE VII
ARBITRATION
7.1. GENERAL. Any dispute or difference between
the parties with respect to the operation or interpretation
of, or arising from or relating to, this Assumption
Agreement on which an amicable understanding cannot be
reached shall be decided pursuant to and in accordance with
the terms, conditions and procedures set forth in Article XI
of the Coinsurance Agreement.
7.2. SURVIVAL. This Article shall survive
termination of this Assumption Agreement.
ARTICLE VIII
INDEMNIFICATION
8.1. THE COMPANY. The Company hereby agrees on
demand to indemnify and hold harmless the Reinsurer, and its
respective officers, directors and employees from and
against any and all demands, actions, proceedings, suits (by
any Person) and liabilities, paid or incurred (including
reasonable attorneys' fees), resulting from or arising out
of the breach of or failure to perform any of the duties,
obligations, covenants or agreements of the Company
contained in this Assumption Agreement.
8.2. THE REINSURER. The Reinsurer hereby agrees
to indemnify and hold harmless the Company, and its
respective officers, directors and employees from and
against any and all demands, actions, proceedings, suits (by
any Person) and liabilities, paid or incurred (including
reasonable attorneys' fees), resulting from or arising out
of the breach of or failure to perform any of the duties,
obligations, covenants or agreements of the Reinsurer
contained in this Assumption Agreement.
8.3. SURVIVAL OF ARTICLE. This Article shall
survive termination of this Assumption Agreement.
<PAGE>
ARTICLE IX
EXECUTORY CONTRACT AND INSOLVENCY-SETOFF
9.1. INSOLVENCY-SETOFF (OR OFFSET). In the event
either party to the Assumption Agreement shall be the
subject of insolvency proceedings ("Insolvency Proceedings")
all independent debts on unrelated contracts between the
parties shall be setoff to the extent:
(a) the debt from the creditor to the insolvent arose
pre-petition.
(b) the debt from the insolvent to the creditor arose
pre-petition.
(c) the debts are mutual, meaning they are between the
two parties to this Assumption Agreement, and in the same
right and the same capacity.
The cash payment due on each reinsurance agreement between
the parties shall constitute the "debt" on such agreement.
9.2. ADEQUATE ASSURANCE. In the event of
Insolvency Proceedings involving the Company, the
Reinsurer's future performance is conditioned on receiving
adequate assurance of future performance, as defined in the
Uniform Commercial Code, Section 2-206, and the Official Comments
thereunder.
9.3. IPSO FACTO CLAUSE. If the receiver,
including any liquidator or rehabilitator, of one of the
parties assigns the rights or delegates the duties of this
Assumption Agreement, and the assignee is the subject of
Insolvency Proceedings then the other party may immediately
terminate the Assumption Agreement without further
performance.
9.4. EXECUTORY CONTRACT. In the event either
party to the Assumption Agreement is the subject of
Insolvency Proceedings the receiver of the insolvent, with
respect to future account settlements, may affirm or reject
the Assumption Agreement, but not affirm the rewards and
reject the burdens. If this Assumption Agreement is neither
affirmed nor rejected within one hundred and twenty (120)
days after a party becomes the subject of Insolvency
Proceedings, then the Assumption Agreement shall be deemed
to be rejected.
<PAGE>
If either party is the subject of Insolvency
Proceedings other than liquidation proceedings, then the
other party may request adequate assurance of continued
performance and the first priority administrative expense
with respect to future performance prior to the time the
Assumption Agreement is either affirmed or rejected, and if
such is not provided, then, after one hundred and twenty
(120) days, the other party may treat its future performance
as canceled.
9.5. INSOLVENCY PROCEEDINGS. For purposes of this Assumption
Agreement the term "Insolvency Proceedings" shall include, but not be
limited to, any action by a state insurance regulatory authority to
place a party in, or the actual commencement of, delinquency
proceedings, including conservatorship, receivership, rehabilitation,
reorganization, "adjustment of debts," "voluntary supervision," or
liquidation.
ARTICLE X
MISCELLANEOUS PROVISIONS
10.1. NO THIRD PARTY BENEFICIARIES. This Assumption Agreement is
between the Company and the Reinsurer, and the performance of the
obligations of each party under this Assumption Agreement shall be
rendered solely to the other party. In no instance shall anyone
other than the Company or the Reinsurer, or their successors or
permitted assigns, have any rights, benefits or remedies under this
Assumption Agreement. Until the Reinsurer has reinsured a Reinsured
Policy on an assumption reinsurance basis pursuant to this Assumption
Reinsurance Agreement, the Reinsurer shall not be liable to any
insured, contract owner, or beneficiary under any Reinsured Policy.
10.2. HEADINGS AND EXHIBIT. Headings used herein are inserted solely
for the convenience of reference and are not a part of this Assumption
Agreement and shall not affect the terms hereof. The attached Exhibits
are part of this Assumption Agreement.
10.3. NOTICES. All notices and communications hereunder shall be in
writing and shall be deemed to have been received three (3) Business
Days after mailing, or if by telefax or by hand, when received, and
if by overnight mail, on the next Business Day. Any written notice
shall be by either certified or registered mail, return receipt
requested, or overnight delivery service (providing for delivery
receipt) or delivered by hand. All notices or communications with
the Reinsurer under this Assumption Agreement shall be addressed as
follows:
First International Life Insurance Company
c/o The Guardian Life Insurance Company of America
201 Park Avenue South
New York, New York 10003
Attention: Jeremy Starr
Telefax No.: (212) 598-8659
All notices and communications with the Company under this Assumption
Agreement shall be directed to:
Universal Guaranty Life Insurance Company
5250 South Sixth Street
Springfield, Illinois 62750-5147
Attention: James Melville
Telefax No.: (217) 786-4372
10.4. SEVERABILITY. If any term or provision of this Assumption
Agreement shall be held void, illegal, or unenforceable, the validity
of the remaining portions or provisions of this Assumption Agreement
shall not be affected thereby; PROVIDED, HOWEVER, that to the extent
that such remaining portions or provisions affect the economic
positions of the parties hereunder, this Assumption Agreement shall
be amended by the parties so as to return the parties to the economic
positions that they would have been in had no such severance occurred
or so that both parties share the economic detriment of such severance
equally.
10.5. ASSIGNMENT. This Assumption Agreement may not be assigned by
either party without the prior written consent of the other and any
attempted assignment without such consent shall be void.
10.6. SUCCESSORS AND ASSIGNS. The provisions of this Assumption
Agreement shall be binding upon and inure to the benefit of and
be enforceablel by the parties hereto and their respective successors
and permitted assigns.
10.7. EXECUTION IN COUNTERPARTS. This Assumption Agreement may be
executed by the parties hereto in any number of counterparts, and by
each of the parties hereto in separate counterparts, each of which
counterparts, when so executed and delivered, shall be deemed to be
an original, but all such counterparts shall together constitute but
one and the same instrument.
10.8. AMENDMENTS. This Assumption Agreement may be amended only by
written amendment hereto executed by the parties.
10.9. WAIVER. The failure of the Company or Reinsurer to insist on
strict compliance with this Assumption Agreement, or to exercise any
right or remedy under this Assumption Agreement, shall not constitute
a waiver of any rights provided under this Reinsurance Agreement, nor
stop the parties from thereafter demanding full and complete compliance
nor prevent the parties from exercising such a right or remedy in the
future.
10.10. INTERPRETATION. No provision of this Assumption Agreement
shall be construed against any party on the ground that such party
drafted the provision or caused it to be drafted.
10.11. ENTIRE AGREEMENT. This Assumption Agreement and the
Coinsurance Agreement constitute the sole and entire agreement and
understanding between the parties hereto, and supersedes all prior
agreements, whether oral or written, between the parties, with respect
to the subject matter hereof.
10.12. GOVERNING LAW AND FORUM. This Assumption Agreement shall be
governed by the laws of the State of New York, without giving effect
to principles of conflicts of law thereof. Both parties hereby
irrevocably and unconditionally submit themselves to the exclusive
jurisdiction of the Courts of the State of New York for any actions,
suits or proceedings of or relating to this Assumption Agreement and
the transactions contemplated thereby that cannot be resolved pursuant
to the provisions or Article VII hereof.
10.13. CONFIDENTIALITY. Except as required by law or regulatory
authority, neither the Company nor the Reinsurer shall publicly
disclose the purchase price or other terms of the transfer proposed
herein, but this restriction shall terminate if such price and terms
shall otherwise become public knowledge. In the event that the
Reinsurer or its representative are requested or required by oral
questions, interrogatories, requests for information or documents,
subpoena, civil investigation, demand or similar process to disclose
any terms or information regarding such transfer it may disclose any
terms or information regarding such transfer provided, however, that
to the extent practicable under the circumstances the Reinsurer shall
give the Company reasonable notice of the order or request before
making the disclosure provided that such notice can be provided with
out cost to the Reinsurer. This Section 10.13 shall survive
termination of this Assumption Agreement and the Coinsurance Agreement.
<PAGE>
NCE AGREEMENT
Between
UNIVERSAL GUARANTY LIFE INSURANCE COMPANY
hereinafter referred to as "the Company"
and
FIRST INTERNATIONAL LIFE INSURANCE COMPANY
hereinafter referred to as "the Reinsurer"
WHEREAS, the Company and the Reinsurer have made
and entered into a Coinsurance Agreement dated as of
September 30, 1996 (the "Agreement"); and
WHEREAS, the Company and the Reinsurer wish to
amend certain provisions of the Agreement;
NOW, THEREFORE, in consideration of the mutual
agreements, promises and covenants provided herein, the
Company and the Reinsurer hereby agree to amend the
Agreement as follows:
SECTION 1.-DEFINITIONS
All terms used in this Amendment shall be subject
to the definitions provided in the Agreement.
The definition of Reinsured Policies in Article I
shall be replaced with the following:
""REINSURED POLICIES" means all paid-up
life insurance and, if attached thereto, annuity
policies, contracts, binders or certificates of
insurance, and all riders, endorsements and amendments
thereto, whether written or oral, issued or assumed by
the Company, that are in force on the Effective Date,
except those offered in settlement to so called "HIV"
policyholders and paid-up business associated with the
Company's Jr./Sr. Plan Single Premium Interest
Sensitive Whole Life policies, including, without
limitation, Policy Loans, all such Reinsured Policies
being set forth in Schedule G, attached hereto."
The definition of Closing Date in
Article I shall be replaced with the following:
<PAGE>
""CLOSING DATE" shall be December 6,
1996, unless all of the conditions in Article XV
hereunder have not been satisfied prior to such date,
in which event it shall be that date ten (10) Business
Days following receipt of notice from the Company to
the Reinsurer that all of the conditions in Article XV
hereunder have been satisfied."
SECTION 2.-TABLE OF CONTENTS
Add to the Table of Contents "SCHEDULE G -
LIST OF REINSURED POLICIES" at page G-1.
SECTION 3.-SCHEDULE G
Add to the Agreement a new "SCHEDULE G" as
attached hereto.
SECTION 4.-INITIAL REINSURANCE CONSIDERATION
Section 4.01 of the Agreement is to be replaced with the
following:
"4.01. INITIAL REINSURANCE CONSIDERATION. On
the Closing Date, as consideration for the assumption
by the Reinsurer of the Reserves and Liabilities under
the Reinsured Policies, the Company shall transfer to
the Reinsurer cash in an amount equal to one hundred
percent (100%) of the Reserves and Liabilities, which
excludes all claim liabilities, as of the Effective
Date (the "Initial Reinsurance Premium"), less the
Expense Allowance described in Article V below (such
net amount being the "Initial Reinsurance
Consideration" as described in Schedule C attached
hereto). Such Initial Reinsurance Premium (shown on
Schedule C) shall be subject to further and final
adjustment as follows: (1) within ninety (90) days
after the Closing Date, the Reinsurer shall send a
notice to the Company advising the Company of the final
valuation of the Initial Reinsurance Premium, and (2)
the Company shall then have five (5) Business Days from
receipt of the aforementioned notice to make an
adjustment to the cash amount it transferred to the
Reinsurer on the Closing Date, in order to reflect the
final valuation of the Initial Reinsurance
Consideration pursuant to this Section 4.01."
<PAGE>
SECTION 5.-DEATH BENEFITS AND OTHER PAYMENTS
Section 6.01 of the Agreement is to be
replaced with the following:
"6.01. DEATH, ANNUITY BENEFITS AND PAYMENTS
UNDER SETTLEMENT OPTIONS. The Reinsurer shall assume
liability for, subject to Section 2.03, all death
benefits, all annuity benefits, all periodic or lump
sum payments on settlement options or withdrawals from
Dividends on deposit, and all surrender and endorsement
payments to Policyholders with respect to Reinsured
Policies (such death benefits, annuity benefits and
other payments are referred to collectively as
"Benefits"), and shall indemnify the Company with
respect to any such Benefits paid by the Company
incurred after the Effective Date."
SECTION 6.-ARTICLE VII
Article VII of the Agreement is to be
replaced with the following:
"NON-GUARANTEED ELEMENTS
7.01. PARTICIPATION. The Reinsurer shall
participate in the excess interest credited, dividends
and coupon ("Dividends") scales in effect on the
Effective Date of this Agreement. Should the Company
desire to change said scales, it shall do so only upon
the consent of the Reinsurer, which shall not be
unreasonably withheld. The Reinsurer shall only
reimburse those Dividends that are incurred after the
Effective Date. The Reinsurer may also make
recommendations about a change in the Dividend scales.
Article 7.02. OPTIONS. The Reinsurer shall
participate in all Dividend options provided under the
Reinsured Policies."
SECTION 7.-SCHEDULE A
Substitute the term "Reinsured Policies" for the
term "Policies" in paragraphs E.1., E.2. and F.1. of
Schedule A.
<PAGE>
SECTION 8.-SCHEDULE B
Substitute the Schedule B attached hereto as
Schedule B to the Agreement.
SECTION 9.-COUNTERPARTS
This Amendment to the Agreement may be executed in
several counterparts and each shall have the same force and
effect as an original.
SECTION 10.-REPLACEMENTS
Add a new Section 9.07 as follows:
"9.07. REPLACEMENTS. The replacement of any
Reinsured Contract, pursuant to any program of replacement
initiated by the Company or any Person acting on behalf or
in the place of the Company, including any receiver,
liquidator or rehabilitator, shall be considered as a
recaptured contract and not a surrender unless the
reinsurance provided by the Reinsurer hereunder is continued
for the new contract. Any contracts so surrendered and
deemed recaptured shall be treated in accordance with the
recapture terms in Schedule E."
SECTION 11.-EFFECT
Except as amended herein, the Agreement,
together with all Schedules and Exhibits, remains in full
force and effect.
IN WITNESS WHEREOF, UNIVERSAL GUARANTY LIFE
INSURANCE COMPANY and FIRST INTERNATIONAL LIFE INSURANCE
COMPANY have by their respective officers made and entered
into this Amendment as of the 30th day of September, 1996.
UNIVERSAL GUARANTY LIFE FIRST INTERNATIONAL LIFE
INSURANCE COMPANY INSURANCE COMPANY
James E. Melville Jeremy Starr
By By
President Vice President, Reinsurance
Title Title
<PAGE>
SCHEDULE B
EXPENSE ALLOWANCE
Expense Allowance = Base Allowance - Closing Interest
Base Allowance = P x Reserves and Liabilities +
Interest Adjustment Factor
Interest Adjustment Factor = $1,600,000 x (A - B)
Closing Interest = (Reserves and Liabilities - Policy Loans
on the Effective Date - Base Allowance)
x D x B/365
Where:
P = 23.7% for Paid-up permanent policies
43.4% for Paid-up term policies
23.0% for Dividends on deposit, endowments
on deposit and reserves on Paid-up
additions bought by Dividends
0.0% for provisions for policyholder
Dividends payable in the following year
100.0% for immediate payment of claim
reserves
3.0% for Annuities
A = 30 Year Treasury Rate in effect three (3)
Business Days prior to the Closing Date
B = 30 Year Treasury Rate on September 6, 1996
(which is 7.12%)
D = Calendar Days between Closing Date and
Effective Date
Records with:
First Character In-Force
"class base" Code
Paid-up Term
ETI A,N,T D
Other Term 4,5,8 B or C
Paid-up Permanent 1,2,3 B or C
Dividend Options amounts in any record
Annuities D,F,S amounts in any record
<PAGE>
SCHEDULE G
LIST OF REINSURED POLICIES
[A completed Schedule G will be prepared by the Reinsurer
and provided under separate cover]
<PAGE>
AMENDMENT
to
ASSUMPTION REINSURANCE AGREEMENT
Between
UNIVERSAL GUARANTY LIFE INSURANCE COMPANY
hereinafter referred to as "the Company"
and
FIRST INTERNATIONAL LIFE INSURANCE COMPANY
hereinafter referred to as "the Reinsurer"
WHEREAS, the Company and the Reinsurer have made and
entered into an Assumption Reinsurance Agreement dated as of
September 30, 1996 (the "Assumption Agreement"); and
WHEREAS, the Company and the Reinsurer wish to amend
certain provisions of the Assumption Agreement;
NOW, THEREFORE, in consideration of the mutual
agreements, promises and covenants provided herein, the
Company and the Reinsurer hereby agree to amend the
Assumption Agreement as follows:
SECTION 1.-DEFINITIONS
All terms used in this Amendment shall be subject to
the definitions provided in the Assumption Agreement.
The definition of Reinsured Policies in Article I shall
be replaced with the following:
""REINSURED POLICIES" means all paid-up life
insurance and, if attached thereto, annuity policies,
contracts, binders or certificates of insurance, and
all riders, endorsements and amendments thereto,
whether written or oral, issued or assumed by the
Company, that are in force on the Effective Date,
except those offered in settlement to so called "HIV"
policyholders and paid-up business associated with the
Company's Jr./Sr. Plan Single Premium Interest
Sensitive Whole Life policies, including, without
limitation, Policy Loans, all such Reinsured Policies
being set forth in Schedule G of the Coinsurance
Agreement."
<PAGE>
SECTION 2.-COUNTERPARTS
This Amendment to the Assumption Agreement may be
executed in several counterparts and each shall have the
same force and effect as an original.
SECTION 3.-EFFECT
Except as amended herein, the Assumption
Agreement, together with all Exhibits, remains in full force
and effect.
IN WITNESS WHEREOF, UNIVERSAL GUARANTY LIFE INSURANCE
COMPANY and FIRST INTERNATIONAL LIFE INSURANCE COMPANY have
by their respective officers made and entered into this
Amendment as of the 30th day of September, 1996.
UNIVERSAL GUARANTY LIFE FIRST INTERNATIONAL LIFE
INSURANCE COMPANY INSURANCE COMPANY
James E. Melville Jeremy Starr
By By
President Vice President, Reinsurance
Title Title
<PAGE>
SECOND AMENDMENT
to
ASSUMPTION REINSURANCE AGREEMENT
Between
UNIVERSAL GUARANTY LIFE INSURANCE COMPANY
hereinafter referred to as "the Company"
and
FIRST INTERNATIONAL LIFE INSURANCE COMPANY
hereinafter referred to as "the Reinsurer"
WHEREAS, the Company and the Reinsurer have made and
entered into an Assumption Reinsurance Agreement dated as of
September 30, 1996 (the "Assumption Agreement"); and
WHEREAS, the Company and the Reinsurer have made and
entered into an Amendment to the Assumption Agreement dated
as of September 30, 1996; and
WHEREAS, the Company and the Reinsurer wish hereby to
further amend the Assumption Agreement;
NOW, THEREFORE, in consideration of the mutual
agreements, promises and covenants provided herein, the
Company and the Reinsurer hereby agree to amend the
Assumption Agreement as follows:
SECTION 1.-REGULATORY CONSENTS AND APPROVALS
Section 2.1 of the Assumption Agreement is to be
replaced with the following:
"Section 2.1. COVERAGE. After the Effective Date
and upon the terms and conditions, including Article
XVI of the Coinsurance Agreement, and other provisions
of this Assumption Agreement and any required
governmental and regulatory consents and approvals,
including consent and approval by the State of Ohio,
the Company, if requested to do so by the Reinsurer,
hereby agrees to cede to the Reinsurer and the
Reinsurer hereby agrees to accept and reinsure, on an
assumption basis, any Reinsured Policy. Reinsurance
pursuant to this Section 2.1 shall occur no less
frequently than on a monthly basis until all Reinsured
Policies have been assumed pursuant to the provisions
of Article III hereunder; provided, however, that
<PAGE>
reinsurance may occur more frequently if the parties
hereto agree."
SECTION 2.-COUNTERPARTS
This Second Amendment to the Assumption Agreement
may be executed in several counterparts and each shall have
the same force and effect as an original.
SECTION 3.-EFFECT
Except as amended herein, the Assumption
Agreement, together with all Exhibits, remains in full force
and effect.
IN WITNESS WHEREOF, UNIVERSAL GUARANTY LIFE INSURANCE
COMPANY and FIRST INTERNATIONAL LIFE INSURANCE COMPANY have
by their respective officers made and entered into this
Second Amendment as of the 5th day of December, 1996.
UNIVERSAL GUARANTY LIFE FIRST INTERNATIONAL LIFE
INSURANCE COMPANY INSURANCE COMPANY
James E. Melville Jeremy Starr
By By
President Vice President, Reinsurance
Title Title
