SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 AND 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarter Ended June 30, 1995 Commission File No. 0-16867
UNITED TRUST, INC.
(Exact Name of Registrant as specified in its Charter)
Illinois 37-1172848
(State or other jurisdiction (I.R.S. Employer
incorporation or organization) Identification No.)
P.O. Box 5147, Springfield, Illinois 62705
(Address of principal executive offices) (Zip Code)
Registrant's telephone number including area code: (217) 786-4300
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or such shorter period that the
Registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
YES X NO
Indicate the number of shares outstanding of each of the Registrant's classes
of common stock, as of the latest practicable date.
Shares outstanding at July 31, 1995: 18,675,935
Common stock, no par value per share
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UNITED TRUST, INC.
(the "Company")
INDEX
Part I: Financial Information
Consolidated Balance Sheets - June 30, 1995 and
December 31, 1994. . . . . . . . . . . . . . . . . . . . 3
Consolidated Statements of Operations for the six
months and three months ended June 30, 1995 and 1994 . . 4
Consolidated Statements of Cash Flows for the six months
ended June 30, 1995 and 1994 . . . . . . . . .. . . . . 5
Notes to Financial Statements . . . . . . . . . . . . . 6
Management's Discussion and Analysis of
Financial Condition and Results of Operations. . . . . . 13
Part II: Other Information
Legal Proceedings. . . . . . . . . . . . . . . . . . . . 22
Signatures . . . . . . . . . . . . . . . . . . . . . . . 23
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PART 1. FINANCIAL INFORMATION
Item 1. Financial Statements
UNITED TRUST, INC.AND SUBSIDIARIES
Consolidated Balance Sheets
<TABLE>
June 30, December 31,
ASSETS 1995 1994
<S> <C> <C>
Investments:
Fixed maturities at amortized cost
(market $188,728,849 and $172,822,882) $ 187,358,497 $ 184,590,646
Equity securities, at market
(cost $1,246,164 and $395,846) 1,893,471 911,012
Mortgage loans on real estate at
amortized cost 14,783,086 15,822,056
Investment real estate, at cost,
net of accumulated depreciation 11,985,784 11,737,847
Real estate acquired in satisfaction ofdebt,
at cost, net of accumulated depreciation 5,334,774 5,620,101
Policy loans 16,153,036 16,338,632
Short term investments 450,000 350,000
Investments held for sale at market
(cost $3,154,238 and$3,450,273) 3,140,821 3,337,672
241,099,469 238,707,966
Cash and cash equivalents 12,013,790 11,697,067
Investment in affiliates 5,692,283 5,161,034
Indebtedness of affiliates, net 74,329 67,865
Accrued investment income 3,582,197 3,500,585
Reinsurance receivables:
Future policy benefits 13,156,379 12,818,658
Unpaid policy claims and benefits 1,282,143 975,613
Paid policy claims and benefits 562,087 125,355
Other accounts and notes receivable 417,743 694,773
Cost of insurance acquired 51,978,154 53,324,051
Deferred policy acquisition costs 10,778,602 10,634,476
Value of agency force acquired 15,151,389 15,489,946
Costs in excess of net assets purchased,
less accumulated amortization 9,854,574 9,992,621
Other assets 1,433,790 1,068,820
TOTAL ASSETS $ 367,076,929 $ 364,258,830
LIABILITIES AND SHAREHOLDERS' EQUITY
Policy liabilities and accruals:
Future policy benefits $ 239,931,492 $ 234,875,800
Policy claims and benefits payable 4,692,575 3,207,014
Other policyholder funds 2,934,135 3,124,851
Dividend and endowment accumulations 11,644,429 11,106,903
Income taxes payable 205,846 237,846
Deferred income taxes 21,009,704 22,035,873
Notes payable 21,450,381 22,053,289
Other liabilities 5,028,709 6,200,879
TOTAL LIABILITIES 306,897,271 302,842,455
Minority interests in consolidated subsidiaries 38,699,865 39,547,280
SHAREHOLDERS' EQUITY
Common stock - no par value, stated value
$.02 per share. Authorized 35,000,000 shares -
18,675,935 shares issued after deducting
treasury shares of 423,840 373,519 373,119
Additional paid-in capital 18,288,410 18,276,311
Unrealized depreciation of equity securities
and investments held for sale of affiliates (34,648) (143,405)
Retained earnings 2,852,512 3,363,070
TOTAL SHAREHOLDERS' EQUITY 21,479,793 21,869,095
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 367,076,929 $ 364,258,830
</TABLE>
See accompanying notes.
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UNITED TRUST, INC.
AND SUBSIDIARIES
Consolidated Statements of Operations
<TABLE>
Three Months Ended Six Months Ended
June 30, June 30, June 30, June 30,
1995 1994 1995 1994
<S> <C> <C> <C> <C>
Revenues:
Premium income $ 9,294,974 $ 9,986,229 $19,117,662 $20,368,327
Reinsurance premium (1,314,929) (716,003) (2,434,285) (2,727,355)
Other considerations 833,667 753,613 1,627,323 1,530,912
Other considerations
paid to reinsurers (47,908) (11,984) (99,674) (117,554)
Net investment income 3,843,518 3,556,633 7,693,679 6,923,628
Realized investment
gains (losses) (61,239) 212,393 7,268 (212,414)
Other income 385,287 271,547 715,868 532,765
12,933,370 14,052,428 26,627,841 26,298,309
Benefits and expenses:
Benefits, claims and settlement expenses:
Life 8,933,564 7,234,663 15,671,639 13,908,341
Annuity 522,337 (213,852) 951,157 156,824
Reinsurance benefits
and claims (1,438,270) (448,937) (1,654,816) (1,503,849)
Dividends to policyholders 1,096,302 924,891 2,243,783 1,863,192
Commissions and amortization
of deferred policy
acquisition costs 1,960,458 1,300,645 3,516,984 1,941,848
Amortization of cost of
insurance acquired 675,860 2,655,931 1,345,897 3,557,884
Amortization of agency force 168,902 142,524 338,557 285,050
Operating expenses 2,492,689 1,898,048 5,696,906 4,264,774
Interest expense 460,889 491,128 953,061 955,140
14,872,731 13,985,041 29,063,168 25,429,204
Income (loss) before income taxes
and minority interest (1,939,361) 67,387 (2,435,327) 869,105
Credit (provision) for
income taxes 324,218 239,514 1,026,169 26,469
Minority interest in income of
consolidated subsidiaries 1,082,694 129,756 1,014,968 (545,642)
Equity in earnings (loss)
of investees (157,153) (553,806) (116,368) (871,103)
Net income (loss) $ (689,602) $ (117,149) $ (510,558) $ (521,171)
Net income (loss)
per common share $ (0.04) $ (0.01) $ (0.03) $ (0.03)
Average common
shares outstanding 18,685,935 18,664,830 18,680,963 18,664,830
</TABLE>
See accompanying notes.
4
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UNITED TRUST, INC.
AND SUBSIDIARIES
Consolidated Statements of Cash Flows
<TABLE>
June 30, June 30,
1995 1994
<S>
Increase (decrease) incash and cash equivalents <C> <C>
Cash flows from operating activities:
Net income (loss) $ (510,558) $ (521,171)
Adjustments to reconcile net income (loss) to net
cash provided (used) by operating activities
net of changes in assets and liabilities resulting
from the sales and purchases of subsidiaries:
Charges for mortality and administration of
universal life and annuity products (4,891,143) (4,912,438)
Change in policy liabilities 4,269,592 725,428
Change in reinsurance receivables (1,080,983) 3,765,456
Amortization of cost of insurance acquired 1,345,897 3,557,884
Amortization of goodwill, net 138,047 142,500
Minority interest (1,014,968) 545,642
Equity in earnings of investees 116,368 871,103
Change in accrued investment income (81,612) (415,233)
Depreciation 286,136 357,975
Change in federal income tax liability (1,058,169) 7,317
Realized (gains) losses (7,268) 212,414
Policy acquisition costs deferred (1,363,000) (2,452,509)
Amortization of deferred acquisition costs 1,507,126 523,563
Amortization of value of agency force 338,557 285,050
Change in indebtedness of affiliates, net (6,464) (596,855)
Premiums, operating receivables, commissions,
general expenses, and other assets
and liabilities (1,959,773) (159,449)
Net cash provided by (used in) operating activities (3,972,215) 1,936,677
Cash flows from investing activities:
Proceeds from investments sold and matured:
Investments held for sale matured 101,849 0
Fixed maturities sold 0 0
Fixed maturities matured 5,163,959 17,600,291
Equity securities 104,260 0
Mortgage loans 1,371,424 2,955,240
Real estate 485,169 1,063,504
Policy loans 2,312,670 2,376,424
Short term 200,000 653,856
Total proceeds from investments sold and matured 9,739,331 24,649,315
Cost of investments acquired:
Investments held for sale
Fixed maturities (8,244,414) (41,346,057)
Equity securities (1,000,000) 0
Mortgage loans (332,454) (4,881,871)
Real estate (531,435) (1,955,749)
Policy loans (2,148,796) (2,107,582)
Short term (100,000) (325,000)
Total cost of investments acquired (12,357,099) (50,616,259)
Cash of subsidiary at date of sale 0 (3,134,343)
Cash received in sale of subsidiary 0 3,978,586
Net cash used in investing activities (2,617,768) (25,122,701)
Cash flows from financing activities:
Policyholder contract deposits 12,999,801 12,902,084
Policyholder contract withdrawals (8,719,786) (10,402,430)
Interest credited to account balances 3,229,599 3,137,773
Payments on principal of notes (602,908) (2,822)
Net cash provided by financing activities 6,906,706 5,634,605
Net increase (decrease) in cash and cash equivalents 316,723 (17,551,419)
Cash and cash equivalents at beginning of year 11,697,067 32,303,668
Cash and cash equivalents at end of year $ 12,013,790 $ 14,752,249
</TABLE>
See accompanying notes
5
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UNITED TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The accompanying consolidated financial statements have been prepared by
United Trust, Inc. ("Trust") and its consolidated subsidiaries (the "Company")
pursuant to the rules and regulations of the Securities and Exchange
Commission. Although the Company believes the disclosures are adequate to
make the information presented not be misleading, it is suggested that these
consolidated financial statements be read in conjunction with the consolidated
financial statements and the notes thereto presented in the Company's Annual
Report on Form 10-K filed with the Securities and Exchange Commission for the
year ended December 31, 1994.
The information furnished reflects, in the opinion of the Company, all
adjustments (which include only normal and recurring accruals) necessary for a
fair presentation of the results of operations for the periods presented.
Operating results for interim periods are not necessarily indicative of
operating results to be expected for the year or of the Company's future
financial condition.
At June 30, 1995, the parent, significant subsidiaries and affiliates of
United Trust, Inc. were as depicted on the following organizational chart.
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ORGANIZATIONAL CHART
AS OF JUNE 30, 1995
United Trust, Inc. ("UTI") is the ultimate controlling company. UTI owns53%of
United Trust Group ("UTG") and 30% of United Income, Inc. ("UII"). UII
owns 47% of UTG. UTG owns 69% of Commonwealth Industries Corporation ("CIC"),
47% of First Commonwealth Corporation ("FCC"), 33% of Universal Guaranty
Investment Company ("UGIC"), and 18% of Investors Trust, Inc. ("ITI"). CIC
owns 42% of ITI. ITI owns 35% of UGIC. UGIC owns 49.959% of FCC. FCC owns
100% of Universal Guaranty Life Insurance Company ("UG") and 21% of ITI. UG
owns 100% of United Security Assurance Company ("USA"). USA owns 84% of
Appalachian Life Insurance Company ("APPL") and APPL owns 100% of Abraham
Lincoln Insurance Company ("ABE").
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2. FIXED MATURITIES AND INVESTMENTS HELD FOR SALE
As of June 30, 1995, fixed maturities and investments held for sale
represented 79% of total invested assets. As prescribed by the various state
insurance department statutes and regulations, the insurance companies'
investment portfolio is required to be invested primarily in investment grade
securities to provide ample protection for policyholders. The liabilities of
the insurance companies are predominantly long term in nature and therefore,
the companies invest primarily in long term fixed maturity investments. The
Company has analyzed its fixed maturities portfolio and reclassified those
securities expected to be sold prior to maturity as investments held for sale.
The investments held for sale are carried at market. Management has the
intent and ability to hold its fixed maturity portfolio to maturity and as
such carries these securities at amortized cost. As of June 30, 1995, the
carrying value of fixed maturity securities in default as to principal or
interest was immaterial in the context of consolidated assets or shareholders'
equity.
3. MORTGAGE LOANS AND REAL ESTATE
The Company holds approximately $14,783,000 in mortgage loans and $17,321,000
in real estate holdings which represent 4% and 5% of the total assets of the
Company, respectively. All mortgage loans held by the Company are first
position loans. The Company has $652,000 in mortgage loans net of a $22,000
reserve allowance, which are in default or in the process of foreclosure
representing approximately 5% of the total portfolio. The Company has 2
loans for approximately $51,000 which are under a repayment plan. Letters are
sent to each mortgagee when the loan becomes 30 days or more delinquent.
Loans 90 days or more delinquent are placed on a non-performing status and
classified as delinquent loans. Reserves for loan losses on delinquent loans
are established based on management's analysis of the loan balances and what
is believed to be the realizable value of the property should foreclosure take
place. Loans are placed on a non-accrual status based on a quarterly case by
case analysis of the likelihood of repayment.
The following tables show the distribution of mortgage loans and real estate
by type.
Mortgage loans Amount % of Total
FHA/VA $ 830,790 6%
Commercial $ 3,474,066 23%
Residential $ 10,478,230 71%
Real Estate Amount % of Total
Home Office $ 3,156,942 18%
Commercial $ 2,193,060 13%
Residential development $ 6,635,782 38%
Foreclosed real estate $ 5,334,774 31%
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4. LONG-TERM DEBT
At June 30, 1995, the Company has $21,450,000 in long term debt outstanding.
The debt is comprised of the following components:
Senior debt $ 11,400,000
Subordinated 10 yr. notes 6,494,000
Subordinated 20 yr. notes 3,530,000
Encumbrance on real estate 26,000
$ 21,450,000
The senior debt is comprised of participations of several lenders. Interest
is based on 1% above the lead bank's base rate and is payable quarterly. The
1995 principal payment of $2,900,000 was prepaid $2,000,000 in December 1994
and $900,000 in March 1995. The next scheduled principal payment is not due
until June 1996. Principal reductions are due June 1 of each year.
The subordinated debt was incurred June 16, 1992 as a part of the acquisition
of CIC. The 10 year notes bear interest at the rate of 7 1/2% per annum,
payable semi-annually beginning December 16, 1992. These notes provide for
principal payments equal to 1/20th of the principal balance due with each
interest installment beginning June 16, 1997, with a final payment due June
16, 2002. The 20 year notes bear interest at the rate of 8 1/2% per annum,
payable semi-annually beginning December 16, 1992, with a lump sum principal
payment due June 16, 2012.
Scheduled principal reductions on the Company's debt for the next five years
are as follows:
Year Amount
1995 $ 0
1996 3,900,000
1997 4,549,000
1998 3,249,000
1999 649,000
5. COMMITMENTS AND CONTINGENCIES
During the third quarter of 1994, the Company became aware that certain new
insurance business was being solicited by certain agents of UG and issued to
individuals considered to be not insurable by Company standards. These
policies had a face amount of $22,700,000 and represent less than 1/2 of 1% of
the insurance in force of the Company. Management's analysis of the business
in force indicates that the expected death claims on the business in force to
be adequately covered by the mortality assumptions inherent in thecalculation
of statutory reserves. Nevertheless, management has determinedit is in the
best interest of the Company to attempt to acquire as many ofthe policies as
possible. As of July 31, 1995, there remained approximately $6,800,000 of the
original face amount whith the Company has either determined to have bad health
or not yet contacted by the Company regarding a possible repurchase of the
insurance policy.
9
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During 1994, the Company authorized $1,250,000 for the acquisition of these
policies. At December 31, 1994, the Company had $227,961 remaining for the
purchase of these policies. Through June 30, 1995, the Company spent an
additional $876,000 for the purchase of the policies and legal costs.
Freeman v. Universal Guaranty Life Insurance Company (U.S.D.C., N.D. Ga, 1994,
1-94-CV-2593-RCF); Tappan v. Universal Guaranty Life Insurance Company and
James Melville (U.S.D.C., M.D. Fla, 1994, 94-1044-CIV-ORL-18); Armstrong v.
Universal Guaranty Life Insurance Company and James Melville (Circuit Court of
Davidson County, Tenn., 1994, 94C3222); Armstrong v. Universal Guaranty Life
Insurance Company and James Melville (Circuit Court of Davidson County, Tenn.,
1994, 94C3720); Ridings v. Universal Guaranty Life Insurance Company and James
Melville (Circuit Court of Davidson County, Tenn., 1994, 94C3221); Ronald L.
Mekkes, Jr. v. Universal Guaranty Life Insurance Company and James Melville,
(Circuit Court of Kent County, Michigan, 1995, 95-1073-NZ).
Four general agents of UG filed independent suits against UG in the latter
part of September or early October, 1994. Kathy Armstrong (3-94-1085),
another general agent, filed her suit on November 16, 1994. Ronald L. Mekkes,
Jr., a general agent, filed a suit on March 15, 1995. All of the suits allege
that the plaintiff was libeled by statements made in a letter sent by UG. The
letter was sent to persons who had been issued life insurance policies by UG
as the result of policy applications submitted by the five agents. Mr.
Melville is a defendant in some of the suits because he signed the letter as
president of UG. In addition to the defamation count, Mr. Freeman and Ms.
Tappan allege that UG also breached a contract with each of them by failing to
pay them commissions for policies issued. Mr. Freeman claims unpaid
commissions of $104,000 and Ms. Tappan's commission claim is for an
unspecified amount. In the libel claim, Mr. Freeman claimscompensatory
damages of over $5,000,000 punitive damages of over$3,000,000, costs, and
litigation expenses. The other plaintiffs requestthe award of unspecified
compensatory damages and punitive (or special) damages as well as costs and
attorney's fees. UG has filed Answers to all five of these suits asserting
various defenses and, where appropriate,counterclaims. UG believes that it
has no liability to any of the plaintiffs and intends to defend each of the
suits vigorously. On August 1, 1995, the Tappan suit was dismissed with
prejudice.
Terl, et al. v. Universal Guaranty Life Insurance Company (U.S.D.C., M.D.
Fla., 1995, 94-1236-CIV-ORL-19).
A lawsuit was filed against UG on November 23, 1994 on behalf of five insureds
and a potential class of other insureds. The plaintiffs allege that UG
violated the Racketeer Influenced and Corrupt Organizations Act. The
plaintiffs contend they were fraudulently induced by misrepresentations on the
part of UG to purchase, and in some instances to surrender, policies of
insurance. The plaintiffs contend that UG knew it would never honor the terms
of the policies and was attempting to achieve short-term profits by willfully
targeting high risk applicants. The plaintiffs seek damages, including treble
damages, in excess of $50,000, exclusive of interest and costs, and other
equitable relief. UG filed an Answer to this class action suit in February,
1995, asserting various defenses and reserving the right to assert
counterclaims. This lawsuit was settled during the first quarter of 1995.
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S.D., et al. v. Universal Guaranty Life Insurance Company. (U.S.D.C., N.D.
Ga., 1995, 195-CV-0454-GET).
A lawsuit was filed against UG in February, 1995 on behalf of four applicants
for insurance and a potential class of other applicants. The plaintiffs
alleged that UG violated Title III of the Americans With Disabilities Act of
1990 (the "ADA") by discriminating against the plaintiffs in connection with
the issuance of insurance policies by requiring the plaintiffs to submit
additional medical evidence not required of others.
The plaintiffs allege that UG's requirement of a blood test violated the ADA
by discriminating against each of the plaintiffs of the basis of a perceived
disability which resulted in the denial of an insurance policy.
In addition to the ADA violation, plaintiffs allege a violation of Georgia
Insurance Regulations with regard to procedures for obtaining information
regarding an applicant's HIV/AIDS status.
The plaintiffs seek relief in the form of requiring UG to reopen the
plaintiffs' insurance applications and process those applications, enjoining
UG from requiring blood tests from the plaintiffs, directing UG to issue life
insurance policies as applied for, and awarding the plaintiffs and other class
members costs, expenses, and reasonable attorneys' fees pursuant to Title III
of the ADA.
UG has filed an Answer to this potential class action. UG believes that it
has no liability to any of the plaintiffs, or other potential class members,
and intends to defend the lawsuit vigorously. In June 1995, summary judgment
was granted to dismiss the case.
Jeffrey Ploskonka, Keith Bohn and Paul Phinney v. Universal Guaranty Life
Insurance Company (Circuit Court of the Seventh Judicial Circuit Sangamon
County, Illinois Case No.: 95-L-0213)
On March 9, 1995 a lawsuit was filed against Universal Guaranty Life Insurance
on behalf of three insureds and a potential class of other insureds. The
Plaintiffs allege that UG violated the insurance contract in attempting to
cancel life insurance contracts. Additionally, the Plaintiffs assert
violations of Illinois law alleging vexations and unreasonable insurance
practices, breach of duty of good faith and fair dealing, and that Illinois
consumer fraud laws have been violated. The Plaintiffs seek unspecified
compensatory damages, injunctive relief, attorneys' fees, statutory damages in
an amount up to $25,000.00, punitive damages of $1,000,000.00, and other
equitable relief. UG filed an Answer to this lawsuit in May 1995, asserting
various defenses and reserving the right to assert counterclaims. UG has also
filed motions to dismiss certain allegations and claims made in the lawsuit.
UG believes it has no liability to any of the plaintiffs, or other potential
class members, and intends to defend the lawsuit vigorously. In June 1995,
the court conditionally certified a class of non-settling insureds.
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The Company and its subsidiaries are named as defendants in a number of legal
actions arising primarily from claims made under insurance policies. Those
actions have been considered in establishing the Company's liabilities.
Management and its legal counsel are of the opinion that the settlement of
those actions will not have a material adverse effect on the Company's
financial position or results of operations.
The number of insurance companies that are under regulatory supervision has
increased, and that increase is expected to result in an increase in
assessments by state guarantee funds to cover losses to policyholders of
insolvent or rehabilitated companies. Those mandatory assessments may be
partially recovered through a reduction in future premium taxes in some
states. For all assessment notifications received, the Company has accrued
for those assessments.
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Item 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The purpose of this section is to discuss and analyze the Company's financial
condition, changes in financial condition and results of operations which
reflect the performance of the Company. The information in the consolidated
financial statements and related notes should be read in conjunction with this
section.
LIQUIDITY AND CAPITAL RESOURCES:
HOLDING COMPANY OPERATIONS
The payment of cash dividends to shareholders by UTI is not legally
restricted. At June 30, 1995 and December 31, 1994, substantially all of
consolidated stockholders' equity of UTI represented net assets of its
subsidiaries. UTI has limited day to day operations of its own. Cash
requirements of UTI primarily relate to the payment of expenses related to
maintaining the Company as a corporation in good standing with the various
regulatory bodies which govern corporations in the jurisdictions where the
Company does business. UTI is able to meet its cash needs through its
management agreement with UII, income received on invested assets and cash
balances. 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,
1994, UG had a statutory gain from operations of $1,621,000. At December 31,
1994, UG statutory capital and surplus amounted to $7,683,000. Extraordinary
dividends (amounts in excess of ordinary dividend limitations) require prior
approval of the insurance commissioner and are not restricted to a specific
calculation as to amount.
The Company's Senior Debt bears interest at a variable per annum rate equal to
1% over the variable per annum rate of interest most recently announced by the
First Bank of Missouri as its "Base Rate". As of June 30, 1995, the interest
rate on the senior debt had increased to 10% compared to 7% one year ago. On
December 2, 1994, the Company prepaid $2,000,000 of the $2,900,000 scheduled
principal payment due June 1, 1995. On March 1, 1995, the Company prepaid the
remaining $900,000 of the June 1, 1995 scheduled principal payment. The next
scheduled principal payment is not due until June 1, 1996. The principal
amount of the Company Senior Debt to outside parties was $11,300,000 and
$10,700,000 at December 31, 1994, and June 30, 1995, respectively.
Management believes that it will be able to continue to service this debt in
the future.
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INSURANCE OPERATIONS
The primary sources of liquidity for the insurance subsidiaries include their
operating cash flows, financing cash flows, dividends, and short-term
investments, which principally consist of certificates of deposit.
The net cash used in investing activities equalled $2,618,000 during the first
six months of 1995, compared to $25,123,000 as of June 30, 1994. As of June
30, 1995, the Company has $12,014,000 in cash and cash equivalents, which
represents 3% of total assets.
Other principal sources of liquidity available to the Company are invested
assets. Sources available are $450,000 of short-term investments, $3,141,00
of investments held for sale at market and $1,893,000 of equity securities.
Other sources are maturities of the fixed maturity portfolio. As of June 30,
1995, the Company had $5,164,000 of fixed maturities matured compared to
$17,600,000 in the same period one year ago.
The principal requirement for liquidity in connection with the Company's
insurance operations is its contractual obligations to policyholders and
annuitants, including payments of surrender benefits, policyholder dividends,
claims under outstanding insurance policies and annuities, and policy loans.
Policyholder surrender benefits totalled $8,928,000 as of June 30, 1995, and
$9,386,000 as of June 30, 1994. The Company believes that it maintains
adequate liquidity to pay anticipated benefits and claims to policyholders and
annuitants.
The Company had net cash provided by (used in) operating activities of
$(3,972,000) and $1,937,000 as of June 30, 1995 and 1994, respectively. The
net cash provided by (used in) operating activities, interest credited to
account balances and net policyholder contract deposits ofthe Company's
insurance subsidiaries after the payment of policyholderwithdrawals, equalled
$3,537,000 and $7,574,000 as June 30, 1995 and 1994, respectively. This
measurement of cash flow indicates the performance of the Company's insurance
operations as well as the Company's universal life production. The decrease
in 1995 compared to 1994 is due to a decline infirst year premium production.
Policy acquisition costs deferred decreased significantly when comparing the
first six months of 1995 to 1994. The decrease is due to two factors. The
decline in first year production as was discussed in the operating activities
of the Company. The decline is also the result of a change in the commission
structure. The commission structure was changed in reference to the products
that are being marketed currently compared to the first six months of 1994.
Management believes that the overall sources of liquidity available to the
Company will continue to be more than sufficient to satisfy its financial
obligations and operating expenses.
14
<PAGE>
RESULTS OF OPERATIONS
Year-to-date 1995 compared to 1994:
(a) Revenues:
Revenues increased slightly during first six months of 1995 compared to the
same period of one year ago. The increase in net investment income
contributed significantly to the increase in revenues.
Premium income, net of reinsurance, decreased 5% during the first six months
of 1995 compared to the same period of 1994. The decrease in premium income
was expected by management. In late 1994, the Company discontinued marketing
the traditional and interest sensitive whole life products. The Company is
currently marketing three universal life insurance products. Universal life
insurance products contribute only cost of insurance charges to the premium
income line item.
Other considerations, net of reinsurance, consisting of administrative loads
charged on interest sensitive whole life and universal life products,
increased 8% for the first six months of 1995 compared to first six months of
1994. The Company is currently marketing three universal life products. In
late 1994, the Company discontinued marketing the traditional whole life and
interest sensitive whole life insurance products.
Net investment income increased 11% during the first six months of 1995
compared to the same period one year ago. The increase is attributable to the
Company investing a significant portion of its cash and cash equivalents
in long term fixed maturities and mortgage loans during March and April of 1994.
The Company's investments are generally managed to match related insurance and
contract holder liabilities. The overall annualized gross investment yields
as of first quarter 1995 and 1994, are 7.18% and 7.20%, respectively. The
comparison of investment return with insurance or investment product crediting
rates establishes an interest spread. Minimum interest spreads between earned
and credited rates are 1% to 1.5%. The Company continually assesses
investment yields, and when necessary takes action to reduce credited interest
rates on its insurance products to preserve targeted spreads. Credited rates
are established by the Board of Directors. Over 60% of the insurance and
investment product reserves are crediting 5% or less in interest and 39% of
the insurance and investment product reserves are crediting 5.25% to 6% in
interest. It is expected that the monitoring of the interest spreads by
management will provide the necessary margin to adequately provide for
associated costs on insurance policies that the Company has in force and will
write in the future.
The Company realized $7,000 of investment gains during the first six months of
1995 compared to realized investment losses of $212,000 in the same period in
1994. The realized investment gains in 1995 is attributable to three fixed
maturities that were written-off in prior periods but the Company was able to
recover full face value. The realized investment gains were offset by
realized investment losses that were attributable to securities in the bond
portfolio that were called by the issuer prior to maturity.
15
<PAGE>
(b) Expenses:
Expenses increased 14% during the first six months of 1995, compared to the
same period in 1994. The increase in expenses is due to the increase in
commissions and amortization of deferred policy acquisition costs and
operating expenses.
Life benefits and reinsurance benefits and claims increased 13% for first six
months of 1995, compared to the same period in 1994. A factor that is
contributing to decrease life and annuity benefits is that the Company in
1994, lowered the interest rates credited on its interest sensitive, universal
life and annuity products to a 6% interest rate. This has resulted in a lower
reserve increase on these products than was experienced in the prior year as a
lower interest rate is being credited to the policies involved. The life
insurance and annuity products are continuing to credit interest at 6% in
1995. By maintaining the credited interest rates at 6%, it has enabled the
Company to achieve larger interest spreads.
There are several factors that contributed to increase life benefits. The
first factor is that the Company's mortality experience increased $1,420,000
in the current period compared to the previous year.
The second factor is that during the third quarter of 1994, UG became aware
that certain new insurance business was being solicited by certain agents and
issued to individuals considered to be not insurable by Company standards.
These policies had a face amount of $22,700,000 and represent less than 1/2 of
1% of the insurance in force of the Company. Management's analysis of the
business in force indicates that the expected death claims on the business in
force to be adequately covered by the mortality assumptions inherent in the
calculation of statutory reserves. Nevertheless, management has determined it
is in the best interest of the Company to attempt to acquireas many of the
policies as possible. As of July 31, 1995, there remained policies which
represented $6,800,000 of the original face amount of these policies which the
Company has either determined that the insurer has bad health or the owners
have not yet been contacted by the Company regarding a possible repurchase of
the insurance policy.
During 1994, the Company authorized $1,250,000 for the acquisition of these
policies. At December 31, 1994, the Company had $227,961 remaining for the
purchase of these policies. Through June 30, 1995, the Company paid an
additional $447,000 for the acquisition of these policies and $429,000 in
legal fees that is reported in the general expense line item.
Dividends to policyholders increased 20% for first six months of 1995 compared
to the same period for 1994. USA continued to market participating policies
through most of 1994. Management expects dividends to policyholders will
continue to increase in the future. A portion of the Company's insurance in
force is participating insurance. A significant portion of the participating
business is relatively newer business. The dividend scale for participating
policies increases significantly in the early years. The dividend scale is
subject to approval of the Board of Directors and may be changed at their
discretion. The Company no longer markets any participating policies.
16
<PAGE>
Commissions and amortization of deferred policy acquisition costs increased
significantly for the first six months of 1995 compared to the same period of
1994. The products that are currently being marketed are designed differently
than the products offered one year ago. The current products do not defer as
much acquisition costs for future periods.
Operating expenses increased 34% for the period. There are several factors
that are contributing to the increase in operating expenses. Through June 30,
1995, the Company paid $429,000 in legal fees for the acquisition of certain
policies and the defense of related legal issues. Please refer to the notes
to the consolidated financial statements and the analysis of life benefits
expense in the management's discussion and analysis for a detailed
explanation.
Management continues its efforts to reduce operating costs and streamline
operations. The Company was able to streamline its operations by reducing the
number of companies through a series of mergers and the sale of F&R. As of
June 30, 1995, the Company controls four insurance companies.
Interest expense decreased slightly when comparing 1995 to 1994. The interest
rate on the senior debt is the prime interest rate plus an additional 1% of
interest. As of June 30, 1995, the interest rate on the senior debt had
increased to 10% compared to 7% one year ago. The Company has reduced its
senior debt $2,900,000 within the last twelve months.
(c) Net (loss) income:
The Company recorded net losses of $511,000 during the first six months of
1995 compared to $521,000 for the same period in 1994. The slight improvement
in results is attributable to the increase in net investment income.
Second quarter 1995 compared to second quarter 1994:
(a) Revenues:
Revenues decreased 8% during second quarter 1995 compared to second quarter
1994. The decrease in premium income contributed significantly to the
decrease in revenues.
Premium income, net of reinsurance, decreased 14% during the second quarter of
1995 compared to the second quarter of 1994. The decrease in premium income
was expected by management. In late 1994, the Company discontinued marketing
the traditional and interest sensitive whole life products. The Company is
currently marketing three universal life insurance products. Universal life
insurance products contribute only cost of insurance charges to the premium
income line item.
Other considerations, net of reinsurance, consisting of administrative loads
charged on interest sensitive and universal life products, increased 6% for
the second quarter 1995 compared to second quarter 1994. The Company is
currently marketing three universal life products. In late 1994, the Company
discontinued marketing the traditional and interest sensitive products.
17
<PAGE>
Net investment income increased 8% during the second quarter of 1995 compared
to second quarter 1994. The increase is attributable to the Company investing
a significant portion of its cash and cash equivalents in long term fixed
maturities and mortgage loans during March and April of 1994.
The Company's investments are generally managed to match related insurance and
contract holder liabilities. The overall annualized gross investment yields
as of second quarter 1995 and 1994, are 7.18% and 7.46%, respectively. The
comparison of investment return with insurance or investment product crediting
rates establishes an interest spread. Minimum interest spreads between earned
and credited rates are 1% to 1.5%. The Company continually assesses
investment yields, and when necessary takes action to reduce credited interest
rates on its insurance products to preserve targeted spreads. Credited rates
are established by the Board of Directors. Over 60% of the insurance and
investment product reserves are crediting 5% or less in interest and 39% of
the insurance and investment product reserves are crediting 5.25% to 6% in
interest. It is expected that the monitoring of the interest spreads by
management will provide the necessary margin to adequately provide for
associated costs on insurance policies that the Company has in force and will
write in the future.
The Company realized $61,000 of investment losses during the second quarter of
1995 compared to realized investment gains of $212,000 in the same period in
1994. The realized gains in 1995 is attributable to three fixed maturities
that were written-off in prior periods but the Company was able to recover
full face value. The realized loss in second quarter 1995 is attributable to
securities in the bond portfolio that were called by the issuer prior to
maturity.
(b) Expenses:
Expenses increased 6% during the second quarter of 1995, compared to second
quarter 1994. The increase in expenses is due to the increase in commissions
and amortization of deferred policy acquisition costs and operating expenses.
Life benefits and reinsurance benefits and claims increased 10% for second
quarter of 1995, compared to the same period in 1994. A factor that is
contributing to decrease life and annuity benefits is that the Company in
1994, lowered the interest rates credited on its interest sensitive, universal
life and annuity products to a 6% interest rate. This has resulted in a lower
reserve increase on these products than was experienced in the prior year as a
lower interest rate is being credited to the policies involved. The life
insurance and annuity products are continuing to credit interest at 6% in
1995. By maintaining the credited interest rates at 6%, it has enabled the
Company to achieve larger interest spreads.
There are several factors that contributed to increase life benefits. The
first factor is that the Company's mortality experience increased $561,000 in
the current period compared to the previous year.
The second factor is that during the third quarter of 1994, UG became aware
that certain new insurance business was being solicited by certain agents and
issued to individuals considered to be not insurable by Company standards.
These policies had a face amount of $22,700,000 and represent less than 1/2 of
1% of the insurance in force of the Company. Management's analysis of the
business in force indicates that the expected death claims on the business in
force to be adequately
18
<PAGE>
covered by the mortality assumptions inherent in the calculation of statutory
reserves. Nevertheless, management has determined it is in the best interest
of the Company to attempt to acquire as many of the policies as possible. As
of July 31, 1995, there remained policies which represented $6,800,000 of
the original face amount of these policies which theCompany has either
determined that the insurer has bad health or the owners have not yet been
contacted by the Company regarding a possible repurchase of the insurance
policy.
During 1994, the Company authorized $1,250,000 for the acquisition of these
policies. At December 31, 1994, the Company had $227,961 remaining for the
purchase of these polciies. Through June 30, 1995, the Company paid an
additional $447,000 for the acquisition of these policies and $429,000 in
legal fees that is reported in the general expense line item.
Dividends to policyholders increased 18% for second quarter 1995 compared to
the same period for 1994. USA continued to market participating policies
through most of 1994. Management expects dividends to policyholders will
continue to increase in the future. A portion of the Company's insurance in
force is participating insurance. A significant portion of the participating
business is relatively newer business. The dividend scale for participating
policies increases significantly in the early years. The dividend scale is
subject to approval of the Board of Directors and may be changed at their
discretion. The Company no longer markets any participating policies.
Commissions and amortization of deferred policy acquisition costs increased
significantly for first quarter 1995 compared to the same period of 1994. The
products that are currently being marketed are designed differently than the
products offered one year ago. The current products do not defer as much
acquisition costs for future periods.
Operating expenses increased 31% for the period. The increase in operating
expenses is related to increased legal fees incurred regarding the legal
matters discussed in the Notes to the Financial Statements.
Management continues its efforts to reduce operating costs and streamline
operations. The Company was able to streamline its operations by reducing the
number of companies through a series of mergers and the sale of F&R. As of
March 31, 1995, the Company controls four insurance companies.
Interest expense decreased 6% for 1995 compared to 1994. The interest rate on
the senior debt is the prime interest rate plus an additional 1% of interest.
As of June 30, 1995, the interest rate on the senior debt had increased to 10%
compared to 7% one year ago. The Company has reduced its senior debt
$2,900,000 within the last twelve months.
(c) Net (loss) income:
The Company recorded net losses of $690,000 during the second quarter of 1995
compared to $117,000 for the same period in 1994. The decline inresults is
attributable to the increase in commissions and amortization of deferred
policy acquisition costs and operating expenses.
19
<PAGE>
FINANCIAL CONDITION
(a) Assets:
The Company's financial position at June 30, 1995, reflected an increase in
assets and liabilities compared to December 31, 1994.
As of June 30, 1995, and December 31, 1994, invested assets represented
approximately 66% of consolidated assets. As of June 30, 1995, fixed
maturities and investments held for sale represented 79% of total invested
assets.
Invested assets changed very little through second quarter 1995 compared to
December 31, 1994. The Company acquired $1,000,000 of American General
Capital Corporation's preferred stock. Mortgage loans declined 7% due to
refinancing activity. The Company does not actively solicit new mortgage
loans.
Other accounts and notes receivable decreased $277,000 at June 30, 1995
compared to December 31, 1994. The decrease is due to a change in Company
policy during 1994 as to how the agents are advanced on submitted insurance
applications. The change in Company policy enables the Company to better
control advances made to agents.
Deferred policy acquisition costs ("DPAC") increased approximately $144,000
through the second quarter of 1995 compared to December 31, 1994. DPAC will
increase due to new business and will decrease due to amortization in relation
to insurance in force. The products that are currently being marketed are
designed differently than the products offered one year ago. The current
products do not defer as much acquisition costs for future periods.
Cost of insurance acquired, value of agency force and cost in excess of net
assets purchased decreased as expected by management through second quarter
1995 compared to December 31, 1994.
(b) Liabilities:
Liabilities increased slightly through second quarter of 1995 compared to
December 31, 1994. Future policy benefits represented 78% of total
liabilities at June 30, 1995 and at December 31, 1994. Future policy benefits
will increase related to growth in and duration of insurance in force and
decrease from reserves released on deaths and other policy terminations.
Policyholders' dividend accumulations increased 5% through second quarter of
1995 compared to December 31, 1994. The policyholder dividend accumulation
originates from the policyowner selecting the option to have their dividend
deposited with the insurance company to accumulate with interest. A
significant portion of the participating business is relatively newer
business. The dividend scale for participating policies increases
significantly in the early years. The dividend scale is subject to approval
of the Board of Directors and may be changed at their discretion. The Company
no longer markets any participating policies.
20
<PAGE>
Deferred income taxes decreased approximately 5% through second quarter of
1995 compared to December 31, 1994. A deferred tax liability is recognized
for the estimated future tax effects attributable to temporary differences and
carryforwards. The measurement of this liability is based on provisions of
the enacted tax law. Primary items affecting deferred taxes of the Company
are cost of insurance acquired, deferred policy acquisition costs and future
policy benefits.
Notes payable decreased $603,000 through second quarter of 1995 compared to
December 31, 1994. On March 1, 1995, the Company prepaid the remaining
$900,000 of the June 1, 1995 scheduled principal payment. No payments are due
on Company debt until June 1996.
(c) Shareholders' Equity:
Overall shareholders' equity decreased 2% through second quarter 1995 compared
to December 31, 1994. Unrealized depreciation of equity securities and
investments held for sale improved due to the general decline in bond yields
in the market place. The decline in bond yields has improved the market value
of the Company's holdings of investments held for sale at market. Retained
earnings experienced a decline due to the operating results of the Company.
FUTURE OUTLOOK
Factors expected to influence life insurance industry growth include: 1)
competitive pressure among the large number of existing firms; 2)
competition from financial service companies, as they seek to expand into
insurance products; 3) customers' changing needs for new types ofinsurance
products; 4) customers' lack of confidence in the entire industry as a
result of the recent highly visible failures; and 5) uncertainty concerning
the future regulation of the industry. Growth in demand for insurance
products will depend on demographic variables such asincome growth, wealth
accumulation, populations and workforce changes.
The Board of Directors of CIC, ITI and UGIC ("the Affiliates"), by resolution
adopted at their meetings of the Board of Directors on June 7, 1994,
unanimously approved a Plan of Liquidation and Dissolution ("the Plan"). The
affirmative vote of the majority of the outstanding shares of the Affiliates
will be required for adoption of the Plan. Subject to proxy requirements, the
matter will be brought before the Affiliate's shareholders at a Special
Meeting of Shareholders of the Affiliates scheduled for August 15, 1995. Each
affiliate is currently the indirect owner of FCC's common stock. The only
assets held by the Affiliates is stock in its subsidiary (see Organizational
Chart). If the Plan is adopted, each shareholder of the Affiliates will own
directly the same proportionate share of FCC's common stock.
The liquidation and dissolution of the Affiliates will significantly
streamline the organization of the UTI holding company system by eliminating
three holding companies from the system. The elimination of the Affiliates
will reduce filing fees and administrative expenses of the holding company
system associated with the continued existence of suchcompanies, including
fees and expenses in connection with the filing of annual, quarterly and
periodic reports with the Securities and ExchangeCommission and mailings to
public shareholders. If the Plan is adopted, UTG would own approximately 72%
of the common stock of FCC.
21
<PAGE>
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
S.D., et al. v. Universal Guaranty Life Insurance Company. (U.S.D.C., N.D.
Ga., 1995, 195-CV-0454-GET).
A lawsuit was filed against UG in February, 1995 on behalf of four applicants
for insurance and a potential class of other applicants. The plaintiffs
alleged that UG violated Title III of the Americans With Disabilities Act of
1990 (the "ADA") by discriminating against the plaintiffs in connection with
the issuance of insurance policies by requiring the plaintiffs to submit
additional medical evidence not required of others.
The plaintiffs allege that UG's requirement of a blood test violated the ADA
by discriminating against each of the plaintiffs of the basis of a perceived
disability which resulted in the denial of an insurance policy.
In addition to the ADA violation, plaintiffs allege a violation of Georgia
Insurance Regulations with regard to procedures for obtaining information
regarding an applicant's HIV/AIDS status.
The plaintiffs seek relief in the form of requiring UG to reopen the
plaintiffs' insurance applications and process those applications, enjoining
UG from requiring blood tests from the plaintiffs, directing UG to issue life
insurance policies as applied for, and awarding the plaintiffs and other class
members costs, expenses, and reasonable attorneys' fees pursuant to Title III
of the ADA.
UG has filed an Answer to this potential class action. UG believes that it
has no liability to any of the plaintiffs, or other potential class members,
and intends to defend the lawsuit vigorously. In June 1995, summary judgment
was granted to dismiss the case.
Jeffrey Ploskonka, Keith Bohn and Paul Phinney v. Universal Guaranty Life
Insurance Company (Circuit Court of the Seventh Judicial Circuit Sangamon
County, Illinois Case No.: 95-L-0213)
On March 9, 1995 a lawsuit was filed against Universal Guaranty Life Insurance
on behalf of three insureds and a potential class of other insureds. The
Plaintiffs allege that UG violated the insurance contract in attempting to
cancel life insurance contracts. Additionally, the Plaintiffs assert
violations of Illinois law alleging vexations and unreasonable insurance
practices, breach of duty of good faith and fair dealing, and that Illinois
consumer fraud laws have been violated. The Plaintiffs seek unspecified
compensatory damages, injunctive relief, attorneys' fees, statutory damages in
an amount up to $25,000.00, punitive damages of $1,000,000.00, and other
equitable relief. UG filed an Answer to this lawsuit in May 1995, asserting
various defenses and reserving the right to assert counterclaims. UG has also
filed motions to dismiss certain allegations and claims made in the lawsuit.
UG believes it has no liability to any of the plaintiffs, or other potential
class members, and intends to defend the lawsuit vigorously. In June 1995,
the court conditionally certified a class of non-settling insureds.
22
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
UNITED TRUST, INC.
(Registrant)
Date August 11, 1995 By /s/ Thomas F. Morrow
Thomas F. Morrow, Chief Operating
Officer, President, Treasurer
and Director
Date August 11, 1995 By /s/ James E. Melville
James E. Melville, Chief
Financial Officer and Senior
Executive Vice President
23
<TABLE> <S> <C>
<ARTICLE> 7
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 6-MOS
<FISCAL-YEAR-END> DEC-31-1995 DEC-31-1994
<PERIOD-END> JUN-30-1995 JUN-30-1994
<DEBT-HELD-FOR-SALE> 3,140,821 3,337,672
<DEBT-CARRYING-VALUE> 187,358,497 184,590,646
<DEBT-MARKET-VALUE> 0 0
<EQUITIES> 1,893,471 911,012
<MORTGAGE> 14,783,086 15,822,056
<REAL-ESTATE> 17,320,558 17,357,948
<TOTAL-INVEST> 241,099,469 238,707,966
<CASH> 12,013,790 11,697,067
<RECOVER-REINSURE> 15,000,609 13,939,626
<DEFERRED-ACQUISITION> 10,778,602 10,634,476
<TOTAL-ASSETS> 367,076,929 364,258,830
<POLICY-LOSSES> 0 0
<UNEARNED-PREMIUMS> 0 0
<POLICY-OTHER> 239,931,492 234,875,800
<POLICY-HOLDER-FUNDS> 19,271,139 17,438,768
<NOTES-PAYABLE> 21,450,381 22,053,289
<COMMON> 373,519 373,119
0 0
0 0
<OTHER-SE> 21,106,274 21,495,976
<TOTAL-LIABILITY-AND-EQUITY> 367,076,929 364,258,830
16,683,377 17,640,972
<INVESTMENT-INCOME> 7,693,679 6,923,628
<INVESTMENT-GAINS> 7,268 (212,414)
<OTHER-INCOME> 715,868 532,765
<BENEFITS> 17,211,763 14,424,508
<UNDERWRITING-AMORTIZATION> 5,201,438 5,784,782
<UNDERWRITING-OTHER> 6,649,967 5,219,914
<INCOME-PRETAX> (2,435,327) 869,105
<INCOME-TAX> (1,026,169) (26,469)
<INCOME-CONTINUING> (510,558) (521,171)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (510,558) (521,171)
<EPS-PRIMARY> (0.03) (0.03)
<EPS-DILUTED> (0.03) (0.03)
<RESERVE-OPEN> 0 0
<PROVISION-CURRENT> 0 0
<PROVISION-PRIOR> 0 0
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<PAYMENTS-PRIOR> 0 0
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