SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K/A
AMENDMENT NUMBER 1 TO
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1997Commission 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
Amendment No. 1
The undersigned registrant hereby amends the following items, financial
statements, exhibits, or other portions of its December 31, 1997 filing of
Form 10-K as set forth in the pages attached hereto:
Each amendment as shown on the index page is amended to
replace the existing item, statement or exhibit
reflected in the December 31, 1997 Form 10-K filing.
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant duly caused this amendment to be signed on its behalf by the
undersigned , thereunto duly authorized.
UNITED TRUST, INC.
(Registrant)
By: /s/ James E. Melville
James E. Melville
President and Chief
Operating Officer
By: /s/ Theodore C. Miller
Senior Vice President and
Chief Financial Officer
Date: June 1, 1998
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UNITED TRUST, INC.
FORM 10-K/A
INDEX
PART I
ITEM 1. BUSINESS
Products 3
Marketing 4
PART II
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS 5-18
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PART I, ITEM I, BUSINESS, PRODUCTS OF UTI SHOULD BE AMENDED AS FOLLOWS:
PRODUCTS
The Company's portfolio consists of two universal life insurance products.
Universal life insurance is a form of permanent life insurance that is
characterized by its flexible premiums, flexible face amounts, and
unbundled pricing factors. 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 premium load is a general expense charge which is added to
a policy's net premium to cover the insurer's cost of doing business. 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'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.
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. The previously defined Universal
life and interest sensitive whole life, which is a type of indeterminate
premium life insurance which provides that the policy's cash value may be
greater than that guaranteed if changing assumptions warrant an increase,
business account for approximately 46% of the insurance in force.
Approximately 29% of the insurance in force is participating business,
which represents policies under which the policyowner shares in the
insurance companies divisible surplus. The Company's average persistency
rate for its policies in force for 1997 and 1996 has been 89.4% and 87.9%,
respectively. The Company does not anticipate any material fluctuations in
these rates in the future that may result from competition.
Interest-sensitive life insurance products have characteristics similar to
annuities with respect to the crediting of a current rate of interest at or
above a guaranteed minimum rate and the use of surrender charges to
discourage premature withdrawal of cash values. Universal life insurance
policies also involve variable premium charges against the policyholder's
account balance for the cost of insurance and administrative expenses.
Interest-sensitive whole life products generally have fixed premiums.
Interest-sensitive life insurance products are designed with a combination
of front-end loads, periodic variable charges, and back-end loads or
surrender charges. Traditional life insurance products have premiums and
benefits predetermined at issue; the premiums are set at levels that are
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designed to exceed expected policyholder benefits and Company expenses.
Participating business is traditional life insurance with the added feature
of an annual return of a portion of the premium paid by the policyholder
through a policyholder dividend. This dividend is set annually by the
Board of Directors of each insurance company and is completely
discretionary.
PART I, ITEM I, BUSINESS, MARKETING OF UTI SHOULD BE AMENDED AS FOLLOWS:
MARKETING
The Company markets its products through separate and distinct agency
forces. The Company has approximately 45 captive agents who actively write
new business, and 15 independent agents who primarily service their
existing customers. Captive agents work under an ordinary agency
distribution system which relies on career agents to sell and service
insurance and annuity policies of a single company. Independent agents
work under a brokerage distribution system which relies on brokers to
distribute the insurance and annuity policies of more than one company.
Both captive and independent agents work on a contractual basis and are
paid commissions on a percentage of premiums written. No individual sales
agent accounted for over 10% of the Company's premium volume in 1997. The
Company's sales agents do not have the power to bind the Company.
Marketing is based on referrals from existing policyholders and new
prospect lists obtained from newly recruited sales agents. Recruiting of
sales agents is based on referrals from existing agents and the invitation
to attend our Company's comprehensive training school. The industry has
experienced a downward trend in the total number of agents who sell
insurance products, and competition for the top sales producers has
intensified. As this trend appears to continue, the recruiting focus of
the Company has been on introducing quality individuals to the insurance
industry through an extensive internal training program. The Company feels
this approach is conducive to the mutual success of our new recruits and
the Company as these recruits market our products in a professional,
company structured manner.
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.
USA is licensed in Illinois, Indiana and Ohio. During 1997, Ohio accounted
for 99% of USA's direct premiums collected.
ABE is licensed in Alabama, Arizona, Illinois, Indiana, Louisiana and
Missouri. During 1997, Illinois and Indiana accounted for 46% and 32%,
respectively of ABE'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 1997, 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 1997, Illinois accounted for 33%, and Ohio accounted for 14% of
direct premiums collected. No other state accounted for more than 7% of
direct premiums collected in 1997.
In 1997 $38,471,452 of total direct premium was written by USA, ABE, APPL
and UG. Ohio accounted for 35%, Illinois accounted for 21%, and West
Virginia accounted for 10% of total direct premiums collected.
New business production has decreased 15% from 1995 to 1996 and 43% from
1996 to 1997. Several factors have had a significant impact on new
business production. Over the last two years there has been the
possibility of a change in control of UTI. In September of 1996, an
agreement was reached effecting a change in control of UTI to an unrelated
party. The transaction did not materialize. At this writing negotiations
are progressing with a different unrelated party for change in control of
UTI. Please refer to note 17 in the Notes to the Consolidated Financial
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Statements for additional information. The possible changes in control,
and the uncertainty surrounding each potential event, have hurt the
insurance Companies' ability to attract and maintain sales agents. In
addition, increased competition for consumer dollars from other financial
institutions, product Illustration guideline changes by State Insurance
Departments, and a decrease in the total number of insurance sales agents
in the industry, have all had an impact, given the relatively small size of
the Company.
Management recognizes the aforementioned challenges and is responding. The
potential change in control of the Company is progressing, bringing the
possibility for future growth, efforts are being made to introduce
additional products, and the recruitment of quality individuals for
intensive sales training, are directed at reversing current marketing
trends.
AMEND PART II , ITEM 7 AS FOLLOWS:
UTI MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 1997
The purpose of this section is to discuss and analyze the Company's
consolidated results of operations, financial condition and liquidity and
capital resources. This analysis should be read in conjunction with the
consolidated financial statements and related notes which appear elsewhere
in this report. The Company reports financial results on a consolidated
basis. The consolidated financial statements include the accounts of UTI
and its subsidiaries at December 31, 1997.
RESULTS OF OPERATIONS
1997 COMPARED TO 1996
(a) REVENUES
Premiums and policy fee revenues, net of reinsurance premiums and policy
fees, decreased 7% when comparing 1997 to 1996. The Company currently
writes little new traditional business, consequently, traditional premiums
will decrease as the amount of traditional business in-force decreases.
Collected premiums on universal life and interest sensitive products is not
reflected in premiums and policy revenues because Generally Accepted
Accounting Procedures ("GAAP") requires that premiums collected on these
types of products be treated as deposit liabilities rather than revenue.
Unless the Company acquires a block of in-force business or marketing
changes its focus to traditional business, premium revenue will continue to
decline at a rate consistent with prior experience.
Another cause for the decrease in premium revenues is related to the
potential change in control of UTI over the last two years to two different
parties. During September of 1996, it was announced that control of UTI
would pass to an unrelated party, but the change in control did not
materialize. At this writing, negotiations are progressing with a
different unrelated party for the change in control of UTI. Please refer
to the Notes to the Consolidated Financial Statements for additional
information. The possible changes and resulting uncertainties have hurt
the insurance companies' ability to recruit and maintain sales agents.
New business production decreased significantly over the last two years.
New business production decreased 43% or $3,935,000 when comparing 1997 to
1996. In recent years, the insurance industry as a whole has experienced a
decline in the total number of agents who sell insurance products,
therefore competition has intensified for top producing sales agents. The
relatively small size of our companies, and the resulting limitations, have
made it challenging to compete in this area.
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 Companies' average persistency rate for all policies in
force for 1997 and 1996 has been approximately 89.4% and 87.9%,
respectively.
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Net investment income decreased 6% when comparing 1997 to 1996. The
decrease relates to the decrease in invested assets from a coinsurance
agreement. The Company's insurance subsidiary UG entered into a
coinsurance agreement with First International Life Insurance Company
("FILIC"), an unrelated party, as of September 30, 1996. During 1997,
FILIC changed its name to Park Avenue Life Insurance Company ("PALIC").
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. 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.
To provide the cash required to be transferred under the agreement, the
Company sold $18,737,000 of fixed maturity investments.
The overall investment yields for 1997, 1996 and 1995, are 7.24%, 7.29% and
7.12%, respectively. Since 1995, investment yield improved due to the
fixed maturity investments. Cash generated from the sales of universal
life insurance products, has been invested primarily in our fixed maturity
portfolio.
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, which currently
is the Company's primary sales product. The Company monitors investment
yields, and when necessary adjusts credited interest rates on its insurance
products to preserve targeted interest spreads. It is expected that
monitoring of the interest spreads by management will provide the necessary
margin to adequately provide for associated costs on the insurance policies
the Company currently has in force and will write in the future.
Realized investment losses were $279,000 and $988,000 in 1997 and 1996,
respectively. Approximately $522,000 of realized losses in 1996 are due to
the charge-off of two specific 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.
(b) EXPENSES
Life benefits, net of reinsurance benefits and claims, decreased 11% in
1997 as compared to 1996. The decrease in premium revenues resulted in
lower benefit reserve increases in 1997. In addition, policyholder
benefits decreased due to a decrease in death benefit claims of $162,000.
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 benefit costs of $3,307,000, and $720,000 in 1996 and
1995, respectively. The Company incurred legal costs of $906,000 and
$687,000 in 1996 and 1995, respectively. All policies associated with this
issue have been settled as of December 31, 1996. Therefore, expense
reductions for 1997 would follow.
Commissions and amortization of deferred policy acquisition costs decreased
14% in 1997 compared to 1996. The decrease is due primarily due to a
reduction in commissions paid. Commissions decreased 19% in 1997 compared
to 1996. The decrease in commissions was due to the decline in new business
production. There is a direct relationship between premium revenues and
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commission expense. First year premium production decreased 43% and first
year commissions decreased 33% when comparing 1997 to 1996. Amortization
of deferred policy acquisition costs decreased 6% in 1997 compared to 1996.
Management would expect commissions and amortization of deferred policy
acquisition costs to decrease in the future if premium revenues continue to
decline.
Amortization of cost of insurance acquired decreased 57% in 1997 compared
to 1996. 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 improvement of persistency during the
year had a positive impact on amortization of cost of insurance acquired.
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 1997 and 1996 has been approximately 89.4% and 87.9%,
respectively.
Operating expenses decreased 23% in 1997 compared to 1996. The decrease in
operating expenses is directly related to settlement of certain litigation
in December of 1996. The Company incurred legal costs of $0, $906,000 and
$687,000 in 1997, 1996 and 1995, respectively in relation to the settlement
of the non-standard insurance policies.
Interest expense increased 5% in 1997 compared to 1996. Since December 31,
1996, notes payable increased approximately $1,886,000. Average
outstanding indebtedness was $20,517,000 with an average cost of 8.9% in
1997 compared to average outstanding indebtedness of 20,510,000 with an
average cost of 8.5% in 1996. The increase in outstanding indebtedness was
due to the issuance of convertible notes to seven individuals, all officers
or employees of UTI. In March 1997, the base interest rate for most of the
notes payable increased a quarter of a point. The base rate is defined as
the floating daily, variable rate of interest determined and announced by
First of America Bank. Please refer to Note 12 "Notes Payable" in the
Consolidated Notes to the Financial Statements for more information.
(c) NET LOSS
The Company had a net loss of $559,000 in 1997 compared to a net loss of
$938,000 in 1996. The improvement is directly related to the decrease in
life benefits and operating expenses primarily associated with the 1996
settlement and other related costs of the non-standard life insurance
policies.
1996 COMPARED TO 1995
(a) REVENUES
Premium and policy fee revenues, net of reinsurance premium, decreased 7%
when comparing 1996 to 1995. The decrease in premium income is primarily
attributed to a 15% decrease in new business production. 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
based on consumer demand.
In addition, 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.). The
change in distribution systems effectively reduced the total number of
agents representing and producing business for the Company. Broker agents
sell insurance and related products for several companies. Captive agents
sell for only one company.
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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 Companies' average persistency rate for all policies in
force for 1996 and 1995 has been approximately 87.9% and 87.3%,
respectively.
Net investment income increased 3% when comparing 1996 to 1995. The
overall investment yields for 1996 and 1995 are 7.29% and 7.12%,
respectively. The improvement in investment yield is primarily attributed
to fixed maturity investments. Cash generated from the sales of universal
life insurance products, has been invested primarily in our fixed
investment portfolio.
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, which currently
is the Company's primary sales product. The Company monitors investment
yields, and when necessary adjusts credited interest rates on its insurance
products to preserve targeted interest spreads. It is expected that
monitoring of the interest spreads by management will provide the necessary
margin to adequately provide for associated costs on the insurance policies
the Company currently 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 realized losses in 1996 are due to
the charge-off of two specific 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.
(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 and $720,000 in 1996 and 1995,
respectively. The Company incurred legal costs of $906,000 and $687,000 in
1996 and 1995, 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 is due to a decrease in
commissions expense. Commissions decreased 15% in 1996 compared to 1995.
The decrease in commissions was due to the decline in new business
production. There is a direct relationship between premium revenues and
commission expenses. First year premium production decreased 15% and first
year commissions decreased 32% when comparing 1996 to 1995. Amortization
of deferred policy acquisition costs decreased 12% in 1996 compared to
1995. Management expects commissions and amortization of deferred policy
acquisition costs to decrease in the future if premium revenues continue to
decline.
Amortization of cost of insurance acquired increased 25% 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
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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 and write-off 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 and $687,000 in 1996 and 1995, 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 that 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.
(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.
FINANCIAL CONDITION
(a) ASSETS
Investments are the largest asset group of the Company. 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 that 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, 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.
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The following table summarizes the Company's fixed maturities distribution
at December 31, 1997 and 1996 by ratings category as issued by Standard and
Poor's, a leading ratings analyst.
Fixed Maturities
Rating % of Portfolio
1997 1996
Investment Grade
AAA 31% 30%
AA 14% 13%
A 46% 46%
BBB 9% 10%
Below investment grade 0% 1%
100% 100%
Mortgage loans decreased 14% in 1997 as compared to 1996. 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 $298,227 in mortgage loans, net of a $10,000 reserve allowance, which
are in default and in the process of foreclosure, this represents
approximately 3% of the total portfolio.
Investment real estate and real estate acquired in satisfaction of debt
decreased slightly in 1997 compared to 1996. Investment real estate
holdings represent approximately 3% of the total assets of the Company.
Total investment real estate is separated into three categories:
Commercial 38%, Residential Development 47% and Foreclosed Properties 15%.
Policy loans decreased 2% in 1997 compared to 1996. 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.
Deferred policy acquisition costs decreased 6% in 1997 compared to 1996.
Deferred policy acquisition costs, which vary with, and are primarily
related to producing new business, are referred to as ("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 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
$586,000 in policy acquisition costs deferred, $425,000 in interest
accretion and $1,735,636 in amortization in 1997. The Company did not
recognize any impairment during the period.
Cost of insurance acquired decreased 5% in 1997 compared to 1996. At
December 31, 1997, cost of insurance acquired was $41,523,000 and
amortization totaled $2,394,000 for the year. 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.
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(b) LIABILITIES
Total liabilities increased slightly in 1997 compared to 1996. However,
future policy benefits which represented 81% of total liabilities at
December 31, 1997, decreased slightly in 1997.
Policy claims and benefits payable decreased 35% in 1997 compared to 1996.
There is no single event that caused this item to decrease. Policy claims
vary from year to year and therefore, fluctuations in this liability are to
be expected and are not considered unusual by management.
Other policyholder funds decreased 12% in 1997 compared to 1996. 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 7% in 1997 compared to 1996.
The increase is attributed to the significant amount of participating
business the Company has in force. Over 47% of all dividends paid were put
on deposit with the Company to accumulate with interest. Management
expects this liability to increase in the future.
Income taxes payable and deferred income taxes payable increased 7% in 1997
compared to 1996. The change in deferred income taxes payable is
attributable to temporary differences between Generally Accepted Accounting
Principles ("GAAP") and tax basis accounting. Federal income taxes are
discussed in more detail in Note 3 of the Consolidated Notes to the
Financial Statements.
Notes payable increased approximately $1,886,000 in 1997 compared to 1996.
On July 31, 1997, United Trust Inc. issued convertible notes totaling
$2,560,000 to seven individuals, all officers or employees of United Trust
Inc. The notes bear interest at a rate of 1% over prime, with interest
payments due quarterly and principal due upon maturity of July 31, 2004.
The conversion price of the notes are graded from $12.50 per share for the
first three years, increasing to $15.00 per share for the next two years
and increasing to $20.00 per share for the last two years. As of December
31, 1997, the notes were convertible into 204,800 shares of UTI common
stock with no conversion privileges having been exercised. The Company's
long-term debt is discussed in more detail in Note 12 of the Notes to the
Financial Statements.
(c) SHAREHOLDERS' EQUITY
Total shareholders' equity decreased 15% in 1997 compared to 1996. The
decrease is attributable to the Company's acquisition of treasury stock.
As indicated in the notes payable paragraph above, on July 31, 1997 UTI
issued convertible notes totaling $2,560,000. The notes were issued to
provide UTI with additional funds to be used for the following purposes.
A portion of the proceeds in combination with debt instruments were used to
acquire approximately 16% of the Larry E. Ryherd and family stock holdings
in UTI. This transaction reduced the largest shareholder's stock holdings
for the purpose of making UTI stock more attractive to the investment
community.
Additionally, a portion of the proceeds in combination with debt
instruments were used to acquire the stock holdings of Thomas F. Morrow and
family in UTI and UII. Simultaneous to this stock acquisition Mr. Morrow
retired as an executive officer of UTI. Mr. Morrow's retirement will
provide an annual cost savings to the Company in excess of debt service on
the new notes.
The remaining proceeds of approximately $1,500,000, of the original
$2,560,000, will be used to reduce the outstanding debt of the Company.
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LIQUIDITY AND CAPITAL RESOURCES
The Company has three principal needs for cash - the insurance companies'
contractual obligations to policyholders, the payment of operating expenses
and the servicing of its long-term debt. Cash and cash equivalents as a
percentage of total assets were 5% as of December 31, 1997and 1996,
respectively. Fixed maturities as a percentage of total invested assets
were 82% as of December 31, 1997and 1996..
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 sufficient
return to cover these obligations. 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.
Cash provided by operating activities was $23,000, $3,140,000 and 486,000
in 1997, 1996 and 1995, respectively. The net cash provided by operating
activities plus net policyholder contract deposits after the payment of
policyholder withdrawals equaled $3,412,000 in 1997, $9,952,000 in 1996 and
$9,499,000 in 1995. 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 when
reporting on cash flows.
Cash provided by (used in) investing activities was ($2,989,000),
$15,808,000 and ($8,063,000), for 1997, 1996 and 1995, respectively. The
most significant aspect of cash provided by (used in) investing activities
are the fixed maturity transactions. Fixed maturities account for 70%, 81%
and 76% of the total cost of investments acquired in 1997, 1996 and 1995,
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 $1,746,000,
($14,150,000) and $8,408,000 for 1997, 1996 and 1995, respectively. The
change between 1997 and 1996 is due to a coinsurance agreement with FILIC
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 20% in 1997 compared to 1996, and
decreased 11% in 1996 when compared to 1995. Policyholder contract
withdrawals has decreased 6% in 1997 compared to 1996, and decreased 4% in
1996 compared to 1995.. The change in policyholder contract withdrawals is
not attributable to any one significant event. Factors that influence
policyholder contract withdrawals are fluctuation of interest rates,
competition and other economic factors.
At December 31, 1997, the Company had a total of $21,460,000 in long-term
debt outstanding. Long-term debt principal reductions are approximately
$1.5 million per year over the next several years. The senior debt is
through First of America Bank - NA and is subject to a credit agreement.
The 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%, until March of 1997, when it changed to 8.5%. The base
rate has remained unchanged at 8.5% through the date of this filing.
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, 1997, the Company prepaid the $1,000,000 May 8,1998,
principal payment.
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
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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 with a lump sum principal payment due June 16, 2012.
On July 31, 1997, United Trust Inc. issued convertible notes totaling
$2,560,000 to seven individuals, all officers or employees of United Trust
Inc. The notes bear interest at a rate of 1% over prime, which has
remained unchanged at 8.5%, with interest payments due quarterly and
principal due upon maturity of July 31, 2004. The conversion price of the
notes are graded from $12.50 per share for the first three years,
increasing to $15.00 per share for the next two years and increasing to
$20.00 per share for the last two years. As of December 31, 1997, the
notes were convertible into 204,800 shares of UTI common stock with no
conversion privileges having been exercised.
As of December 31, 1997 the Company has a total $22,575,000 of cash and
cash equivalents, short-term investments and investments held for sale in
comparison to $21,460,000 of notes payable. UTI and FCC service this debt
through existing cash balances and management fees received from the
insurance subsidiaries. FCC is further able to service this debt through
dividends it may receive from UG. See Note 2 in the notes to the
consolidated financial statements for additional information regarding
dividends.
Since UTI is a holding company, funds required to meet its debt service
requirements and other expenses are primarily provided by its subsidiaries.
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, 1997, substantially all of the
consolidated shareholders equity presents net assets of its subsidiaries.
Cash requirements of UTI primarily relate to servicing its long-term debt.
The Company's insurance subsidiaries have maintained adequate statutory
capital and surplus and have not used surplus relief or financial
reinsurance, which have come under scrutiny by many state insurance
departments. 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. UTI is the
ultimate parent of UG through ownership of several intermediary holding
companies. UG can not pay a dividend directly to UTI due to the ownership
structure. Please refer to Note 1 of the Notes to the Consolidated
Financial Statements. UG's dividend limitations are described below
without effect of the ownership structure.
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, 1997, UG had a statutory gain from operations of $1,779,000.
At December 31, 1997, UG's statutory capital and surplus amounted to
$10,997,000. 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. The
risk-based capital formula measures 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 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
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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, 1997, each of the insurance subsidiaries has a Ratio that
is in excess of 3, which is 300% of the authorized control level;
accordingly the insurance subsidiaries meet the RBC requirements.
The Company is not aware of any litigation that will have a material
adverse effect on the financial position of the Company. In addition, 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.
REGULATORY ENVIRONMENT
The Company's insurance subsidiaries are assessed contributions by life and
health guaranty associations in almost all states to indemnify
policyholders of failed companies. In several states the company may
reduce premium taxes paid to recover a portion of assessments paid to the
states' guaranty fund association. This right of "offset" may come under
review by the various states, and the company cannot predict whether and to
what extent legislative initiatives may affect this right to offset. Also,
some state guaranty associations have adjusted the basis by which they
assess the cost of insolvencies to individual companies. The Company
believes that its reserve for future guaranty fund assessments is
sufficient to provide for assessments related to known insolvencies. This
reserve is based upon management's current expectation of the availability
of this right of offset, known insolvencies and state guaranty fund
assessment bases. However, changes in the basis whereby assessments are
charged to individual companies and changes in the availability of the
right to offset assessments against premium tax payments could materially
affect the company's results.
Currently, 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 ABE are domiciled in the states of Ohio, Ohio, West
Virginia and Illinois, respectively.
The insurance regulatory framework continues to be scrutinized by various
states, the federal government and the National Association of Insurance
Commissioners ("NAIC"). The NAIC is an association whose membership
consists of the insurance commissioners or their designees of the various
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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.
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 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 in the notes to the consolidated financial
statements), and payment of dividends (see note 2 in the notes to the
consolidated financial statements) in excess of specified amounts by the
insurance subsidiary, within the holding company system, are required.
Each year the NAIC calculates financial ratio results (commonly referred to
as IRIS ratios) for each company. These ratios compare various financial
information pertaining to the statutory balance sheet and income statement.
The results are then compared to pre-established normal ranges determined
by the NAIC. Results outside the range typically require explanation to
the domiciliary insurance department.
At year-end 1997, the insurance companies had one ratio outside the normal
range. The ratio is related to the decrease in premium income. The ratio
fell outside the normal range the last three years. A primary cause for
the decrease in premium revenues is related to the potential change in
control of UTI over the last two years to two different parties. During
September of 1996, it was announced that control of UTI would pass to an
unrelated party, but the transaction did not materialize. At this writing,
negotiations are progressing with a different unrelated party for the
change in control of UTI. . Please refer to the Notes to the Consolidated
Financial Statements for additional information. The possible changes and
resulting uncertainties have hurt the insurance companies' ability to
recruit and maintain sales agents. The industry has experienced a downward
trend in the total number of agents who sell insurance products, and
competition for the top sales producers has intensified. As this trend
appears to continue, the recruiting focus of the Company has been on
introducing quality individuals to the insurance industry through an
extensive internal training program. The Company feels this approach is
conducive to the mutual success of our new recruits and the Company as
these recruits market our products in a professional, company structured
manner.
The NAIC, in conjunction with state regulators, has been reviewing existing
insurance laws and regulations. A committee of the NAIC proposed changes
in the regulations governing insurance company investments and holding
company investments in subsidiaries and affiliates which were adopted by
the NAIC as model laws in 1996. The Company does not presently anticipate
any material adverse change in its business as a result of these changes.
Legislative and regulatory initiatives regarding changes in the regulation
of banks and other financial services businesses and restructuring of the
federal income tax system could, if adopted and depending on the form they
take, have an adverse impact on the Company by altering the competitive
environment for its products. The outcome and timing of any such changes
cannot be anticipated at this time, but the Company will continue to
monitor developments in order to respond to any opportunities or increased
competition that may occur.
The NAIC adopted the Life Illustration Model Regulation. Many states have
adopted the regulation effective January 1, 1997. 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 that does not meet the various
tests. The only implication is the way in which the product is marketed to
the consumer. A product that does not pass the tests uses guaranteed
assumptions rather than current assumptions in presenting future product
performance to the consumer. The Company conducts an ongoing thorough
review of its sales and marketing process and continues to emphasize its
compliance efforts.
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A task force of the NAIC is currently undertaking a project to codify a
comprehensive set of statutory insurance accounting rules and regulations.
This project is not expected to be completed earlier than 1999. Specific
recommendations have been set forth in papers issued by the NAIC for
industry review. The Company is monitoring the process, but the potential
impact of any changes in insurance accounting standards is not yet known.
ACCOUNTING AND LEGAL DEVELOPMENTS
The Financial Accounting Standards Board (FASB) has issued Statement of
Financial Accounting Standards (SFAS) No. 128 entitled Earnings per share,
which is effective for financial statements for fiscal years beginning
after December 15, 1997. SFAS No. 128 specifies the computation,
presentation, and disclosure requirements for earnings per share (EPS) for
entities with publicly held common stock or potential common stock. The
Statement's objective is to simplify the computation of earnings per share,
and to make the U.S. standard for computing EPS more compatible with the
EPS standards of other countries.
Under SFAS No. 128, primary EPS computed in accordance with previous
opinions is replaced with a simpler calculation called basic EPS. Basic
EPS is calculated by dividing income available to common stockholders
(i.e., net income or loss adjusted for preferred stock dividends) by the
weighted-average number of common shares outstanding. Thus, in the most
significant change in current practice, options, warrants, and convertible
securities are excluded from the basic EPS calculation. Further,
contingently issuable shares are included in basic EPS only if all the
necessary conditions for the issuance of such shares have been satisfied by
the end of the period.
Fully diluted EPS has not changed significantly but has been renamed
diluted EPS. Income available to common stockholders continues to be
adjusted for assumed conversion of all potentially dilutive securities
using the treasury stock method to calculate the dilutive effect of options
and warrants. However, unlike the calculation of fully diluted EPS under
previous opinions, a new treasury stock method is applied using the average
market price or the ending market price. Further, prior opinion
requirement to use the modified treasury stock method when the number of
options or warrants outstanding is greater than 20% of the outstanding
shares also has been eliminated. SFAS 128 also includes certain shares
that are contingently issuable; however, the test for inclusion under the
new rules is much more restrictive.
SFAS No. 128 requires companies reporting discontinued operations,
extraordinary items, or the cumulative effect of accounting changes are to
use income from operations as the control number or benchmark to determine
whether potential common shares are dilutive or antidilutive. Only
dilutive securities are to be included in the calculation of diluted EPS.
This statement was adopted for the 1997 Financial Statements. For all
periods presented the Company reported a loss from continuing operations so
any potential issuance of common shares would have an antidilutive effect
on EPS. Consequently, the adoption of SFAS No. 128 did not have an impact
on the Company's financial statement.
The FASB has issued SFAS No. 130 entitled Reporting Comprehensive Income
and SFAS No. 132 Employers' Disclosures about Pensions and Other
Postretirement Benefits. Both of the above statements are effective for
financial statements with fiscal years beginning after December 15, 1997.
SFAS No. 130 defines how to report and display comprehensive income and its
components in a full set of financial statements. The purpose of reporting
comprehensive income is to report a measure of all changes in equity of an
enterprise that result from recognized transactions and other economic
events of the period other than transactions with owners in their capacity
as owners.
SFAS No. 132 addresses disclosure requirements for post-retirement
benefits. The statement does not change post-retirement measurement or
recognition issues.
The Company will adopt both SFAS No. 130 and SFAS No. 132 for the 1998
financial statements. Management does not expect either adoption to have a
material impact on the Company's financial statements.
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The Company is not aware of any litigation that will have a material
adverse effect on the financial position of the Company. In addition, 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.
YEAR 2000 ISSUE
The "Year 2000 Issue" is the inability of computers and computing
technology to recognize correctly the Year 2000 date change. The problem
results from a long-standing practice by programmers to save memory space
by denoting Years using just two digits instead of four digits. Thus,
systems that are not Year 2000 compliant may be unable to read dates
correctly after the Year 1999 and can return incorrect or unpredictable
results. This could have a significant effect on the Company's
business/financial systems as well as products and services, if not
corrected.
The Company established a project to address year 2000 processing concerns
in September of 1996. In 1997 the Company completed the review of the
Company's internally and externally developed software, and made
corrections to all year 2000 non-compliant processing. The Company also
secured verification of current and future year 2000 compliance from all
major external software vendors. In December of 1997, a separate computer
operating environment was established with the system dates advanced to
December of 1999. A parallel model office was established with all dates
in the data advanced to December of 1999. Parallel model office processing
is being performed using dates from December of 1999 to January of 2001, to
insure all year 2000 processing errors have been corrected. Testing should
be completed by the end of the first quarter of 1998. After testing is
completed, periodic regression testing will be performed to monitor
continuing compliance. By addressing year 2000 compliance in a timely
manner, compliance will be achieved using existing staff and without
significant impact on the Company operationally or financially.
PROPOSED MERGER
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 for each share held by UII shareholders.
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.
A vote of the shareholders of UTI and UII regarding the proposed merger is
anticipated to occur sometime during the third quarter of 1998.
SUBSEQUENT EVENT
On February 19, 1998, UTI signed a letter of intent with Jesse T. Correll,
whereby Mr. Correll will personally or in combination with other
individuals make an equity investment in UTI over a period of three years.
Under the terms of the letter of intent Mr. Correll will buy 2,000,000
authorized but unissued shares of UTI common stock for $15.00 per share and
will also buy 389,715 shares of UTI common stock, representing stock of UTI
and UII, that UTI purchased during the last eight months in private
transactions at the average price UTI paid for such stock, plus interest,
or approximately $10.00 per share. Mr. Correll also will purchase 66,667
shares of UTI common stock and $2,560,000 of face amount of convertible
bonds (which are due and payable on any change in control of UTI) in
private transactions, primarily from officers of UTI. Upon completion of
the transaction, Mr. Correll would be the largest shareholder of UTI.
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UTI intends to use the equity that is being contributed to expand their
operations through the acquisition of other life insurance companies. The
transaction is subject to negotiation of a definitive purchase agreement;
completion of due diligence by Mr. Correll; the receipt of regulatory and
other approvals; and the satisfaction of certain conditions. The
transaction is not expected to be completed before June 30, 1998, and there
can be no assurance that the transaction will be completed.
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
Any forward-looking statement contained herein or in any other oral or
written statement by the company or any of its officers, directors or
employees is qualified by the fact that actual results of the company may
differ materially from any such statement due to the following important
factors, among other risks and uncertainties inherent in the company's
business:
1. Prevailing interest rate levels, which may affect the ability of the
company to sell its products, the market value of the company's
investments and the lapse ratio of the company's policies,
notwithstanding product design features intended to enhance
persistency of the company's products.
2. Changes in the federal income tax laws and regulations which may
affect the relative tax advantages of the company's products.
3. Changes in the regulation of financial services, including bank sales
and underwriting of insurance products, which may affect the
competitive environment for the company's products.
4. Other factors affecting the performance of the company, including, but
not limited to, market conduct claims, insurance industry
insolvencies, stock market performance, and investment performance.
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