SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 AND 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarter Ended June 30, 1997 Commission File No. 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 (IRS Employer
Incorporation or organization) Identification No.)
Registrant's telephone number, including area code: (217) 241-6300
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
YES X NO
Indicate the number of shares outstanding of each of the Registrant's
classes of common stock, as of the latest practicable date.
Shares outstanding at July 31, 1997:
1,869,815
Common stock, no par value per share
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UNITED TRUST, INC.
(The "Company")
TABLE OF CONTENTS
Part 1: Financial Information 3
Consolidated Balance Sheets as of June 30, 1997 and December 31, 1996 3
Consolidated Statements of Operations for the six months and three
months ended June 30, 1997 and 1996 4
Consolidated Statements of Cash Flows for the six months ended
June 30, 1997 and 1996 5
Notes to Consolidated Financial Statements 6
Management's Discussion and Analysis of Financial Condition and Results
of Operations 10
Part II - Other Information 15
Item 5. Other information 15
Item 6. Exhibits 15
Signatures 16
2
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<TABLE>
PART 1. FINANCIAL INFORMATION
Item 1. Financial Statements
UNITED TRUST, INC.
AND SUBSIDIARIES
Consolidated Balance Sheets
June 30, December 31,
ASSETS 1997 1996
<S> <C> <C>
Investments:
Fixed maturities at amortized cost
(market $185,386,442 and $181,815,225) $184,362,730 $179,926,785
Investments held for sale:
Fixed maturities, at market
(cost $1,838,367 and $1,984,661) 1,827,692 1,961,166
Equity securities, at market
(cost $1,912,766 and $2,086,159) 2,531,349 1,794,405
Mortgage loans on real estate at amortized cost 10,188,023 11,022,792
Investment real estate, at cost, net of
accumulated depreciation 10,611,081 10,543,490
Real estate acquired in satisfaction of debt,
at cost 3,846,946 3,846,946
Policy loans 14,095,270 14,438,120
Short term investments 423,492 430,983
227,886,583 223,964,687
Cash and cash equivalents 13,090,009 17,326,235
Investment in affiliates 4,876,698 4,826,584
Indebtedness of affiliates, net 29,341 (31,837)
Accrued investment income 3,546,744 3,461,799
Reinsurance receivables:
Future policy benefits 38,172,599 38,745,013
Policy claims and other benefits 3,547,330 3,856,124
Other accounts and notes receivable 827,962 894,321
Cost of insurance acquired 42,866,055 43,917,280
Deferred policy acquisition costs 11,421,038 11,325,356
Costs in excess of net assets purchased,
less accumulated amortization 2,824,166 5,496,808
Other assets 1,986,893 1,659,455
Total assets $351,075,418 $355,441,825
LIABILITIES AND SHAREHOLDERS' EQUITY
Policy liabilities and accruals:
Future policy benefits $249,705,068 $248,879,317
Policy claims and benefits payable 2,218,158 3,193,806
Other policyholder funds 2,544,335 2,784,967
Dividend and endowment accumulations 14,439,182 13,913,676
Income taxes payable:
Current 1,725,932 70,663
Deferred 11,594,166 13,193,431
Notes payable 18,815,701 19,573,953
Other liabilities 5,011,741 5,975,483
Total liabilities 306,054,283 307,585,296
Minority interests in consolidated subsidiaries 26,822,176 29,842,672
Shareholders' equity:
Common stock - no par value, stated value
$.02 per share
Authorized 3,500,000 shares - 1,869,815
and 1,870,093 shares issued after deducting
treasury shares of 42,424 and 42,384 37,397 37,402
Additional paid-in capital 18,636,207 18,638,591
Unrealized depreciation of investments held for sale (47,405) (86,058)
Accumulated deficit (427,240) (576,078)
Total shareholders' equity 18,198,959 18,013,857
Total liabilities and shareholders' equity $351,075,418 $355,441,825
</TABLE>
See accompanying notes.
3
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<TABLE>
UNITED TRUST, INC.
AND SUBSIDIARIES
Consolidated Statements of Operations
Three Months Ended Six Months Ended
June 30, June 30, June 30, June 30,
1997 1996 1997 1996
<S> <C> <C> <C> <C>
Revenues:
Premium income $ 7,975,216 $ 8,749,389 $16,143,254 $17,677,871
Reinsurance premium (1,031,186) (1,072,667) (2,127,314) (2,363,646)
Other considerations 910,982 876,639 1,815,340 1,762,138
Other considerations
paid to reinsurers (46,230) (39,186) (96,112) (80,677)
Net investment income 3,825,457 3,890,127 7,670,356 7,863,476
Realized investment
gains and (losses), net (22,443) (270,916) (28,579) (282,947)
Other income 260,157 322,489 460,579 749,800
11,871,953 12,455,875 23,837,524 25,326,015
Benefits and other expenses:
Benefits, claims and
settlement expenses:
Life 5,955,358 6,111,321 12,626,544 11,221,641
Reinsurance benefits
and claims (533,072) (536,079) (966,248) (776,044)
Annuity 414,909 442,054 767,412 888,947
Dividends to
policyholders 1,024,504 1,066,507 2,152,006 2,278,019
Commissions and
amortization of deferred
policy acquisition costs 553,913 924,174 1,664,323 2,086,024
Amortization of cost of
insurance acquired 586,023 1,325,928 1,112,287 2,683,552
Operating expenses 2,777,409 2,851,752 5,366,585 6,299,081
Interest expense 409,686 407,416 824,634 853,608
11,188,730 12,593,073 23,547,543 25,534,828
Income (loss) before income
taxes, minority interest
and equity in earnings of
investees 683,223 (137,198) 289,981 (208,813)
Credit (provision) for
income taxes (530,769) 95,563 (127,207) 672,660
Minority interest in
(income)loss of
consolidated subsidiaries (76,042) 35,486 (55,950) (235,657)
Equity in earnings (loss)
of investees 25,400 15,187 42,014 85,585
Net income (loss) $ 101,812 $ 9,038 $ 148,838 $ 313,775
Net income (loss) per
common share $ 0.05 $ 0.00 $ 0.08 $ .17
Weighted average common
shares outstanding 1,869,940 1,870,093 1,870,016 1,868,919
</TABLE>
See accompanying notes
4
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<TABLE>
UNITED TRUST, INC.
AND SUBSIDIARIES
Consolidated Statements of Cash Flows
June 30, June 30,
1997 1996
<S> <C> <C>
Increase (decrease) in cash and cash equivalents
Cash flows from operating activities:
Net income (loss) $ 148,838 $ 313,775
Adjustments to reconcile net income (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 321,874 482,402
Realized investment (gains) losses, net 28,579 282,947
Policy acquisition costs deferred (825,000) (977,000)
Amortization of deferred policy acquisition costs 729,318 1,218,314
Amortization of cost of insurance acquired 1,112,287 2,683,552
Amortization of costs in excess of net
assets purchased 77,500 81,970
Depreciation 163,591 263,946
Minority interest 55,950 235,657
Equity in earnings of investees (42,014) (85,585)
Change in accrued investment income (84,945) (27,307)
Change in reinsurance receivables 881,208 46,135
Change in policy liabilities and accruals (1,237,684) (505,843)
Charges for mortality and administration of
universal life and annuity products (4,736,072) (5,133,997)
Interest credited to account balances 3,679,554 3,503,500
Change in income taxes payable 56,004 (796,759)
Change in indebtedness (to) from affiliates, net (84,945) 3,107
Change in other assets and liabilities, net (1,270,184) (988,058)
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES (1,026,141) 600,756
Cash flows from investing activities:
Proceeds from investments sold and matured:
Fixed maturities held for sale matured 140,000 500,583
Fixed maturities sold 0 0
Fixed maturities matured 3,492,302 15,982,534
Equity securities 42,801 8,990
Mortgage loans 834,769 1,086,205
Real estate 234,073 2,225,127
Policy loans 2,441,970 2,177,694
Short term 110,000 400,000
Total proceeds from investments sold and matured 7,295,915 22,381,133
Cost of investments acquired:
Fixed maturities held for sale 0 0
Fixed maturities (8,262,020) (18,713,187)
Equity securities (710,388) 0
Mortgage loans 0 (119,924)
Real estate (466,770) (385,147)
Policy loans (2,099,120) (2,262,305)
Short term (102,509) (300,000)
Total cost of investments acquired (11,640,807) (21,780,563)
NET CASH PROVIDED BY (USED IN)INVESTING ACTIVITIES (4,344,892) 600,570
Cash flows from financing activities:
Policyholder contract deposits 9,997,553 12,108,411
Policyholder contract withdrawals (7,568,374) (8,023,342)
Payment for fractional shares from
reverse stock split (2,128) 0
Payment for fractional shares from reverse
stock split of subsidiary (533,992) 0
Proceeds from issuance of notes payable 666,786 400,000
Payments of principal on notes payable (1,425,038) (1,752,996)
NET CASH PROVIDED BY FINANCING ACTIVITIES 1,134,807 2,732,073
Net increase in cash and cash equivalents (4,236,226) 3,933,399
Cash and cash equivalents at beginning of period 17,326,235 12,528,025
Cash and cash equivalents at end of period $ 13,090,009 $ 16,461,424
</TABLE>
See accompanying notes
5
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UNITED TRUST, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
1. BASIS OF PRESENTATION
The accompanying consolidated financial statements have been prepared by United
Trust Inc. ("Trust") and its consolidated subsidiaries ("Company") pursuant
to the rules and regulations of the Securities and Exchange Commission. Although
the Company believes the disclosures are adequate to make the information
presented not be misleading, it is suggested that these consolidated financial
statements be read in conjunction with the consolidated financial statements
and the notes thereto presented in the Company's Annual Report on Form 10-K
filed with the Securities and Exchange Commission for the year ended December
31, 1996.
The information furnished reflects, in the opinion of the Company, all
adjustments (which include only normal and recurring accruals) necessary for
a fair presentation of the results of operations for the periods presented.
Operating results for interim periods are not necessarily indicative of
operating results to be expected for the year or of the Company's future
financial condition.
At June 30, 1997, the parent, significant 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 29.9% of United Income, Inc. ("UII").
UII owns 47% of UTG. UTG owns 79.3% of First Commonwealth Corporation ("FCC")
and FCC owns 100% of Universal Guaranty Life Insurance Company ("UG"). UG
owns 100% of United Security Assurance Company ("USA"). USA owns 83.9% of
Appalachian Life Insurance Company ("APPL") and APPL owns 100% of Abraham
Lincoln Insurance Company ("ABE").
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2. FIXED MATURITIES
As of June 30, 1997, fixed maturities and fixed maturities held for sale
represented 82% of total invested assets. As prescribed by the various state
insurance department statutes and regulation, the insurance companies'
investment portfolio is required to be invested primarily in investment grade
securities to provide ample protection for policyholders. The liabilities of
the insurance companies are predominantly long term in nature and therefore,
the companies invest primarily in long term fixed maturity investments. The
Company has analyzed its fixed maturity portfolio and reclassified those
securities expected to be sold prior to maturity as investments held for sale.
The investments held for sale are carried at market. Management has the intent
and ability to hold its fixed maturity portfolio to maturity and as such
carries these securities at amortized costs. As of June 30, 1997, the carrying
value of fixed maturity securities in default as to principal or interest was
immaterial in the context of consolidated assets or shareholders' equity.
3. MORTGAGE LOANS AND REAL ESTATE
The Company holds approximately $10,188,000 in mortgage loans and $14,458,000
in real estate holdings, including real estate acquired in satisfaction of debt,
which represent 4% and 6% of total invested assets of the Company, respectively.
All mortgage loans held by the Company are first position loans. The Company
has $541,000 in mortgage loans net of a $10,000 reserve allowance, which are in
default or in the process of foreclosure representing approximately 5% of the
total portfolio.
Letters are sent to each mortgagee when the loan becomes 30 days or more
delinquent. Loans 90 days or more delinquent are placed on a non-performing
status and classified as delinquent loans. Reserves for loan losses on
delinquent loans are established based on management's analysis of the loan
balances and what is believed to be the realizable value of the property should
foreclosure take place. Loans are placed on a non-accrual status based on a
quarterly case by case analysis of the likelihood of repayment.
The following tables show the distribution of mortgage loans and real estate
by type.
Mortgage loans Amount % of Total
FHA/VA $ 549,248 5%
Commercial $ 1,638,366 16%
Residential $ 8,000,409 79%
Real Estate Amount % of Total
Home Office $ 2,880,014 20%
Commercial $ 2,255,421 16%
Residential development $ 5,475,646 37%
Foreclosed real estate $ 3,846,946 27%
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4. NOTES PAYABLE
At June 30, 1997, the Company has $18,816,000 in notes payable. Notes payable
is comprised of the following components:
Senior debt $ 7,900,000
Subordinated 10 yr. Notes 5,731,000
Subordinated 20 yr. Notes 4,035,000
Other notes payable 1,150,000
$ 18,816,000
The senior debt is through First of America Bank - Illinois NA and is subject
to a credit agreement. The debt bears interest at 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 June 30, 1997 was 8.5%. Principal payments of $1,000,000 are due in May of
each year beginning in 1997, with a final payment due May 8, 2005.
The credit agreement contains certain covenants with which the Company must
comply. These 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 of
Universal Guaranty Life Insurance Company and its subsidiaries (based on
Statutory Accounting Practices) and the after-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 in compliance with all of the covenants of the agreement and does
not foresee any problem in maintaining compliance in the future.
United Income, Inc. and First Fidelity Mortgage Company through an assignment
from United Trust, Inc. hold promissory notes receivable of $700,000 and
$300,000 respectively due from FCC. 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 $150,000 from an affiliate 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 except for one $840,000
note, provide for principal payments equal to 1/20th of the principal balance
due with each interest installment beginning December 16, 1997, with a final
payment due June 16, 2002. The $840,000 note provides for a lump sum principal
payment due June 16, 2002. In June 1997, the Company refinanced $204,267 of
its subordinated 10 year notes to subordinated 20-year notes bearing interest
at the rate of 8.75%. The repayment terms of these notes are the same as the
original subordinated 20-year notes. The 20-year notes bear interest at the
rate of 8 1/2% per annum on $3,530,000 and 8.75% per annum on $505,000, payable
semi-annually beginning December 16, 1992, with a lump sum principal payment
due June 16, 2012.
Scheduled principal reductions on the Company's debt for the next five years
are as follows:
Year Amount
1997 $ 0
1998 1,489,000
1999 1,639,000
2000 1,489,000
2001 1,489,000
8
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5. 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.
6. TERMINATION OF AGREEMENT REGARDING PENDING CHANGE IN CONTROL OF UNITED
TRUST, INC.
On April 14, 1997, United Trust, Inc. and United Income, Inc. formally
terminated their stock purchase agreement contract with LaSalle Group, Inc.
("LaSalle"), whereby LaSalle was to acquire certain authorized but unissued
shares of UTI and UII and additional outstanding shares in privately
negotiated transactions so that LaSalle would own not less than 51% of the
outstanding common stock of UTI and indirectly control 51% of UII.
LaSalle had not performed its obligations under the terms of the contract,
and the Company felt it should be free to negotiate with other interested
parties in becoming an equity partner.
7. REVERSE STOCK SPLIT
On May 13, 1997, the Company effected a 1 for 10 reverse stock split.
Fractional shares received a cash payment on the basis of $1.00 for each old
share. The reverse split was completed to enable the Company to meet new NASDAQ
requirements regarding market value of stock to remain listed on the NASDAQ
market and to increase the market value per share to a level where more brokers
will look at the Company and its stock. Prior period numbers have been restated
to give effect of the reverse split.
8. REVERSE STOCK SPLIT OF FCC
On May 13, 1997, FCC effected a 1 for 400 reverse stock split. Fractional
shares received a cash payment on the basis of $.25 for each old share. The
Company maintained a significant number of shareholder accounts with less than
$100 of market value of stock. The reverse stock split enabled these smaller
shareholders to receive cash for their shares without incurring broker costs
and will save the Company administrative costs associated with maintaining
these accounts.
9
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ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
The purpose of this section is to discuss and analyze the Company's financial
condition, changes in financial condition and results of operations, which
reflect the performance of the Company. The information in the consolidated
financial statements and related notes should be read in conjunction with this
section.
LIQUIDITY AND CAPITAL RESOURCES
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 3.7% and 4.9% as of June
30, 1997, and December 31, 1996, respectively. Fixed maturities as a
percentage of total invested assets were 81% and 80% as of June 30, 1997 and
December 31, 1996, 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 is 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
($1,026,000) and $601,000 for the first six months of 1997 and 1996,
respectively. The net cash (used in) or provided by operating activities
plus net policyholder contract deposits after the payment of policyholder
withdrawals, equaled $1,403,000 for the first six months of 1997 and $4,686,000
for the first six months of 1996. Management uses 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. Dollar volume of
new business production is down 33% when comparing the first half of 1997 to
the first half of 1996. New business production suffered in 1997 from a
combination of the uncertainty generated by the pending change of control of
the Company (See Note 6), and modifications to certain products in the Company's
life insurance portfolio. The modifications to the products were necessary to
meet new regulations adopted by state insurance departments. The modifications
to the products required re-training of the Company's agency force.
Cash provided by (used in) investing activities was ($4,345,000) and $601,000
for the first six months of 1997 and 1996, respectively. The most significant
aspect of cash provided by (used in) investing activities is the fixed maturity
transactions. Fixed maturities account for 71% and 86% of the total cost of
investments acquired for the first six months of 1997 and 1996, respectively.
The Company has not directed its investable funds to so-called "junk bonds" or
derivative investments.
Net cash provided by financing activities was $1,135,000 and $2,732,000 for
the first six months of 1997 and 1996, respectively. Policyholder contract
deposits decreased 17% for the first six months of 1997 compared to the first
six months of 1996. The decrease is due to the decline in new business
production. Policyholder contract withdrawals decreased 6% for the first six
months of 1997 compared to the first six months of 1996.
On May 8, 1996, FCC refinanced its senior debt of $8,900,000. The refinancing
was completed through First of America Bank - Illinois NA and is subject to a
credit agreement. The refinanced debt bears interest at 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
10
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at June 30, 1997 was 8.5%. 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. The Company satisfied its $1,000,000 principal
obligation for 1997 by prepaying $500,000 on November 8, 1996 and a payment of
$500,000 on May 8, 1997. The next scheduled principal payment is $1,000,000
due on May 8, 1998.
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 June 30, 1997, substantially all of the consolidated
shareholders equity represents net assets of its subsidiaries. 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, the state insurance department regulates
insurance company dividend payments 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.
Management believes the overall sources of liquidity available will be
sufficient to satisfy its financial obligations.
RESULTS OF OPERATIONS
YEAR-TO-DATE 1997 COMPARED TO 1996:
(a) REVENUES
Premium income, net of reinsurance premium, decreased 8% when comparing the
first six months of 1997 to the first six months of 1996. The Company's
primary product is the "Century 2000" universal life insurance product.
Universal life and interest sensitive life insurance products contribute
only the risk charge to premium income, however traditional insurance products
contribute all monies received to premium income. Since the Company does not
actively market traditional life insurance products, it is expected that
premium income will continue to decrease in future perods as a result of
expected lapses of business in force.
Other considerations, net of reinsurance, increased approximately 2% compared
to one year ago. Other considerations consist 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 focus on universal life insurance products.
Net investment income decreased 2% when comparing the first six months of 1997
to 1996. The decrease is the result of a smaller invested asset base from one
year ago. During the fourth quarter 1996, the Company transferred
approximately $22,000,000 in assets as part of a coinsurance agreement with
First International Life Insurance Company ("FILIC"). The overall annualized
investment yields for the first six months of 1997 and 1996 are 7.2% and 7.0%,
respectively. The improvement in investment yield is primarily attributed to
the fixed maturity portfolio. The Company has invested excess cash and
financing activities generated 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.
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(b) EXPENSES
Life benefits, net of reinsurance benefits and claims, increased 6% in the
first six months of 1997 compared to 1996. The increase in life benefits is
attributed to an increase in mortality. Mortality increased 21% in the first
six months of 1997 compared to 1996. There is no single event that caused
mortality to increase. Policy claims vary from year to year and therefore,
fluctuations in mortality are to be expected and are not considered unusual by
management. The Company experienced a decline of 33% in dollar volume of new
business production. This decline results in less of an increase in reserves
from new business as compared to the previous year.
Commissions and amortization of deferred policy acquisition costs decreased
20% for the first six months of 1997 compared to the first six months of 1996.
The decrease was due to the decline in new business production.
Amortization of cost of insurance acquired decreased $1,571,000 for the first
six months of 1997 compared to 1996. The decrease is attributed to the
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 a non-premium paying life insurance policy.
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.
Operating expenses decreased 15% when comparing the first six months of 1997
to the first six months of 1996. The decrease in operating expenses is
attributed to the settlement of certain litigation in the fourth quarter of
1996. The Company incurred elevated legal fees in the previous year due to the
litigation. Operating expenses were further reduced from a restructuring of
the home office personnel completed in late 1996.
Interest expense decreased 3% for the first six months of 1997 compared to
1996. On May 8, 1996, FCC refinanced its senior debt of $8,900,000. The
refinanced debt bears interest to a rate equal to the "base rate" plus
nine-sixteenths of one percent. Prior to refinancing, the interest rate was
equal to the base rate plus one percent. The decrease in interest rate and
principal reductions made during the last year provided the decrease in
interest expense for the first six months of 1997.
(c) NET INCOME (LOSS)
The Company had a net income of $149,000 for the first six months of 1997
compared to a net income of $314,000 for the first six months of 1996. The
decline in net income for the current period is primarily due to the increase
in mortality.
SECOND QUARTER 1997 COMPARED TO SECOND QUARTER 1996:
(a) REVENUES
Premium income, net of reinsurance premium, decreased 10% when comparing second
quarter of 1997 to second quarter of 1996. The Company's primary product is
the "Century 2000" universal life insurance product. Universal life and
interest sensitive life insurance products contribute only the risk charge to
premium income, however traditional insurance products contribute all monies
received to premium income. Since the Company does not actively market
traditional life insurance products, it is expected that premium income will
continue to decrease in future peroids as a result of expected lapses of
business in force.
Other considerations, net of reinsurance, increased approximately 3% compared
to one year ago. Other considerations consist 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 focus on universal life insurance products.
Net investment income decreased 2% when comparing second quarter of 1997 to
1996. The decrease is the result of a smaller invested asset base from one
year ago. During the fourth quarter 1996, the Company transferred
12
<PAGE>
approximately $22,000,000 in assets as part of a coinsurance agreement with
First International Life Insurance Company ("FILIC").
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.
(b) EXPENSES
Life benefits, net of reinsurance benefits and claims, decreased 3% in second
quarter of 1997 compared to 1996. The decrease in life benefits is due to the
decrease in new business production. Although life benefits decreased,
mortality increased $137,000 in second quarter of 1997 compared to 1996.
There is no single event that caused mortality to increase. Policy claims
vary from year to year and therefore, fluctuations in mortality are to be
expected and are not considered unusual by management.
Commissions and amortization of deferred policy acquisition costs decreased
40% for second quarter of 1997 compared to second quarter of 1996. The
decrease was due to the decline in new business production.
Amortization of cost of insurance acquired decreased $740,000 for second
quarter of 1997 compared to 1996. The decrease is attributed to the
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 a non-premium paying life insurance
policy. 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.
Interest expense increased slightly for second quarter of 1997 compared to
1996. On May 8, 1996, FCC refinanced its senior debt of $8,900,000. The
refinanced debt bears interest to a rate equal to the "base rate" plus
nine-sixteenths of one percent. The base-lending rate increased a quarter
of a percent in March 1997. This impact was partially offset by principal
reductions made during the last year.
(c) NET INCOME (LOSS)
The Company had net income of $102,000 for second quarter of 1997 compared to
$9,000 for second quarter of 1996. The improvement in net income is due to
the decrease in amortization of cost of insurance acquired.
FINANCIAL CONDITION
The financial condition of the Company changed slightly since December 31,
1996. The most significant changes to occur are a decrease in cash and cash
equivalents and the corresponding increase in fixed maturities. Future policy
benefits increased as expected due to the aging in force business.
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.
13
<PAGE>
The Company does not own any derivative investments or "junk bonds". As of
June 30, 1997, 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.
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.
14
<PAGE>
PART II - OTHER INFORMATION
ITEM 5. OTHER INFORMATION
PROPOSED MERGER OF UNITED TRUST, INC. AND UNITED INCOME, INC.
On March 25, 1997, the Board of Directors of UTI and UII voted to recommend to
the shareholders a merger of the two companies. Under the Plan of Merger, UTI
would be the surviving entity with UTI issuing one share of its stock (after
its reverse stock split of one share for each ten shares) for each share held
by UII shareholders (after its reverse stock split of one share for every
14.2857 shares).
UTI stock currently trades on NASDAQ. The reverse stock split increased the
price at which the Company's stock trades, enabling it to meet new NASDAQ
requirements regarding eligibility to remain listed.
UTI owns 53% of United Trust Group, Inc., an insurance holding company, and UII
owns 47% of United Trust Group, Inc. Neither UTI nor UII have any other
significant holdings or business dealings. The Board of Directors of each
company thus concluded a merger of the two companies would be in the best
interests of the shareholders. The merger will result in certain cost savings,
primarily related to costs associated with maintaining a corporation in good
standing in the states in which it transacts business.
ITEM 6. EXHIBITS
The Company hereby incorporates by reference the exhibits as reflected in the
Index to Exhibits of the Company's Form 10-K for the year ended December 31,
1996.
15
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
UNITED TRUST, INC.
(Registrant)
Date: August 13, 1997 By JAMES E. MELVILLE
James E. Melville
Senior Executive Vice President
and Chief Financial Officer
16
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<FISCAL-YEAR-END> DEC-31-1997 DEC-31-1996
<PERIOD-END> JUN-30-1997 JUN-30-1996
<DEBT-HELD-FOR-SALE> 1,827,692 2,670,087
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<DEBT-MARKET-VALUE> 185,386,442 192,654,841
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<REAL-ESTATE> 14,458,027 15,173,850
<TOTAL-INVEST> 227,886,583 243,133,923
<CASH> 13,090,009 16,461,424
<RECOVER-REINSURE> 41,719,929 14,355,766
<DEFERRED-ACQUISITION> 11,421,038 11,678,042
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<INVESTMENT-INCOME> 7,670,356 7,863,476
<INVESTMENT-GAINS> (28,579) (282,947)
<OTHER-INCOME> 2,179,807 2,431,261
<BENEFITS> 14,579,714 13,612,563
<UNDERWRITING-AMORTIZATION> 1,112,287 2,683,552
<UNDERWRITING-OTHER> 6,191,219 7,152,689
<INCOME-PRETAX> 289,981 (208,813)
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