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
0-16867
UNITED TRUST, INC.
(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)
ILLINOIS 37-1172848
(State or other jurisdiction of (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 NASDAQ
Securities registered pursuant to Section 12(g) of the Act:
TITLE OF EACH CLASS
Common Stock
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.
At March 1, 1997, the Registrant had outstanding 18,700,935 shares of
Common Stock, stated value $.02 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 1
ITEM 1. BUSINESS
United Trust, Inc. (the "Registrant") was incorporated in 1984, under
the laws of the State of Illinois to serve as an insurance holding
company. At December 31, 1996, 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
ITEM 1. BUSINESS
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.
United Trust, Inc., ("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.
UTI currently owns 30% of the outstanding common stock of UII and
accounts for its investment in UII using the equity method.
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 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, Tennessee, Utah, Virginia,
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 include provisions for possible unfavorable deviations.
The Company makes these assumptions at the time the contract is
<PAGE> 5
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 $ 38,063
Assumed 0 0 0
Ceded (4,768) (5,203) (5,659)
Net
premiums $ 27,619 $ 29,998 $ 32,404
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 $ 13,326,312 $ 13,190,121 $ 12,185,941
Equity securities 88,661 52,445 3,999
Mortgage loans 1,047,461 1,257,189 1,423,474
Real estate 794,844 975,080 990,857
Policy loans 1,121,538 1,041,900 1,014,723
Short-term investments 515,346 505,637 444,135
Other 197,188 158,290 221,125
Total consolidated
investment income 17,091,350 17,180,662 16,284,254
Investment expenses (1,222,903) (1,724,438) (1,915,808)
Consolidated net
investment income $ 15,868,447 $ 15,456,224 $ 14,368,446
<PAGE> 7
At December 31, 1996, the Company had a total of $6,025,000 of
investments, which did not produce income during 1996. These
investments are comprised of $5,325,000 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 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 $ 29,998,240 $ 29,492,006
government agencies
States, municipalities and 14,561,203 7,608,494
political subdivisions
Collateralized mortgage 13,246,780 15,428,596
obligations
Public utilities 51,941,647 59,254,524
Corporate 72,140,081 82,516,775
$ 181,887,951 $ 194,300,395
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 $181,887,951 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 14,390,436 not applicable 5.01%
Policy loans 14,438,120 not applicable 6.55%
Short-term investments 430,983 159 days 4.15%
Total Investments $223,964,687 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 $431,000 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 $13,362,000 and $1,039,000
respectively, maturing in one year and $75,691,000 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 5% of the total portfolio. The
Company has one loan of $63,900 which is 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 Amount % of
Loans 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 Real
Loans Estate
Colorado 2% 0%
Illinois 12% 60%
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% 3%
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 (Resturctured
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 policyholder
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 norm 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 actuarially 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 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 $ 2,885,908 20%
Commercial $ 2,397,475 17%
Residential development $ 5,260,107 36%
Foreclosed real estate $ 3,846,946 27%
Real estate holdings represent approximately 4% of the total assets of
the Company net of accumulated depreciation of $1,341,000 and
$1,050,000 at year end 1996 and 1995 respectively. 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
On June 18, 1990, UTI became a member of NASDAQ. Quotations began on
that date under the symbol UTIN. The following table shows the high
and low bid quotations for each quarterly period during the past two
years, without retail mark-up, mark-down or commission and may not
necessarily represent actual transactions.
BID
PERIOD LOW HIGH
1996
First quarter 3/8 9/16
Second quarter 3/8 11/16
Third quarter 1/2 11/16
Fourth quarter 3/8 3/4
1995
First quarter 1/2 5/8
Second quarter 1/2 1
Third quarter 1/2 5/8
Fourth quarter 3/8 9/16
CURRENT MARKET MAKERS ARE:
M. H. Meyerson and Company Carr Securities Corporation
30 Montgomery Street 17 Battery Place
Jersey City, NJ 07303 New York, NY 10004
Herzog, Heine, Geduld, Inc. Howe, Barnes Investments, Inc.
26 Broadway, 1st Floor 135 South LaSalle, Suite 1500
New York, NY 10004 Chicago, IL 60603
As of December 31, 1996, no cash dividends had been declared on the
common stock of UTI.
See Note 2 in the accompanying consolidated financial statements for
information regarding dividend restrictions.
Number of Common Shareholders as of March 3, 1997 is 5,689.
<PAGE> 15
ITEM 6. SELECTED FINANCIAL DATA
FINANCIAL HIGHLIGHTS
(000's omitted, except per share data)
1996 1995 1994 1993 1992
Premium income
net of reinsurance $ 27,619 $ 29,998 $ 32,404 $ 31,160 $ 19,076
Total revenues $ 46,976 $ 49,869 $ 49,207 $ 48,541 $ 36,826
Net income (loss)* $ (938)$ (3,001)$ (1,624)$ (862)$ 5,661
Net income (loss)
per share $ (0.05)$ (0.16)$ (0.09)$ (0.05)$ 0.30
Total assets $355,474 $356,305 $360,258 $375,755 $370,259
Total long term debt $ 19,574 $ 21,447 $ 22,053 $ 24,359 $ 27,494
Dividends paid per
share NONE NONE NONE NONE NONE
* Includes equity earnings of investees.
<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 $2,785,000, $453,000 and $2,145,000 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 $9,596,000 in 1996, $9,466,000 in 1995, and
$10,361,000 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 ($28,595,000), 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 ($14,150,000),
$8,408,000 and $5,844,000 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 impact policyholder contract withdrawals are fluctuation of
interest rates, competition and other economic factors. The Company's
current marketing strategy and product 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, UTI's cash flow is dependent on revenues from
a management agreement with UII and its earnings received on invested
assets and cash balances. At December 31, 1996, substantially all of
the consolidated shareholders equity represents net assets of its
subsidiaries. UTI does not have significant 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. 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 approximately 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%, 7.04%
and 7.13%, 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 $988,000 and $124,000 in 1996 and
1995, respectively. Approximately $522,000 of the realized losses in
1996 is due to the charge-off of two investments. The Company
realized a loss of $207,000 from a single loan and $315,000 from an
investment in First Fidelity Mortgage Company ("FFMC"). The charge-
off of the loan represented the entire loan balance at the time of the
charge-off. Additionally, 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.
<PAGE> 19
(b) EXPENSES
Life benefits, net of reinsurance benefits and claims, increased 2%
compared to 1995. The increase in life benefits is due primarily to
settlement expenses discussed in the following paragraph:
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 14% in 1996 compared to 1995. The decrease was due to the
decline in first year premium production.
Amortization of cost of insurance acquired increased 28% 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 increase 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 reported a non-recurring write down of value of agency
force of $0 and $8,297,000 in 1996 and 1995, respectively. The write
down was directly related to the Company's change in distribution
systems. The Company changed its focus from primarily a broker agency
distribution system to a captive agent system. Business produced 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 most of the
agents involved in the broker agency force caused management to re-
evaluate the value of the agency force carried on the balance sheet.
Operating expenses increased 4% 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 12% in 1996 compared to 1995. Since
December 31, 1995, notes payable decreased approximately $1,873,000
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 11 "Notes Payable" of the
Consolidated Notes to the Financial Statements for more information on
this matter.
<PAGE> 20
(c) NET LOSS
The Company had a net loss of $938,000 in 1996 compared to a net loss
of $3,001,000 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.
RESULTS OF OPERATIONS
1995 COMPARED TO 1994
(a) REVENUES
Total revenue increased 1% when comparing 1995 to 1994.
Premium income, net of reinsurance premium, decreased 7% when
comparing 1995 to 1994. The decrease is primarily attributed to the
reduction in new business production and the change in products
marketed. In 1995, the Company streamlined the product portfolio, as
well as restructured the marketing force. The decrease in first year
premium production was 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
termination of the broker agency force caused a non-recurring write
down of the value of agency force asset. See discussion of
amortization of agency force for further details.)
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. 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 8% 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 7.04%, 7.13% and 7.22%, 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 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 policyholder 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 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
<PAGE> 21
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 the Company has in force and will write in
the future.
Realized investment losses were $124,000 and $1,437,000 in 1995 and
1994, respectively. Fixed maturities and equity securities realized
net investment losses of $224,000 and real estate realized net
investment gains of $100,000 in 1995. The realized loss in 1995
cannot be attributed to any one specific transaction. In 1994, the
Company realized losses of $865,000 due to a permanent impairment of
property located in Louisiana. The permanent impairment was based on
recent appraisals and marketing analysis of surrounding properties.
The Company realized a gain of $467,000 from the sale of an
insignificant subsidiary in 1994. In 1994, the Company realized a
loss of $212,000 from the charge off of its investment in its equity
subsidiary, United Fidelity, Inc. 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 increased 16% when comparing 1995 to 1994.
Life benefits, net of reinsurance benefits and claims, decreased 4%
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 16% 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 each duration.
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 21% 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 37% 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.
During 1995, the Company reported a non-recurring write down of value
of agency force of $8,297,000. The write down 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 produced 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 most of the agents involved in the
broker agency force caused management to re-evaluate the value of the
agency force and write-off the remaining value carried on the balance
sheet.
Operating expenses increased 18% 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, affected 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 increased slightly in 1995 compared to 1994. The
increase was due to the increase in the interest rate on the Company's
senior debt, which is tied to the base rate of the First Bank of
Missouri. The interest rate on the senior debt 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 early 1995. The interest rate on the senior debt has
decreased to 9.25% as of March 1, 1996.
<PAGE> 23
(c) NET LOSS
The Company had a net loss of $3,001,000 in 1995 compared to a net
loss of $1,624,000 in 1994. The decline in 1995 is attributed to the
non-recurring write down of the value of agency force and the increase
in operating expenses. The write down of agency force, net of
deferred income taxes and minority interest, caused $2,608,000 of the
$3,001,000 net loss in 1995. The net loss was minimized by the
improvement of net investment income and realized investment losses
when compared to the previous year.
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 National Association of Insurance Commissioners ("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 20%, Commercial
17%, Residential Development 36% and Foreclosed Properties 27%.
<PAGE> 24
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.
Deferred policy acquisition costs decreased 1% 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, $408,000 in interest accretion
and $1,796,000 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 slightly in 1996 compared to 1995. Future
policy benefits increased 2% in 1996 and represented 81% 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 7% 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 10% 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 Consolidated Notes to
the Financial Statements.
<PAGE> 25
Notes payable decreased approximately $1,873,000 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 11 of
the Notes to the Financial Statements.
(c) SHAREHOLDERS' EQUITY
Total shareholders' equity decreased 5% in 1996 compared to 1995. The
decrease in shareholders' equity is primarily due to the net loss of
$938,000 in 1996. The Company experienced $85,000 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.
<PAGE> 26
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 norm 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.
The Company receives funds from its insurance subsidiaries in the form
of management and cost sharing arrangements (See Note 9 of the
Consolidated Notes to the 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 Consolidated Notes to the
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 actuarially 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.
<PAGE> 27
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.
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
During 1996, the Company adopted Statement of Financial Accounting Standards
No. 123, accounting for stock-based compensation. The adoption of this
standard did not have 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:
UNITED TRUST, INC. AND CONSOLIDATED SUBSIDIARIES
Page No.
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 35-55
ITEM 9. DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
None
<PAGE> 29
Independent Auditors' Report
Board of Directors and Shareholders
United Trust, Inc.
We have audited the accompanying consolidated balance sheets of United
Trust, Inc. (an Illinois 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
United Trust, Inc. 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 United Trust, Inc. 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>
UNITED TRUST, INC.
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) $179,926,785 $191,074,220
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 10,543,490 11,978,575
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 430,983 425,000
223,964,687 244,815,985
Cash and cash equivalents 17,326,235 12,528,025
Investment in affiliates 4,826,584 5,169,596
Accrued investment income 3,461,799 3,671,842
Reinsurance receivables:
Future policy benefits 38,745,013 13,540,413
Policy claims and other benefits 3,856,124 861,488
Other accounts and notes receivable 894,321 1,246,367
Cost of insurance acquired 43,917,280 55,816,934
Deferred policy acquisition costs 11,325,356 11,436,728
Cost in excess of net assets purchased,
net of accumulated amortization 5,496,808 5,661,462
Other assets 1,659,455 1,555,986
Total assets $355,473,662 $356,304,826
LIABILITIES AND SHAREHOLDERS' EQUITY
Policy liabilities and accruals:
Future policy benefits $248,879,317 $243,044,963
Policy claims and benefits payable 3,193,806 3,110,378
Other policyholder funds 2,784,967 3,004,655
Dividend and endowment accumulations 13,913,676 12,636,949
Income taxes payable:
Current 70,663 215,944
Deferred 13,193,431 17,762,408
Notes payable 19,573,953 21,447,428
Indebtedness to (from) affiliates, net 31,837 (87,869)
Other liabilities 5,975,483 5,009,637
Total liabilities 307,617,133 306,144,493
Minority interests in consolidated subsidiaries 29,842,672 31,138,077
Shareholders' equity:
Common stock - no par value, stated
value $.02 per share.
Authorized 35,000,000 shares -
18,700,935 and 18,675,935 shares
issued after deducting treasury
shares of 423,840 and 423,840 374,019 373,519
Additional paid-in capital 18,301,974 18,288,411
Unrealized depreciation of investments
held for sale (86,058) (1,499)
Retained earnings (accumulated deficit) (576,078) 361,825
Total shareholders' equity 18,013,857 19,022,256
Total liabilities and shareholders'
equity $355,473,662 $356,304,826
</TABLE>
See accompanying notes.
<PAGE> 31
<TABLE>
UNITED TRUST, INC.
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 $ 38,063,186
Reinsurance premium (4,767,743) (5,202,690) (5,658,697)
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 15,868,447 15,456,224 14,368,446
Realized investment gains
and (losses), net (987,930) (124,235) (1,436,521)
Other income 1,151,395 1,438,559 1,130,176
46,976,370 49,869,084 49,206,628
Benefits and other expenses:
Benefits, claims and settlement
expenses:
Life 26,568,062 26,680,217 27,479,315
Reinsurance benefits
and claims (2,283,827) (2,850,228) (2,766,776)
Annuity 1,892,489 1,797,475 1,314,384
Dividends to
policyholders 4,149,308 4,228,300 3,634,311
Commissions and amortization
of deferred policy
acquisition costs 4,224,885 4,907,653 4,060,425
Amortization of cost of
insurance acquired 5,524,815 4,303,237 6,878,074
Amortization of agency force 0 396,852 382,006
Non-recurring write down of
value of agency force 0 8,296,974 0
Operating expenses 11,994,464 11,517,648 9,787,962
Interest expense 1,731,309 1,966,776 1,936,324
53,801,505 61,244,904 52,706,025
Loss before income taxes,
minority interest and
equity in loss of investees (6,825,135) (11,375,820) (3,499,397)
Credit for income taxes 4,703,741 4,571,028 1,965,084
Minority interest in loss
of consolidated subsidiaries 1,278,883 4,439,496 1,035,831
Equity in loss of investees (95,392) (635,949) (1,125,118)
Net loss $ (937,903) $ (3,001,245) $ (1,623,600)
Net loss per
common share $ (0.05) $ (0.16) $ (0.09)
Weighted average common
shares outstanding 18,695,113 18,668,510 18,664,830
</TABLE>
See accompanying notes
<PAGE> 32
<TABLE>
UNITED TRUST, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Three Years Ended December 31, 1996
1996 1995 1994
<S> <C> <C> <C>
Common stock
Balance, beginning of year $ 373,519 $ 373,119 $ 373,297
Issued during year 500 400 0
Purchase treasury stock 0 0 (178)
Balance, end of year $ 374,019 $ 373,519 $ 373,119
Additional paid-in capital
Balance, beginning of year $18,288,411 $18,276,311 $18,066,119
Issued during year 13,563 12,100 0
Public offering of affiliate 0 0 277,559
Purchase treasury stock 0 0 (67,367)
Balance, end of year $18,301,974 $18,288,411 $18,276,311
Unrealized appreciation
(depreciation) of investments
held for sale
Balance, beginning of year $ (1,499) $ (143,405) $ (23,624)
Change during year (84,559) 141,906 (119,781)
Balance, end of year $ (86,058) $ (1,499) $ (143,405)
Retained earnings
(accumulated deficit)
Balance, beginning of year $ 361,825 $ 3,363,070 $ 4,986,670
Net loss (937,903) (3,001,245) (1,623,600)
Balance, end of year $ (576,078) $ 361,825 $ 3,363,070
Total shareholders' equity,
end of year $18,013,857 $19,022,256 $21,869,095
</TABLE>
See accompanying notes.
<PAGE> 33
<TABLE>
UNITED TRUST, INC.
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 $ (937,903) $ (3,001,245) $ (1,623,600)
Adjustments to reconcile
net loss to net cash
provided by (used in)
operating activities
net of changes in assets
and liabilities resulting
from the sales and purchases
of subsidiaries:
Amortization/accretion of
fixed maturities 899,445 803,696 1,173,981
Realized investment (gains)
losses, net 987,930 124,235 1,436,521
Policy acquisition costs
deferred (1,276,000) (2,370,000) (4,939,000)
Amortization of deferred
policy acquisition costs 1,387,372 1,567,748 1,137,923
Amortization of cost of
insurance acquired 5,524,815 4,303,237 6,878,074
Amortization of value of
agency force 0 396,852 382,006
Non-recurring write down
of value of agency force 0 8,296,974 0
Amortization of costs in
excess of net assets
purchased 185,279 423,192 297,676
Depreciation 390,357 720,605 510,459
Minority interest (1,278,883) (4,439,496) (1,035,831)
Equity in loss of investees 95,392 635,949 1,125,118
Change in accrued
investment income 210,043 (171,257) (543,476)
Change in reinsurance
receivables 83,871 (482,275) (1,009,745)
Change in policy liabilities
and accruals 3,326,651 3,581,928 4,487,982
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 (4,714,258) (4,595,571) (2,120,009)
Change in indebtedness
(to) from affiliates,
net 119,706 (20,004) 375,848
Change in other assets and
liabilities, net 944,824 (2,208,660) (1,142,055)
Net cash provided by operating
activities 2,785,086 452,836 2,144,528
Cash flows from investing
activities:
Proceeds from investments
sold and matured:
Fixed maturities held
for sale 1,152,736 619,612 250,000
Fixed maturities sold 18,736,612 0 0
Fixed maturities matured 20,787,782 16,265,140 23,894,954
Equity securities 8,990 104,260 49,557
Mortgage loans 3,364,427 2,252,423 4,029,630
Real estate 3,219,851 1,768,254 2,640,025
Policy loans 3,937,471 4,110,744 4,064,602
Short term 825,000 25,000 1,103,856
Total proceeds from investments
sold and matured 52,032,869 25,145,433 36,032,624
Cost of investments acquired:
Fixed maturities (29,365,111) (25,112,358) (52,768,480)
Equity securities 0 (1,000,000) (249,925)
Mortgage loans (503,113) (322,129) (5,611,967)
Real estate (841,793) (1,927,413) (3,321,599)
Policy loans (4,329,124) (4,713,471) (3,886,821)
Short term (830,983) (100,000) (650,000)
Total cost of investments
acquired (35,870,124) (33,175,371) (66,488,792)
Cash of subsidiary at
date of sale 0 0 (3,134,343)
Cash received in sale
of subsidiary 0 0 4,995,804
Net cash provided by (used
in) investing activities 16,162,745 (8,029,938) (28,594,707)
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 9,050,000 300,000 0
Payments of principal on
notes payable (10,923,475) (905,861) (2,305,687)
Purchase of treasury stock 0 0 (67,545)
Proceeds from issuance of
common stock 500 400 0
Net cash provided by (used in)
financing activities (14,149,621) 8,408,060 5,843,578
Net increase (decrease) in
cash and cash equivalents 4,798,210 830,958 (20,606,601)
Cash and cash equivalents at
beginning of year 12,528,025 11,697,067 32,303,668
Cash and cash equivalents at
end of year $ 17,326,235 $ 12,528,025 $ 11,697,067
</TABLE>
See accompanying notes.
<PAGE> 34
UNITED TRUST, INC.
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 United Trust, Inc. 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> 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 - United Trust, Inc. 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. Investments in 20% to 50%
owned affiliates in which management has the ability to
exercise significant influence are included based on the
equity method of accounting and the Company's share of
such affiliates' operating results is reflected in
Equity in loss of investees. 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
United Trust, Inc.'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
$1,340,746 and $1,049,652 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 $ 11,437,000 $ 10,634,000 $ 7,160,000
Acquisition costs deferred:
Commissions, net of
reinsurance of $0
$0 and $1,837,000 845,000 1,838,000 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 408,000 338,000 181,000
Amortization charged
to income (1,796,000) (1,905,000) (1,319,000)
Net amortization (1,388,000) (1,567,000) (1,138,000)
Deferred acquisition
costs disposed of at
sale of subsidiary 0 0 (327,000)
Change for the year (112,000) 803,000 3,474,000
Deferred, end of year $ 11,325,000 $ 11,437,000 $ 10,634,000
<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 $ 1,388,000 $ 1,567,000 $ 1,138,000
Commissions 2,837,000 3,341,000 2,922,000
Total $ 4,225,000 $ 4,908,000 $ 4,060,000
Estimated net amortization expense of deferred policy
acquisition costs for the next five years is as follows:
Interest Net
Accretion Amortization Amortization
1997 $ 400,000 $ 1,600,000 $ 1,200,000
1998 400,000 1,500,000 1,100,000
1999 300,000 1,300,000 1,000,000
2000 300,000 1,200,000 900,000
2001 300,000 1,000,000 700,000
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
24% 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 $ 55,817,000 $ 60,120,000 $ 68,995,000
Additions from
acquisitions 0 0 0
Interest accretion 6,313,000 7,044,000 7,593,000
Amortization (11,838,000) (11,347,000) (14,471,000)
Net amortization (5,525,000) (4,303,000) (6,878,000)
Balance attributable to
coinsurance agreement(6,375,000) 0 0
Balance attributable to
subsidiary at date
of sale 0 0 (1,379,000)
Balance attributable to
downstream merger of
subsidiary 0 0 (618,000)
Write-offs due to impairment 0 0 0
Cost of insurance acquired,
end of year $ 43,917,000 $ 55,817,000 $ 60,120,000
<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 $ 5,500,000 $ 9,200,000 $3,700,000
1998 5,100,000 8,200,000 3,100,000
1999 4,800,000 7,200,000 2,400,000
2000 4,600,000 6,700,000 2,100,000
2001 4,400,000 6,700,000 2,300,000
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 $1,265,146 and $1,079,867 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 Company operates 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 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 UTI's subsidiaries. The payment of
cash dividends to shareholders by UTI or UTG 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 any 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) $ (148,000) $ 3,000 $ 51,000
Deferred tax
expense (credit) (4,556,000) (4,574,000) (2,016,000)
$(4,704,000) $(4,571,000) $(1,965,000)
The Companies have net operating loss carryforwards for federal income
tax purposes expiring as follows:
UTI UG FCC
2002 $ 0 $ 0 $ 527,000
2003 50,000 0 285,000
2004 826,000 0 283,000
2005 293,000 0 139,000
2006 213,000 2,109,000 33,000
2007 111,000 783,000 676,000
2008 0 940,000 4,000
2009 0 0 169,000
2010 0 0 19,000
TOTAL $ 1,493,000 $ 3,832,000 $ 2,135,000
<PAGE> 41
The Company has established a deferred tax asset of $2,611,000
for its operating loss carryforwards and has established an allowance
of $2,088,000.
The following table shows the reconciliation of net income to taxable
income of UTI:
1996 1995 1994
Net income (loss) $ (938,000) $ (3,001,000) $ (1,624,000)
Federal income tax
provision (credit) (60,000) 154,000 40,000
Loss (earnings) of
subsidiaries 715,000 2,613,000 341,000
Loss (earnings) of
investees 95,000 636,000 1,125,000
Write off of investment
in affiliate 315,000 10,000 212,000
Write off of note
receivable 211,000 0 0
Depreciation 1,000 3,000 4,000
Other 26,000 22,000 20,000
Taxable income (loss) $ 365,000 $ 437,000 $ 118,000
UTI has a net operating loss carryforward of $1,493,000 at December
31, 1996. UTI has averaged $270,000 in taxable income over the past
four years and must average taxable income of $136,000 per year to
fully realize its net operating loss carryforwards. UTI's operating
loss carryforwards do not begin to expire until 2003. Management
believes future earnings of UTI will be more than sufficient to fully
utilize its net operating loss carryforwards.
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 $ (2,389,000) $ (3,982,000) $ (1,225,000)
Changes in taxes due to:
Cost in excess of net
assets purchased 65,000 61,000 104,000
Special insurance deductions 0 0 (24,000)
Benefit of prior losses (2,393,000) (602,000) (649,000)
Other 13,000 (48,000) (171,000)
Income tax expense
(credit) $ (4,704,000) $ (4,571,000) $ (1,965,000)
<PAGE> 42
The following table summarizes the major components which comprise the
deferred tax liability as reflected in the balance sheets:
1996 1995
Investments $ (122,251) $ (48,918)
Cost of insurance
acquired 16,637,884 20,860,602
Other assets (187,747) 0
Deferred policy
acquisition costs 3,963,875 4,002,855
Agent balances (65,609) (71,625)
Furniture and
equipment (37,683) (82,257)
Discount of notes 922,766 1,003,038
Management/consulting
fees (733,867) (841,991)
Future policy benetits(5,906,087) (5,039,938)
Gain on sale of
subsidiary 2,312,483 2,312,483
Net operating loss
carryforward (522,392) (650,358)
Other liabilities (1,151,405) (818,484)
Federal tax DAC (1,916,536) (2,862,999)
Deferred tax
liability $ 13,193,431 $ 17,762,408
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 $ 13,326,312 $ 13,190,121 $ 12,185,941
Equity securities 88,661 52,445 3,999
Mortgage loans 1,047,461 1,257,189 1,423,474
Real estate 794,844 975,080 990,857
Policy loans 1,121,538 1,041,900 1,014,723
Short-term investments 515,346 505,637 444,135
Other 197,188 158,290 221,125
Total consolidated
investment income 17,091,350 17,180,662 16,284,254
Investment expense (1,222,903) (1,724,438) (1,915,808)
Consolidated net
investment income $ 15,868,447 $ 15,456,224 $ 14,368,446
At December 31, 1996, the Company had a total of $6,025,000 of investments,
comprised of $5,325,000 in real estate including its home office
property and $700,000 in equity securities, which did not produce income
during 1996.
<PAGE> 43
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 28,554,631 27,488,188
State, municipalities and political
subdivision 14,421,735 6,785,476
Collateralized mortgage obligations 13,246,781 15,395,913
Public utilities 51,821,989 59,136,696
All other corporate bonds 71,881,649 82,267,947
$ 183,682,356 $196,246,876
By insurance statute, the majority of the Company's investment
portfolio is required to be invested in investment grade securities
to provide ample protection for policyholders. The Company does not
invest in so-called "junk bonds" or derivative investments.
Below investment grade debt securities generally provide higher yields
and involve greater risks than investment grade debt securities because
their issuers typically are more highly leveraged and more vulnerable
to adverse economic conditions than investment grade issuers. In
addition, the trading market for these securities is usually more limited
than for investment grade debt securities. Debt securities classified
as below-investment grade are those that receive a Standard & Poor's
rating of BB or below.
The following table summarizes by category securities held that are below
investment grade at amortized cost:
Below Investment
Grade Investments 1996 1995 1994
State, Municipalities
and Political
Subdivisions $ 10,042 $ 0 $ 32,370
Public Utilities 117,609 116,879 168,869
Corporate 813,717 819,010 848,033
Total $ 941,368 $ 935,889 $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
Amortized Unrealized Unrealized Market
1996 Cost Gains Losses Value
Investments Held
for Sale:
U.S. Government
and govt. agencies
and authorities $1,461,068 $ 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 258,424 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 $28,554,631 $ 421,523 $ 136,410 $28,839,744
States, municipalities
and political
subdivisions 14,421,735 318,682 28,084 14,712,333
Collateralized
mortgage
obligations 13,246,780 175,163 157,799 13,264,145
Public utilities 51,821,990 884,858 381,286 52,325,561
All other
corporate bond 71,881,649 1,240,230 448,437 72,673,442
Total $179,926,785 $ 3,040,456 $1,152,016 $181,815,225
<PAGE> 45
Cost or Gross Gross Estimated
Amortized Unrealized Unrealized Market
1995 Cost Gains Losses Value
Investments Held
for Sale:
U.S. Government
and govt. agencies
and authorities $2,001,860 $ 2,579 $ 621 $ 2,003,818
States, municipalities
and political
subdivisions 812,454 14,313 3,749 823,018
Collateralized
mortgage obligations 32,177 506 0 32,683
Public utilities 119,379 572 2,123 117,828
All other corporate
bonds 258,169 337 9,678 248,828
3,224,039 18,307 16,171 3,226,175
Equity securities 2,086,159 80,721 220,399 1,946,481
Total $5,310,198 $ 99,028 $ 236,570 $ 5,172,656
Held to Maturity
Securities:
U.S. Government
and govt. agenciees
and authorities $27,488,188 $ 841,786 $ 76,417 $28,253,557
States, municipalities
and political
subdivisions 6,785,476 305,053 10,895 7,079,634
Collateralized
mortgage
obligations 15,395,913 295,344 67,472 15,623,785
Public utilities 59,136,696 2,279,509 134,091 61,282,114
All other corporate
bonds 82,267,947 2,974,553 475,333 84,767,167
Total $191,074,220 $6,696,245 $ 764,208 $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
Fixed Maturities Held to Amortized
Maturity Cost
December 31, 1996
Due in one year or less $13,222,084
Due after one year
through five years 74,120,886
Due after five years
through ten years 77,222,430
Due after ten years 15,361,385
$179,926,785
<PAGE> 46
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 $276,000 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 $126,000 and
gross losses of $246,000 were realized on those sales, calls and
maturities.
Proceeds from sales, calls and maturities of investments in debt
securities during 1994 were $24,145,000. Gross gains of $84,000 and
gross losses of $554,000 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.
D. INVESTMENTS IN AND ADVANCES TO AFFILIATED COMPANIES - The
Company's investment in United Income, Inc., a 30% owned
affiliate, is carried at an amount equal to the Company's
share of the equity of United Income. The Company's equity
in United Income, Inc. includes the original investment of
$194,304, an increase of $4,359,749 resulting from a public
offering of stock and the Company's share of earnings and
losses since inception.
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.
(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.
<PAGE> 47
(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
Assets Carrying Fair Carrying Fair
Amount Value Amount Value
Fixed maturities $179,926,785 $181,815,225 $191,074,220 $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 430,983 430,983 425,000 425,000
Investment in real
estate 10,543,490 10,543,490 11,978,575 11,978,575
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 19,573,953 18,937,055 21,447,428 20,747,991
<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, 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 Company's insurance subsidiaries reported combined
statutory gain from operations (exclusive of intercompany dividends)
was $10,692,000, $4,076,000 and $3,071,000 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 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.
<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 $ 38,063
Assumed 0 0 0
Ceded (4,768) (5,203) (5,659)
Net premiums$ 27,619 $ 29,998 $ 32,404
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 judgments against the
insurer, including material amounts of punitive damages. In some
states, juries have substantial discretion in awarding punitive
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
United Trust, Inc. has a service agreement with its affiliate, UII
(equity investee), to perform services and provide personnel and
facilities. The services included in the agreement are 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.
UII's service agreement states that USA is to pay UII monthly fees
equal to 22% of the amount of collected first year premiums, 20% in
second year and 6% of the renewal premiums in years three and after.
UII's subcontract agreement with UTI states that UII is to pay UTI
monthly fees equal to 60% of collected service fees from USA as stated
above.
USA paid $1,568,000, $2,015,000 and $1,357,000 under their agreement
with UII for 1996, 1995 and 1994, respectively. UII paid $941,000,
$1,209,000 and $814,000 under their agreement with UTI for 1996, 1995
and 1994, respectively.
<PAGE> 50
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 UTI 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. CAPITAL STOCK TRANSACTIONS
A. PUBLIC OFFERING OF AFFILIATE STOCK
During 1991, an affiliated company, United Fidelity, Inc.,
("UFI") began a stock offering in the State of Illinois.
UFI was offering 400,000 units, each unit consisting of one
share of no par value common stock and one share of Class A
Preferred Stock, $15 par value per share, 9% non-cumulative
convertible. The units were being offered to the public at
$30 per unit. Due to large losses reported by UFI, the sale
of stock units to the public was stopped on June 2, 1994.
The Board of Directors of UFI voted to voluntarily terminate
the offering on August 18, 1994.
The Company accounted for the investment in UFI using the
equity method. At December 31, 1994, the Company charged
off its remaining investment in UFI of $212,247. The
Company determined any material recoverability of its
investment to be unlikely due to continuing losses and
limited capital of UFI. On May 26, 1995, pursuant to a plan
of restructure of UFI's subsidiary, First Fidelity Mortgage
Company (FFMC), UTI surrendered its common stock holdings of
UFI for no value. Additionally, as a part of the FFMC
restructure, UTI invested $615,000 in preferred stock of
FFMC, representing 100% of the outstanding preferred stock
of FFMC, and $10,000 in common stock of FFMC, representing
approximately 14% of the outstanding common stock. Due to
continued losses by FFMC, UTI realized losses of $315,000
and $10,000 from writedowns of their investment in FFMC at
December 31, 1996 and 1995, respectively.
B. STOCK OPTION PLAN
In 1985, the Company initiated a nonqualified stock option
plan for employees, agents and directors of the Company
under which options to purchase up to 440,000 shares of the
company's common stock are granted at $.02 per share.
Through December 31, 1996 options for 424,375 shares were
granted and exercised. Options for 15,625 shares remain
available for grant.
During 1996, the Company adopted Statement of Financial Accounting
Standards No. 123, accounting for stock-based compensation. The
adoption of this standard did not have a material impact on the
Company's financial statements.
Following is a summary of stock option transactions for the
three years ended December 31, 1996:
1996 1995 1994
Option Shares exercised 25,000 20,000 0
Compensation expense
charged to operatiions $ 13,563 $ 12,100 $ 0
Approximate percent of
market value at which
options were granted 3.6% 3.2% 0%
<PAGE> 51
C. 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.
11. NOTES PAYABLE
At December 31, 1996, the Company has $19,574,000 in long term debt
outstanding. The debt is comprised of the following components:
1996 1995
Senior debt $ 8,400,000 $ 10,400,000
Subordinated 10 yr. notes 6,209,000 6,209,000
Subordinated 20 yr. notes 3,815,000 3,815,000
Other notes payable 1,150,000 1,000,000
Encumbrance on real estate 0 23,000
$ 19,574,000 $ 21,447,000
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> 52
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 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. The Company's
subordinated debt consists of $4,495,000 and $3,532,000 of ten year and
twenty year notes, respectively, owed to current officers and directors
of the Company or its affiliates.
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 1,687,000
2000 1,537,000
2001 1,537,000
12. OTHER CASH FLOW DISCLOSURE
The Company recognized an increase in its paid-in capital of $0, $0
and $277,559 for the years 1996, 1995 and 1994 respectively, from its
equity investment in UFI from the offering price per share of UFI
exceeding UTI's carrying amount per share.
On a cash basis, the Company paid $1,700,973, $1,934,326 and
$1,937,123 in interest expense for the years 1996, 1995 and 1994,
respectively. The Company paid $17,634, $25,821 and $190 in federal
income tax for 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.
<PAGE> 53
13. NON-RECURRING WRITE DOWN OF VALUE OF AGENCY FORCE ACQUIRED
The Company recognized a non-recurring write down of $8,297,000 on its
value of agency force acquired for the year ended December 31, 1995.
The write down released $2,904,000 of the deferred tax liability and
$3,327,000 was attributed to minority interest in loss of consolidated
subsidiaries. In addition, equity loss of investees was negatively
impacted by $542,000. The effect of this write down resulted in an
increase in the net loss of $2,608,000. This write down is directly
related to the Company's change in distribution systems. Due to the
broker agency force not meeting management's expectations and lack of
production, the Company has changed its focus from a primarily broker
agency distribution system to a captive agent system. With the change
in focus, most of the broker agents were terminated and therefore,
management re-evaluated the value of the agency force carried on the
balance sheet. For purposes of the write-down, the broker agency
force has no future expected cash flows and therefore warranted a
write-off of the value. The write down is reported as a separate line
item "non-recurring write down of value of agency force acquired" and
the release of the deferred tax liability is reported in the credit
for income taxes payable in the Statement of Operations. In addition,
the impact to minority interest in loss of consolidated subsidiaries
and equity loss of investees is in the Statement of Operations.
14. 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.
15. 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
indirectly control 51% of 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> 54
<TABLE>
16. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
1996
1st 2nd 3rd 4th
<S> <C> <C> <C> <C>
Premium income and other
considerations, net $8,481,511 $ 8,514,175 $ 7,348,199 $ 6,600,573
Net investment income 3,973,349 3,890,127 4,038,831 3,966,140
Total revenues 12,870,140 12,455,875 11,636,614 10,013,741
Policy benefits
including dividends 6,528,760 7,083,803 8,378,710 8,334,759
Commissions and
amortization of DAC 1,161,850 924,174 703,196 1,435,665
Operating expenses 3,447,329 2,851,752 3,422,654 2,272,729
Operating income (71,615) (137,198) (2,346,452) (4,269,870)
Net income (loss) 304,737 9,038 (892,761) (358,917)
Net income (loss)
per share 0.02 0.00 (0.05) (0.02)
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 3,850,161 3,843,518 3,747,069 4,015,476
Total revenues 13,694,471 12,933,370 11,829,921 11,411,322
Policy benefits including
dividends 8,097,830 9,113,933 5,978,795 6,665,206
Commissions and
amortization of DAC 1,556,526 1,960,458 1,350,662 40,007
Operating expenses 3,204,217 2,492,689 2,232,938 3,587,804
Operating income (495,966) (1,939,361) 120,393 (9,060,886)
Net income (loss) 179,044 (689,602) 198,464 (2,689,151)
Net income (loss) per
share 0.01 (0.04) 0.01 (0.14)
1994
1st 2nd 3rd 4th
Premium income and
other considerations,
net $9,042,475 $ 10,011,855 $ 7,913,497 $ 8,176,700
Net investment income 3,366,995 3,556,633 3,633,334 3,811,484
Total revenues 12,245,881 14,052,428 10,900,385 12,007,934
Policy benefits including
dividends 6,927,743 7,496,765 7,483,568 7,753,158
Commissions and
amortization of DAC 1,685,682 4,099,100 3,086,901 2,448,822
Operating expenses 2,366,726 1,898,048 2,328,443 3,194,745
Operating income 801,718 67,387 (2,477,301) (1,891,201)
Net income (loss) (404,022) (117,149) (515,134) (587,295)
Net income (loss) per
share (0.02) (0.01) (0.03) (0.03)
</TABLE>
<PAGE> 55
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> 56
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 58 and 59).
<PAGE> 57
INDEX TO EXHIBITS
Exhibit
Number
3(a) (1) Amended Articles of Incorporation for the
Company dated November 20, 1987.
3(b) (1) Amended Articles of Incorporation for the
Company dated December 6, 1991.
3(c) (1) Amended Articles of Incorporation for the
Company dated March 30, 1993.
3(d) (1) Code of By-Laws for the Company.
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 Insurance Company.
10(ee) (1) Reinsurance Agreement dated January 1, 1991 between
Universal Guaranty Life Insurance Company and
Republic-Vanguard Life Insurance Company.
10(ff) (1) Reinsurance Agreement dated July 1, 1992 between
United Security Assurance Company and Life
Reassurance Corporation of America.
<PAGE> 58
INDEX TO EXHIBITS
Exhibit
Number
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> 59
<TABLE>
UNITED TRUST, INC. 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 Goverment and
government agencies and
authorities $ 28,554,631 $ 28,839,743 $ 28,554,631
State, municipalities, and
political subdivisions 14,421,735 14,712,334 14,421,735
Collateralized mortgage
obligations 13,246,780 13,264,145 13,246,780
Public utilities 51,821,990 52,325,561 51,821,990
All other corporate bonds 71,881,649 72,673,442 71,881,649
Total fixed maturities 179,926,785 $181,815,225 179,926,785
Investments held for sale:
Fixed maturities:
United States Goverment and
government agencies and
authorities 1,461,068 $ 1,443,609 1,443,609
State, municipalities, and
political subdivisions 145,199 139,467 139,467
Public utilities 119,970 119,658 119,658
All other corporate bonds 258,424 258,432 258,432
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 10,543,490 10,543,490
Real estate acquired in
satisfaction of debt 3,846,946 3,846,946
Policy loans 14,438,120 14,438,120
Short term investments 430,983 430,983
Total investments $224,279,936 $223,964,687
</TABLE>
<PAGE> 60
UNITED TRUST, INC.
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 United Trust, Inc. and Consolidated Subsidiaries.
<PAGE> 61
<TABLE>
UNITED TRUST, INC.
CONDENSED FINANCIAL INFORMATION OF
REGISTRANT PARENT ONLY BALANCE SHEETS
As of December 31, 1996 and 1995 Schedule II
1996 1995
<S> <C> <C>
ASSETS
Investment in affiliates $ 19,475,431 $ 20,494,198
Cash and cash equivalents 422,446 503,357
Notes receivable from affiliate 265,900 15,900
Indebtedness from (to) affiliates, net 30,247 (74,519)
Accrued interest income 2,051 16,273
Other assets 262,927 572,716
Total assets $ 20,459,002 $ 21,527,925
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Notes payable to affiliate $ 840,000 $ 840,000
Deferred income taxes 1,602,345 1,662,869
Other liabilities 2,800 2,800
Total liabilities 2,445,145 2,505,669
Shareholders' equity:
Common stock 374,019 373,519
Additional paid-in capital 18,301,974 18,288,411
Unrealized depreciation of
investments held for sale
of affiliates (86,058) (1,499)
Retained earnings (accumulated deficit) (576,078) 361,825
Total shareholders' equity 18,013,857 19,022,256
Total liabilities and
shareholders' equity $ 20,459,002 $21,527,925
</TABLE>
<PAGE> 62
<TABLE>
UNITED TRUST, INC.
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:
Management fees from affiliates $ 940,734 $1,209,196 $ 835,284
Other income from affiliates 115,235 113,869 130,437
Interest income from affiliates 21,264 13,583 65,560
Interest income 29,340 21,678 53,509
Realized investment losses (207,051) 0 0
Loss from write down of investee (315,000) (10,000) (212,247)
584,522 1,348,326 872,543
Expenses:
Management fee to affiliate 575,000 800,000 850,000
Interest expense to affiliates 63,000 63,000 63,175
Operating expenses 133,897 83,312 76,271
771,897 946,312 989,446
Operating income (loss) (187,375) 402,014 (116,903)
Credit (provision) for income taxes 59,780 (153,764) (40,123)
Equity in loss of investees (95,392) (635,949) (1,125,118)
Equity in loss of subsidiaries (714,916) (2,613,546) (341,456)
Net loss $ (937,903)$(3,001,245)$(1,623,600)
</TABLE>
<PAGE> 63
<TABLE>
UNITED TRUST, INC.
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 $ (937,903) $(3,001,245) $(1,623,600)
Adjustments to reconcile net
loss to net cash provided
by operating activities:
Equity in loss of subsidiaries 714,916 2,613,546 341,456
Equity in loss of investees 95,392 635,949 1,125,118
Compensation expense through
stock option plan 13,563 12,100 0
Change in accrued interest income 14,222 2,260 29,424
Depreciation 18,366 26,412 44,246
Realized investment losses 207,051 0 0
Loss from writedown of investee 315,000 10,000 212,247
Change in deferred income taxes (60,524) 153,764 40,123
Change in indebtedness (to)
from affiliates, net (104,766) (23,027) 217,242
Change in other assets and
liabilities (728) (274,167) 75,737
Net cash provided by operating activities 274,589 155,592 461,993
Cash flows from investing activities:
Purchase of stock of affiliates 0 (325,000) (1,350,410)
Change in notes receivable from
affiliate (250,000) 300,000 175,000
Capital contribution to affiliate (106,000) (53,000) 0
Net cash used in investing activities (356,000) (78,000) (1,175,410)
Cash flows from financing activities:
Purchase of treasury stock 0 0 (67,545)
Proceeds from issuance of common stock 500 400 0
Net cash provided by (used in)
financing activities 500 400 (67,545)
Net increase (decrease) in cash and
cash equivalents (80,911) 77,992 (780,962)
Cash and cash equivalents at
beginning of year 503,357 425,365 1,206,327
Cash and cash equivalents at end of year $ 422,446 $ 503,357 $ 425,365
</TABLE>
<PAGE> 64
<TABLE>
UNITED TRUST, INC.
REINSURANCE
As of December 31, 1996 and the year ended December 31, 1996 Schedule IV
Column A Column B Column C Column D Column E Column F
Percentage
Ceded to Assumed of amount
other from other assumed to
Gross amount companies companies* Net amount net
<S> <C> <C> <C> <C> <C>
Life insurance
in force $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%
</TABLE>
* All assumed business represents the Company's participation in
the Servicemen's Group Life Insurance Program (SGLI).
<PAGE> 65
<TABLE>
UNITED TRUST, INC.
REINSURANCE
As of December 31, 1995 and the year ended December 31, 1995 Schedule IV
Column A Column B Column C Column D Column E Column F
Percentage
Ceded to Assumed of amount
other from other assumed to
Gross amount companies companies* Net amount net
<S> <C> <C> <C> <C> <C>
Life insurance
in force $4,207,695,000 $1,087,774,000 $1,039,517,000 $4,159,438,000 25.0%
Premiums:
Life
insurance $ 34,952,367 $ 5,149,939 $ 0$ 29,802,428 0.0%
Accident
and health
insurance 248,448 52,751 0 195,697 0.0%
$ 35,200,815 $ 5,202,690 $ 0 $ 29,998,125 0.0%
</TABLE>
* All assumed business represents the Company's participation in
the Servicemen's Group Life Insurance Program (SGLI).
<PAGE> 66
<TABLE>
UNITED TRUST, INC.
REINSURANCE
As of December 31, 1994 and the year ended December 31, 1994 Schedule IV
Column A Column B Column C Column D Column E Column F
Percentage
Ceded to Assumed of amount
other from other Assumed to
Gross amount companies companies* Net amount net
<S> <C> <C> <C> <C> <C>
Life insurance
in force $4,543,746,000 $1,217,119,000 $1,077,413,000 $4,404,040,000 24.5%
Life
insurance $ 37,800,871 $ 5,597,512 $ 0 $ 32,203,359 0.0%
Accident
and health
insurance 262,315 61,185 0 201,130 0.0%
$ 38,063,186 $ 5,658,697 $ 0 $ 32,404,489 0.0%
</TABLE>
* All assumed business represents the Company's participation in
the Servicemen's Group Life Insurance Program (SGLI).
<PAGE> 67
<TABLE>
UNITED TRUST, INC.
VALUATION AND QUALIFYING ACCOUNTS
For the years ended December 31, 1996, 1995 and 1994 Schedule V
Balance at Additions
Beginning Charges Balances at
Description Of Period and Expenses Deductions End of Period
<S> <C> <C> <C> <C>
December 31, 1996
Allowance for doubtful accounts -
mortgage loans $ 10,000 $ 0 $ 0 $ 10,000
Accumulated depreciation on
property and equipment and
EDP conversion costs 619,817 99,263 0 719,080
Accumulated amortization of
costs in excess of net
assets purchased 1,079,867 185,279 0 1,265,146
Accumulated depreciation on
real estate 1,049,652 291,094 0 1,340,746
Total $ 2,759,336 $ 575,636 $ 0 $ 3,334,972
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 949,608 420,209 750,000 619,817
Accumulated amortization
of costs in excess of
net assets purchased 656,675 423,192 0 1,079,867
Accumulated depreciation on
real estate 802,476 300,396 53,220 1,049,652
Total $ 2,434,759 $ 1,143,797 $ 819,220 $ 2,759,336
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 740,292 209,316 0 949,608
Accumulated amortization
of costs in excess of
net assets purchased 426,999 297,676 68,000 656,675
Accumulated depreciation on
real estate 501,333 301,143 0 802,476
Total $ 1,968,624 $ 808,135 $ 342,000 $ 2,434,759
</TABLE>
<PAGE> 68
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed below by the following persons on
behalf of the registrant and in the capacities and on the dates
indicated.
UNITED TRUST, INC.
(Registrant)
/s/ John S. Albin March 25, 1997
John S. Albin, Director
/s/ William F. Cellini March 25, 1997
William F. Cellini, Director
/s/ Robert E. Cook March 25, 1997
Robert E. Cook, Director
/s/ Larry R. Dowell March 25, 1997
Larry R. Dowell, Director
/s/ Donald G. Geary March 25, 1997
Donald G. Geary, Director
/s/ Raymond L. Larson March 25, 1997
Raymond L. Larson, Director
/s/ Paul D. Lovell March 25, 1997
Paul D. Lovell, Director
/s/ Dale E. McKee March 25, 1997
Dale E. McKee, Director
/s/ Thomas F. Morrow March 25, 1997
Thomas F. Morrow, Chief Operating
Officer, President, and Director
/s/ Larry E. Ryherd March 25, 1997
Larry E. Ryherd, Chairman of the Board,
Chief Executive Officer and Director
/s/ Robert J. Webb March 25, 1997
Robert J. Webb, Director
/s/ James E. Melville March 25, 1997
James E. Melville, Chief Financial Officer
and Senior Executive Vice President
<PAGE> 69
<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> 179,926,785 191,074,220
<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> 10,543,490 11,978,575
<TOTAL-INVEST> 223,964,687 244,815,985
<CASH> 17,326,235 12,528,025
<RECOVER-REINSURE> 42,601,137 14,401,901
<DEFERRED-ACQUISITION> 11,325,356 11,436,728
<TOTAL-ASSETS> 355,473,662 356,304,826
<POLICY-LOSSES> 0 0
<UNEARNED-PREMIUMS> 0 0
<POLICY-OTHER> 248,879,317 243,044,963
<POLICY-HOLDER-FUNDS> 19,892,449 18,751,982
<NOTES-PAYABLE> 19,573,953 21,447,428
0 0
0 0
<COMMON> 374,019 373,519
<OTHER-SE> 17,639,838 18,648,737
<TOTAL-LIABILITY-AND-EQUITY> 355,473,662 356,304,826
27,618,892 29,998,125
<INVESTMENT-INCOME> 15,868,447 15,456,224
<INVESTMENT-GAINS> (987,930) (124,235)
<OTHER-INCOME> 4,476,961 4,538,970
<BENEFITS> 30,326,032 29,855,764
<UNDERWRITING-AMORTIZATION> 4,224,885 4,907,653
<UNDERWRITING-OTHER> 19,250,588 26,481,487
<INCOME-PRETAX> (6,825,135) (11,375,820)
<INCOME-TAX> (4,703,741) (4,571,028)
<INCOME-CONTINUING> (937,903) (3,001,245)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (937,903) (3,001,245)
<EPS-PRIMARY> (0.05) (0.16)
<EPS-DILUTED> (0.05) (0.16)
<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. T h e
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 VENTURESs.
(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 uponand inure to thebenefit of the partieshereto 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, benetfits 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 imserted
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 serverance 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 enforceable by the parties hereto and their
respective successors and permitted assigns.
10.7. EXECUTION IN CONTERPARTS. 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, blut 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 tereafter 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 writte, 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 by resolved pursuant
to the provisions of 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
otherwisebecome 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 practicably 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. This Section 10.13 shall survive termination of this
Assumption Agreement and the Coinsurance Agreement.
AMENDMENT
to
COINSURANCE 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]
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
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
