SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1996 Commission File Number 0-18540
UNITED INCOME, INC.
(Exact name of registrant as specified in its charter)
2500 CORPORATE EXCHANGE DRIVE
COLUMBUS, OH 43231
(Address of principal executive offices, including zip code)
OHIO 37-1224044
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
Registrant's telephone number, including area code: (614) 899-6773
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange
Title of each class on which registered
None None
Securities registered pursuant to Section 12(g) of the Act:
Title of each class
Common Stock
Registrant has filed all reports required to be filed by Section 13 or
15(d) of the Securities Exchange Act of 1934 during the preceding 12
months, and has been subject to such filing requirements for the past 90
days.
At March 1, 1997, the Registrant had outstanding 19,887,572 shares of
Common Stock, stated value $.033 per share.
DOCUMENTS INCORPORATED BY REFERENCE: Portions of the Registrant's proxy
statement for the annual meeting of shareholders to be held during 1997
are incorporated by reference into Part III of this Report.
Page 1 of 72
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PART I
ITEM 1. BUSINESS
United Income, Inc. (the "Registrant") was incorporated in 1987 under the
laws of the State of Ohio to serve as an insurance holding company. At
December 31, 1996, the affiliates of the Registrant were as depicted on the
following organizational chart:
United Trust, Inc. ("UTI") is the ultimate controlling company. UTI owns
53% of United Trust Group ("UTG") and 30% of United Income, Inc. ("UII").
UII owns 47% of UTG. UTG owns 72% of First Commonwealth Corporation
("FCC"). FCC owns 100% of Universal Guaranty Life Insurance Company
("UG"). UG owns 100% of United Security Assurance Company ("USA"). USA
owns 84% of Appalachian Life Insurance Company ("APPL") and APPL owns 100%
of Abraham Lincoln Insurance Company ("ABE").
<PAGE> 2
ITEM 1. BUSINESS
The Registrant and its affiliates (the "Company") operate principally in
the individual life insurance business. The primary business of the
Company has been the servicing of existing insurance business in force, the
solicitation of new insurance business, and the acquisition of other
companies in similar lines of business.
United Income, Inc. ("UII"), was incorporated on November 2, 1987, as an
Ohio corporation. Between March 1988 and August 1990, UII raised a total
of approximately $15,000,000 in an intrastate public offering in Ohio.
During 1990, UII formed a life insurance subsidiary and began selling life
insurance products.
On February 20, 1992, UII and its affiliate, UTI, formed a joint venture,
United Trust Group, Inc., ("UTG"). On June 16, 1992, UII contributed $7.6
million in cash and 100% of the common stock of its wholly owned life
insurance subsidiary. UTI contributed $2.7 million in cash, an $840,000
promissory note and 100% of the common stock of its wholly owned life
insurance subsidiary. After the contributions of cash, subsidiaries, and
the note, UII owns 47% and UTI owns 53% of UTG.
On June 16, 1992, UTG acquired 67% of the outstanding common stock of the
now dissolved Commonwealth Industries Corporation, ("CIC") for a purchase
price of $15,567,000. Following the acquisition, UTG controlled eleven
life insurance subsidiaries. The Company has taken several steps to
streamline and simplify the corporate structure following the acquisitions.
On December 28, 1992, Universal Guaranty Life Insurance Company ("UG") was
the surviving company of a merger with Roosevelt National Life Insurance
Company ("RNLIC"), United Trust Assurance Company ("UTAC"), Cimarron Life
Insurance Company ("CIM") and Home Security Life Insurance Company
("HSLIC"). On June 30, 1993, Alliance Life Insurance Company ("ALLI"), a
subsidiary of UG, was merged into UG.
On March 30, 1994, Farmers and Ranchers Life Insurance Company ("F&R") was
sold to an unrelated third party. F&R was a small life insurance company
which did not significantly contribute to the operations of the group. F&R
primarily represented a marketing opportunity. The Company determined it
would not be able to allocate the time and resources necessary to properly
develop the opportunity, due to continued focus and emphasis on certain
other agency forces of the Company.
On July 31, 1994, Investors Trust Assurance Company ("ITAC") was merged
into Abraham Lincoln Insurance Company ("ALIC").
On August 15, 1995, the shareholders of CIC, ITI, and UGIC voted to
voluntarily liquidate each of the companies and distribute the assets to
the shareholders (consisting solely of common stock of their respective
subsidiary). As a result, the shareholders of the liquidated companies
became shareholders of FCC. Following the liquidations, UTG holds 72% of
the common stock of FCC.
<PAGE> 3
PRODUCTS
The Company's portfolio consists of two universal life insurance products.
The primary universal life insurance product is referred to as the "Century
2000". This product was introduced to the marketing force in 1993 and has
become the cornerstone of current marketing. This product has a minimum
face amount of $25,000 and currently credits 6% interest with a guaranteed
rate of 4.5% in the first 20 years and 3% in years 21 and greater. The
policy values are subject to a $4.50 monthly policy fee, an administrative
load and a premium load of 6.5% in all years. The administrative load and
surrender charge are based on the issue age, sex and rating class of the
policy. A surrender charge is effective for the first 14 policy years. In
general, the surrender charge is very high in the first couple of years and
then declines to zero at the end of 14 years. Policy loans are available
at 7% interest in advance. The policy's accumulated fund will be credited
the guaranteed interest rate in relation to the amount of the policy loan.
The second universal life product referred to as the "UL90A", has a minimum
face amount of $25,000. The administrative load is based on the issue age,
sex and rating class of the policy. Policy fees vary from $1 per month in
the first year to $4 per month in the second and third years and $3 per
month each year thereafter. The UL90A currently credits 5.5% interest with
a 4.5% guaranteed interest rate. Partial withdrawals, subject to a
remaining minimum $500 cash surrender value and a $25 fee, are allowed once
a year after the first duration. Policy loans are available at 7% interest
in advance. The policy's accumulated fund will be credited the guaranteed
interest rate in relation to the amount of the policy loan. Surrender
charges are based on a percentage of target premium starting at 120% for
years 1-5 then grading downward to zero in year 15. This policy contains a
guaranteed interest credit bonus for the long term policyholder. From
years 10 through 20, additional interest bonuses are earned with a total in
the twentieth year of 1.375%. The bonus is calculated from the policy
issue date and is contractually guaranteed.
The Company markets other products, none of which is significant to
operations. The Company has a variety of policies in force different from
those which are currently being marketed. Approximately 30% of the
insurance in force is participating business. The Company's average
persistency rate for its policies in force for 1996 and 1995 has been 87.9%
and 87.5%, respectively. The Company does not anticipate any material
fluctuations in these rates in the future that may result from competition.
The Company's actual experience for earned interest, persistency and
mortality vary from the assumptions applied to pricing and for determining
premiums. Accordingly, differences between the Company's actual experience
and those assumptions applied may impact the profitability of the Company.
The minimum interest spread between earned and credited rates is 1% on the
"Century 2000" universal life insurance product. The Company monitors
investment yields, and when necessary adjusts credited interest rates on
its insurance products to preserve targeted interest spreads. Credited
rates are reviewed and established by the Board of Directors of the
respective life insurance affiliates.
The premium rates are competitive with other insurers doing business in the
states in which the Company is marketing its products.
MARKETING
The Company markets its products through separate and distinct agency
forces. The Company has approximately 60 captive agents and 15 independent
agents who actively write new business. No individual sales agent
accounted for over 10% of the Company's premium volume in 1996. The
Company's sales agents do not have the power to bind the Company.
The change in marketing strategy from traditional life insurance products
to universal life insurance products had a significant impact on new
business production. As a result of the change in marketing strategy the
agency force went through a restructuring and retraining process.
Marketing is based on a referral network of community leaders and
shareholders of UII and UTI. Recruiting of agents is also based on the
same referral network.
<PAGE> 4
New sales are marketed by UG and USA through their agency forces using
contemporary sales approaches with personal computer illustrations.
Current marketing efforts are primarily focused on the Midwest region.
Recruiting of agents is based on obtaining people with little or no
experience in the life insurance business. These recruits go through an
extensive internal training program.
USA is licensed in Illinois, Indiana and Ohio. During 1996, Ohio accounted
for 99% of USA's direct premiums collected.
ALIC is licensed in Alabama, Arizona, Illinois, Indiana, Louisiana and
Missouri. During 1996, Illinois and Indiana accounted for 44% and 36%,
respectively of ALIC's direct premiums collected.
APPL is licensed in Alabama, Arizona, Arkansas, Colorado, Georgia,
Illinois, Indiana, Kansas, Kentucky, Louisiana, Missouri, Montana,
Nebraska, Ohio, Oklahoma, Pennsylvania, Tennessee, Utah, Virginia, West
Virginia and Wyoming. During 1996, West Virginia accounted for 95% of
APPL's direct premiums collected.
UG is licensed in Alabama, Arizona, Arkansas, Colorado, Delaware, Florida,
Georgia, Idaho, Illinois, Indiana, Iowa, Kansas, Kentucky, Louisiana,
Massachusetts, Michigan, Minnesota, Mississippi, Missouri, Montana,
Nebraska, Nevada, New Mexico, North Carolina, North Dakota, Ohio, Oklahoma,
Oregon, Pennsylvania, Rhode Island, South Carolina, South Dakota,
Tennessee, Texas, Utah, Virginia, Washington, West Virginia and Wisconsin.
During 1996, Illinois and Ohio accounted for 33% and 15%, respectively, of
UG's direct premiums collected. No other states account for more than 7%
of UG's direct premiums collected.
UNDERWRITING
The underwriting procedures of the Company's insurance affiliates are
established by management. Insurance policies are issued by the Company
based upon underwriting practices established for each market in which the
Company operates. Most policies are individually underwritten.
Applications for insurance are reviewed to determine additional information
required to make an underwriting decision, which depends on the amount of
insurance applied for and the applicant's age and medical history.
Additional information may include inspection reports, medical
examinations, statements from doctors who have treated the applicant in the
past and, where indicated, special medical tests. After reviewing the
information collected, the Company either issues the policy as applied for
or with an extra premium charge because of unfavorable factors or rejects
the application. Substandard risks may be referred to reinsurers for full
or partial reinsurance of the substandard risk.
The Company's insurance affiliates require blood samples to be drawn with
individual insurance applications for coverage over $45,000 (age 46 and
above) or $95,000 (age 16-45). Blood samples are tested for a wide range
of chemical values and are screened for antibodies to the HIV virus.
Applications also contain questions permitted by law regarding the HIV
virus which must be answered by the proposed insureds.
RESERVES
The applicable insurance laws under which the Company's insurance
affiliates operate require that each insurance company report policy
reserves as liabilities to meet future obligations on the policies in
force. These reserves are the amounts which, with the additional premiums
to be received and interest thereon compounded annually at certain assumed
rates, are calculated in accordance with applicable law to be sufficient to
meet the various policy and contract obligations as they mature. These
laws specify that the reserves shall not be less than reserves calculated
using certain mortality tables and interest rates.
The liabilities for traditional life insurance and accident and health
insurance policy benefits are computed using a net level method. These
liabilities include assumptions as to investment yields, mortality,
withdrawals, and other assumptions based on the life insurance affiliates'
experience adjusted to reflect anticipated trends and to include provisions
for possible unfavorable deviations. The Company makes these assumptions
at the time the contract
<PAGE> 5
is issued or, in the case of contracts acquired by purchase, at the purchase
date. Benefit reserves for traditional life insurance policies include
certain deferred profits on limited-payment policies that are being
recognized in income over the policy term. Policy benefit claims are
charged to expense in the period that the claims are incurred. Current
mortality rate assumptions are based on 1975-80 select and ultimate
tables. Withdrawal rate assumptions are based upon Linton B or Linton C.
Benefit reserves for universal life insurance and interest sensitive life
insurance products are computed under a retrospective deposit method and
represent policy account balances before applicable surrender charges.
Policy benefits and claims that are charged to expense include benefit
claims in excess of related policy account balances. Interest crediting
rates for universal life and interest sensitive products range from 5.0% to
6.0% in each of the years 1996, 1995 and 1994.
REINSURANCE
As is customary in the insurance industry, the Company's insurance
affiliates cede insurance to other insurance companies under reinsurance
agreements. Reinsurance agreements are intended to limit a life insurer's
maximum loss on a large or unusually hazardous risk or to obtain a greater
diversification of risk. The ceding insurance company remains contingently
liable with respect to ceded insurance should any reinsurer be unable to
meet the obligations assumed by it, however it is the practice of insurers
to reduce their financial statement liabilities to the extent that they
have been reinsured with other insurance companies. The Company sets a
limit on the amount of insurance retained on the life of any one person.
The Company will not retain more than $125,000, including accidental death
benefits, on any one life. At December 31, 1996, the Company had insurance
in force of $3.953 billion of which approximately $1.109 billion was ceded
to reinsurers.
The Company's reinsured business is ceded to numerous reinsurers. The
Company believes the assuming companies are able to honor all contractual
commitments, based on the Company's periodic reviews of their financial
statements, insurance industry reports and reports filed with state
insurance departments.
The Company's insurance affiliate (UG) entered into a coinsurance agreement
with First International Life Insurance Company ("FILIC") as of September
30, 1996. Under the terms of the agreement, UG ceded to FILIC
substantially all of its paid-up life insurance policies. Paid-up life
insurance generally refers to non-premium paying life insurance policies.
A.M. Best, an industry rating company, assigned a Best's Rating of A++
(Superior) to The Guardian Life Insurance Company of America ("Guardian"),
parent of FILIC, based on the consolidated financial condition and
operating performance of the company and its life/health subsidiaries. The
agreement with FILIC accounts for approximately 66% of the reinsurance
receivables as of December 31, 1996.
As a result of the FILIC coinsurance agreement, effective September 30,
1996, UG received a reinsurance credit in the amount of $28,318,000 in
exchange for an equal amount of assets. UG also received $6,375,000 as a
commission allowance.
Currently, the Company is utilizing reinsurance agreements with Business
Men's Assurance Company, ("BMA") and Life Reassurance Corporation, ("LIFE
RE") for new business. BMA and LIFE RE each hold an "A+" (Superior) rating
from A.M. Best, an industry rating company. The reinsurance agreements
were effective December 1, 1993, and cover all new business of the Company.
The agreements are a yearly renewable term ("YRT") treaty where the Company
cedes amounts above its retention limit of $100,000 with a minimum cession
of $25,000.
In selecting a reinsurance company, the Company examines many factors
including:
1) Whether the reinsurer is licensed in the states in which reinsurance
coverage is being sought;
2) the solvency and stability of the company. One source utilized is the
rating given the reinsurer by the A.M. Best Company, an insurance
industry rating company. Another source is the statutory annual
statement of the reinsurer;
<PAGE> 6
3) the history and reputation of the Company;
4) competitive pricing of reinsurance coverage. The Company generally
seeks quotes from several reinsurers when considering a new treaty.
INVESTMENTS
At December 31, 1996, substantially all of the assets of the Company
represent investments or receivables in affiliates. The Company does own
one mortgage loan as of December 31, 1996. Interest income was derived
from mortgage loans and cash and cash equivalents.
COMPETITION
The insurance business is a highly competitive industry and there are a
number of other companies, both stock and mutual, doing business in areas
where the Company operates. Many of these competing insurers are larger,
have more diversified lines of insurance coverage, have substantially
greater financial resources and have a greater number of agents. Other
significant competitive factors include policyholder benefits, service to
policyholders, and premium rates.
The insurance industry is a mature industry. In recent years, the industry
has experienced virtually no growth in life insurance sales, though the
aging population has increased the demand for retirement savings products.
The products offered (see Products) are similar to those offered by other
major companies. The product features are regulated by the states and are
subject to extensive competition among major insurance organizations. The
Company believes a strong service commitment to policyholders, efficiency
and flexibility of operations, timely service to the agency force and the
expertise of its key executives help minimize the competitive pressures of
the insurance industry.
GOVERNMENT REGULATION
The Company's insurance affiliates 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 affiliates, USA,
UG, APPL and ALIC are domiciled in the states of Ohio, Ohio, West Virginia
and Illinois, respectively.
Most states also have insurance holding company statutes which require
registration and periodic reporting by insurance companies controlled by
other corporations licensed to transact business within their respective
jurisdictions. The insurance affiliates are subject to such legislation
and are registered as controlled insurers in those jurisdictions in which
such registration is required. Statutes vary from state to state but
typically require periodic disclosure concerning the corporation that
controls the registered insurers and all affiliates 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, and payment of dividends in excess of
specified amounts by the insurance affiliate within the holding company
system are required.
<PAGE> 7
The National Association of Insurance Commissioners (NAIC) is an
association whose membership consists of the insurance commissioners or
their designees of the various states. The NAIC has no direct regulatory
authority over insurance companies, however its purpose is to provide a
more consistent method of regulation and reporting from state to state.
This is accomplished through the issuance of model regulations, which can
be adopted by individual states unmodified, modified to meet the state's
own needs or requirements, or dismissed entirely.
Each year the NAIC calculates financial ratio results (commonly referred to
as IRIS ratios) for each company. These ratios compare various financial
information pertaining to the statutory balance sheet and income statement.
The results are then compared to pre-established normal ranges determined
by the NAIC. Results outside the range typically require explanation to
the domiciliary insurance department.
At year end 1996, UG had two ratios outside the normal range. The first
ratio compared commission allowances with statutory capital and surplus.
The ratio was outside the norm due to the reinsurance agreement with First
International Life Insurance Company ("FILIC"). Additional information
about the reinsurance agreement with FILIC can be found in the section
titled Reinsurance. Management does not believe that this ratio will be
outside the normal range in future periods.
The second ratio is related to the decrease in premium income. The ratio
fell outside the normal range the last two years. The decrease in premium
income is directly attributable to the change in distribution systems and
marketing strategy. The Company changed its focus from primarily a broker
agency distribution system to a captive agent system and changed its
marketing strategy from traditional whole life insurance products to
universal life insurance products. Management is taking a long-term
approach to its recent changes to the marketing and distribution systems
and believes these changes will provide long-term benefits to the Company.
The NAIC has adopted Risk Based Capital ("RBC") rules, to evaluate the
adequacy of statutory capital and surplus in relation to a company's
investment and insurance risks. The RBC formula reflects the level of risk
of invested assets and the types of insurance products. The formula
classifies company risks into four categories:
1) Asset risk - the risk of loss of principal due to default through
creditor bankruptcy or decline in market value for assets reported at
market.
2) Pricing inadequacy - the risk of adverse mortality, morbidity, and
expense experience in relation to pricing assumptions.
3) Asset and liability mismatch - the risk of having to reinvest funds
when market yields fall below levels guaranteed to contract holders,
and the risk of having to sell assets when market yields are above the
levels at which the assets were purchased.
4) General risk - the risk of fraud, mismanagement, and other business
risks.
The RBC formula is used by state insurance regulators as an early warning
tool to identify, for the purpose of initiating regulatory action,
insurance companies that potentially are inadequately capitalized. In
addition, the formula defines new minimum capital standards that will
supplement the current system of low fixed minimum capital and surplus
requirements on a state-by-state basis. Regulatory compliance is
determined by a ratio of the insurance company's regulatory total adjusted
capital, as defined by the NAIC, to its authorized control level RBC, as
defined by the NAIC. Insurance companies below specific trigger points or
ratios are classified within certain levels, each of which requires
specific corrective action.
<PAGE> 8
The levels and ratios are as follows:
Ratio of Total Adjusted Capital to
Authorized Control Level RBC
REGULATORY EVENT (Less Than or Equal to)
Company action level 2.0*
Regulatory action level 1.5
Authorized control level 1.0
Mandatory control level 0.7
* Or, 2.5 with negative trend.
At December 31, 1996, each of the Company's insurance affiliates has a
Ratio that is in excess of 300% of the authorized control level;
accordingly the Company's affiliates meet the RBC requirements.
The NAIC has recently released the Life Illustration Model Regulation.
This regulation requires products which contain non-guaranteed elements,
such as universal life and interest sensitive life, to comply with certain
actuarially established tests. These tests are intended to target future
performance and profitability of a product under various scenarios. The
regulation does not prevent a company from selling a product which does not
meet the various tests. The only implication is the way in which the
product is marketed to the consumer. A product which does not pass the
tests uses guaranteed assumptions rather than current assumptions in
presenting future product performance to the consumer.
As states in which the Company does business adopt the regulation or adopt
a modified version of the regulation, the Company will be required to
comply with this new regulation. The Company may need to modify existing
products or sales methods.
The NAIC has proposed a new Model Investment Law that may affect the
statutory carrying values of certain investments; however, the final
outcome of that proposal is not certain, nor is it possible to predict what
impact the proposal will have or whether the proposal will be adopted in
the foreseeable future.
EMPLOYEES
UII has no employees of its own. There are approximately 100 persons who
are employed by the Company's affiliates.
ITEM 2. PROPERTIES
The Company leases approximately 1,951 square feet of office space at 2500
Corporate Exchange Drive, Suite 345, Columbus, Ohio 43231. The lease
expires June 30, 1999 with annual lease rent of $23,000 unadjusted for
additional rent for the Company's pro rata share of building taxes,
operating expenses and management expenses. Under the current lease
agreement, the Company will pay a minimum of $59,000 through the remaining
term of the lease. The rent expense will be approximately $35,000 for
1997. The lease contains no renewal or purchase option clause. The leased
space cannot be sublet without written approval of lessor. Rent expense
for 1996, 1995 and 1994 was approximately $61,000, $69,000 and $68,000,
respectively.
<PAGE> 9
ITEM 3. LEGAL PROCEEDINGS
The Company and its affiliates are named as defendants in a number of legal
actions arising primarily from claims made under insurance policies. Those
actions have been considered in establishing the Company's liabilities.
Management and its legal counsel are of the opinion that the settlement of
those actions will not have a material adverse effect on the Company's
financial position or results of operations.
ITEM 4. SUBMISSION OF MATTERS OF A VOTE OF SECURITY HOLDERS
None
PART II
ITEM 5. MARKET FOR COMPANY'S COMMON STOCK AND RELATED SECURITY HOLDERS
MATTERS
As of March 1, 1997, there was no established public trading market for the
Company's common stock. The Company's common stock is not listed on any
exchange. The Company has entered into a stock purchase agreement with
LaSalle Group, Inc., whereby LaSalle will acquire 10,000,000 shares of
authorized but unissued shares of UII for $0.70 per share. Please refer to
Note 9 of the Notes to the Financial Statements, pending change in control
of United Income, Inc. and United Trust, Inc., for additional information
regarding the price per share of stock of United Income, Inc.
As of December 31, 1996, no cash dividends had been declared on the common
stock of UII.
See Note 7 in the accompanying financial statements for information
regarding dividend restrictions.
Number of Common Shareholders as of March 3, 1997 is 6,543.
<PAGE> 10
ITEM 6. SELECTED FINANCIAL DATA
The following table provides selected financial data for the Company for
five (5) years:
FINANCIAL HIGHLIGHTS
(000's omitted, except per share data)
1996 1995 1994 1993 1992
Net Operating
Revenues $ 1,791 $ 2,234 $ 1,667 $ 1,459 $ 4,255
Operating Costs
and Expenses $ 1,414 $ 1,976 $ 1,627 $ 1,384 $ 4,092
Income taxes $ 0 $ 0 $ 0 $ 0 $ 40
Equity in loss
of investees $ (696) $ (2,406) $ (384) $ (580) $ (346)
Net Income (loss) $ (319) $ (2,148) $ (344) $ (505) $ (223)
Net Income (loss)
per common share (1) $ (0.02) $ (0.11) $ (0.02) $ (0.03) $ (0.01)
Cash Dividend Declared
per common share $ 0 $ 0 $ 0 $ 0 $ 0
Total Assets $ 12,881 $ 13,386 $ 15,414 $ 14,919 $ 15,038
Long Term
Obligations $ 902 $ 0 $ 0 $ 0 $ 0
(1) The comparability of the selected financial data for the year 1992 is
materially affected by the formation of United Trust Group, Inc. ("UTG")
and the sale of UII's subsidiary, United Security Assurance Company ("USA").
<PAGE> 11
ITEM 7.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
At December 31, 1996 and 1995, the balance sheet reflects the assets and
liabilities of UII and its 47% equity interest in UTG. The statements of
operations and statements of cash flows presented for 1996, 1995 and
1994 include the operating results of UII.
LIQUIDITY AND CAPITAL RESOURCES
UII's cash flow is dependent on revenues from a management agreement with
USA and its earnings received on invested assets and cash balances. At
December 31, 1996, substantially all of the shareholders equity
represents investment in affiliates. UII does not have significant day to
day operations of its own. Cash requirements of UII primarily relate to the
payment of interest on its convertible debentures and expenses related
to maintaining the Company as a corporation in good standing with the
various regulatory bodies which govern corporations in the jurisdictions
where the Company does business. The payment of cash dividends to
shareholders is not legally restricted. However, insurance company
dividend payments are regulated by the state insurance department where
the company is domiciled. UG's dividend limitations are described below.
Ohio domiciled insurance companies require five days prior notification to
the insurance commissioner for the payment of an ordinary dividend.
Ordinary dividends are defined as the greater of: a) prior year
statutory earnings or b) 10% of statutory capital and surplus. For the
year ended December 31, 1996, UG had a statutory gain from operations of
$8,006,000. At December 31, 1996, UG 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.
The Company currently has $440,000 in cash and cash equivalents. The
Company holds one mortgage loan. Operating activities of the Company
produced cash flows of $256,000, $ 327,000 and $27,000 in 1996, 1995 and
1994, respectively. The Company had uses of cash from investing activities
of $180,000, $193,000 and $811,000 in 1996, 1995 and 1994, respectively.
Cash flows from financing activities were $0, $0 and $905,000 in 1996, 1995
and 1994, respectively.
In early 1994, UII received $902,300 from the sale of Debentures. The
Debentures were issued pursuant to an indenture between the Company and
First of America Bank - Southeast Michigan, N.A., as trustee. The
Debentures are general nsecured obligations of UII, subordinate in right
of payment to any existing or future senior debt of UII. The Debentures
are exchangeable and transferrable, and are convertible at any time prior to
March 31, 1999 into UII's Common Stock at a conversion price of $1.75 per
share, subject to adjustment in certain events. The Debentures bear
interest from March 31, 1994, payable quarterly, at a variable rate
equal to one percentage point above the prime rate published in the Wall
Street Journal from time to time. On or after March 31, 1999, the
Debentures will be redeemable at UII's option, in whole or in part, at
redemption prices declining from 103% of their principal amount. No
sinking fund will be established to redeem the Debentures. The Debentures
will mature on March 31, 2004. The Debentures are not listed on any
national securities exchange or the NASDAQ National Market System.
Management believes that the overall sources of liquidity available to the
Company will be more than sufficient to satisfy its financial obligations.
<PAGE> 12
RESULTS OF OPERATIONS
1996 compared to 1995
(a) REVENUES
The Company's source of revenues is derived from service fee income which
is provided via a service agreement with USA. The service agreement
between UII and USA is to provide USA with certain administrative services.
The fees are based on a percentage of premium revenue of USA. The
percentages are applied to both first year and renewal premiums at
different rates.
The Company holds $864,100 of notes receivable from affiliates. The notes
receivable from affiliates consists of three separate notes. The $700,000
note bears interest at the rate of 1% above the variable per annum rate of
interest most recently published by the Wall Street Journal as the prime
rate. Interest is payable quarterly with principal due at maturity on
May 8, 2006. In February 1996, FCC borrowed an additional $150,000
from UII to provide additional cash for liquidity. The note bears
interest at the rate of 1% over prime as published in the Wall Street
Journal, with interest payments due quarterly and principal due upon
maturity of the note on June 1, 1999. The remaining $14,100 are 20 year
notes of UTG with interest at 8.5% payable semi-annually. At current
interest levels, the notes will generate approximately $80,000 annually.
(b) EXPENSES
The Company has a sub-contract service agreement with United Trust, Inc.
("UTI") for certain administrative services. Through its facilities and
personnel, UTI performs such services as may be mutually agreed upon between
the parties. The fees are based on a percentage of the fees paid to UII by
USA. The Company has incurred $1,241,000, $1,809,000, and $1,210,000 in
service fee expense in 1996, 1995, and 1994, respectively.
Interest expense of $84,000, $89,000 and $59,000 was incurred in 1996, 1995
and 1994, respectively. The interest expense is directly attributable to
the convertible debentures. The Debentures bear interest at a variable rate
equal to one percentage point above the prime rate published in the Wall
Street Journal from time to time.
(c) EQUITY IN LOSS OF INVESTEES
Equity in earnings of investees represents UII's 47% share of the net
loss of UTG. Included with this filing as Exhibit 99(d) are audited
financial statements of UTG. Following is a discussion of the results of
operations of UTG:
REVENUES OF UTG
Premium income, net of reinsurance premium, decreased 8% when
comparing 1996 to 1995. The decrease in premium income is primarily
attributed to the change in marketing strategy and to a lesser extent
the change in distribution systems. The Company changed its
marketing strategy from traditional life insurance products to
universal life insurance products. Universal life and interest
sensitive products contribute only the risk charge to premium
income, however traditional insurance products contribute all monies
received to premium income. The Company changed its marketing strategy
to remain competitive.
<PAGE> 13
The Company changed its focus from primarily a broker agency distribution
system to a captive agent system. Business written by the broker agency
force, in recent years, did not meet Company expectations. With the change
in focus of distribution systems, most of the broker agents were
terminated. (The termination of the broker agency force caused a non-
recurring write down of the value of agency force asset in 1995.
See discussion of amortization of agency force for further details.)
One factor that has had a positive impact on premium income is the
improvement of persistency. Persistency is a measure of insurance in
force retained in relation to the previous year. The Company's average
persistency rate for all policies in force for 1996 and 1995 has been
approximately 87.9% and 87.5%, respectively.
Other considerations, net of reinsurance, increased 7% compared to one
year ago. Other considerations consists of administrative charges on
universal life and interest sensitive life insurance products.
The insurance in force relating to these types of products continues to
increase as marketing efforts are focused on universal life insurance
products.
Net investment income increased 3% when comparing 1996 to 1995.
The overall investment yields for 1996, 1995 and 1994, are 7.21%,
7.04% and 7.13%, respectively. The improvement in investment yield is
primarily attributed to the fixed maturity portfolio. The Company has
invested financing cash flows generated by cash received through sales of
universal life insurance products.
The Company's investments are generally managed to match related insurance
and policyholder liabilities. The comparison of investment return with
insurance or investment product crediting rates establishes an interest
spread. The minimum interest spread between earned and credited rates is
1% on the "Century 2000" universal life insurance product, the Company's
primary product. The Company monitors investment yields, and when necessary
adjusts credited interest rates on its insurance products to preserve
targeted spreads. It is expected that the monitoring of the interest
spreads by management will provide the necessary margin to adequately
provide for associated costs on insurance policies the Company has in force
and will write in the future.
Realized investment losses were $466,000 and $114,000 in 1996 and 1995,
respectively. The Company sold two foreclosed real estate properties that
resulted in approximately $357,000 in realized losses in 1996. The Company
had other gains and losses during the period that comprised the remaining
amount reported but were immaterial in nature on an individual basis.
EXPENSES OF UTG
Life benefits, net of reinsurance benefits and claims, increased 2% compared
to 1995. The increase in life benefits is due primarily to settlement
expenses discussed in the following paragraph:
In 1994, UG became aware that certain new insurance business was being
solicited by certain agents and issued to individuals considered to be not
insurable by Company standards. These non-standard policies had a face
amount of $22,700,000 and represented 1/2 of 1% of the insurance in-force
in 1994. Management's initial analysis indicated that expected death claims
on the business in-force was adequate in relation to mortality assumptions
inherent in the calculation of statutory reserves. Nevertheless,
management determined it was in the best interest of the Company to
repurchase as many of the non-standard policies as possible. Through
December 31, 1996, the Company spent approximately $7,099,000 for the
settlement of non-standard policies and for the legal defense of related
litigation. In relation to settlement of non-standard policies the
Company incurred life benefits of $3,307,000, $720,000 and $1,250,000 in
1996, 1995 and 1994, respectively. The Company incurred legal costs of
$906,000, $687,000 and $229,000 in 1996, 1995 and 1994, respectively. All
the policies associated with this issue have been settled as of December 31,
1996. The Company has approximately $3,742,000 of insurance in-force
and $1,871,000 of reserves from the issuance of paid-up life insurance
policies for settlement of matters related to the original non-standard
policies. Management believes the reserves are adequate in relation to
expected mortality on this block of in-force.
<PAGE> 14
Commissions and amortization of deferred policy acquisition costs decreased
14% in 1996 compared to 1995. The decrease was due to the decline in
first year premium production.
Amortization of cost of insurance acquired increased 26% in 1996
compared to 1995. Cost of insurance acquired is amortized in relation to
expected future profits, including direct charge-offs for any excess of the
unamortized asset over the projected future profits. The Company did not
have any charge-offs during the periods covered by this report. The
increase in amortization during the current period is a normal fluctuation
due to the expected future profits. Amortization of cost of insurance
acquired is particularly sensitive to changes in persistency of certain
blocks of insurance in-force.
The Company reported a non-recurring write down of value of agency
force of $0 and $8,297,000 in 1996 and 1995, respectively. The write
down was directly related to the Company's change in distribution systems.
The Company changed its focus from primarily a broker agency distribution
system to a captive agent system. Business produced by the broker agency
force in recent years did not meet Company expectations. With the change
in focus of distribution systems, most of the broker agents were terminated.
The termination of most of the agents involved in the broker agency force
caused management to re-evaluate the value of the agency force carried on
the balance sheet.
Operating expenses increased 6% in 1996 compared to 1995. The primary
factor that caused the increase in operating expenses is directly related to
increased legal costs and reserves established for litigation. The legal
costs are due to the settlement of non-standard insurance policies as was
discussed in the review of life benefits. The Company incurred legal costs
of $906,000, $687,000 and $229,000 in 1996, 1995 and 1994, respectively in
relation to the settlement of the non-standard insurance policies.
Interest expense decreased 12% in 1996 compared to 1995. Since December
31, 1995, notes payable decreased approximately $1,623,000 which has
directly attributed to the decrease in interest expense during 1996.
Interest expense was also reduced as a result of the refinancing of the
senior debt under which the new interest rate is more favorable. Please
refer to Note 10 "Notes Payable" of the Consolidated Notes to the
Financial Statements for more information on this matter.
NET LOSS OF UTG
UTG had a net loss of $1,661,000 in 1996 compared to a net loss of
$5,321,000 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.
(d) Net loss
The Company recorded a net loss of $319,000 for 1996 compared to a
net loss of $2,148,000 for the same period one year ago. The net loss
is from the equity share of UTG's operating results.
RESULTS OF OPERATIONS
1995 compared to 1994
(a) Revenues
The Company's source of revenues is derived from service fee income which
is provided via a service agreement with USA. The service agreement between
UII and USA is to provide USA with certain administrative services. The
fees are based on a percentage of premium revenue of USA. The percentages
are applied to both first year and renewal premiums at different rates.
<PAGE> 15
The Company holds $714,100 of notes receivable from affiliates.
$700,000 of these notes represent a participation interest in the senior
debt of FCC. The notes carry interest at a rate of 1% above prime,
with interest received quarterly. The remaining $14,100 are 20 year
notes of UTG with interest at 8.5% payable semi-annually. At current
interest levels, the notes will generate approximately $66,000 annually.
(b) EXPENSES
The Company has a sub-contract service agreement with United Trust, Inc.
("UTI") for certain administrative services. Through its facilities and
personnel, UTI performs such services as may be mutually agreed upon between
the parties. The fees are based on a percentage of the fees paid to UII by
USA. The Company has incurred $1,809,000, $1,210,000, and $921,000 in
service fee expense in 1995, 1994, and 1993 respectively.
Interest expense of $89,000 and $59,000 was incurred in 1995 and 1994,
respectively. The interest expense is directly attributable to the
convertible debentures. The Debentures bear interest at a variable rate
equal to one percentage point above the prime rate published in the Wall
Street Journal from time to time.
(c) EQUITY IN LOSS OF INVESTEES
Equity in earnings of investees represents UII's 47% share of the net
loss of UTG. Included with this filing as Exhibit 99(d) are audited
financial statements of UTG. Following is a discussion of the results of
operations of UTG:
REVENUES OF UTG
Total revenue increased slightly when comparing 1995 to 1994.
Premium income, net of reinsurance premium, decreased 7% when
comparing 1995 to 1994. The decrease is primarily attributed to the
reduction in new business production and the change in products
marketed. In 1995, the Company has streamlined the product portfolio,
as well as restructured the marketing force. The decrease in first
year premium production is directly related to the Company's
change in distribution systems. The Company has changed its focus
from primarily a broker agency distribution system to a captive
agent system. Business written by the broker agency force in recent
years did not meet Company expectations. With the change in focus of
distribution systems, most of the broker agents were terminated.
(The termination of the broker agency force caused a non-recurring
write down of the value of agency force asset. See discussion of
amortization of agency force for further details.)
The change in marketing strategy from traditional life insurance
products to universal life insurance products had a significant
impact on new business production. As a result of the change in
marketing strategy the agency force went through a restructure and
retraining process. Cash collected from the universal life and
interest sensitive products contribute only the risk charge to
premium income, however traditional insurance products contribute
monies received to premium income. One factor that has had a
positive impact on premium income is the improvement of persistency.
Persistency is a measure of insurance in force retained in
relation to the previous year. Overall, persistency improved to 87.5%
in 1995 compared to 86.3% in 1994.
Other considerations, net of reinsurance, increased 13% compared to
one year ago. Other considerations consists of administrative charges
on universal life and interest sensitive life insurance products. The
insurance in force relating to these types of products continues to
increase as marketing efforts are focused on universal life insurance
products.
<PAGE> 16
Net investment income increased 8% when comparing 1995 to 1994.
The change reflected an increase in the amount of invested assets,
which was partially offset by a lower effective yield on investments
made during 1995. The overall investment yields for 1995, 1994 and
1993, are 7.04%, 7.13% and 7.22%, respectively. The Company has been
able to increase its investment portfolio through financing cash flows,
generated by cash received through sales of universal life insurance
products. Although the Company sold no fixed maturities during the
last few years, it did experience a significant turnover in the
portfolio. Many companies with bond issues outstanding took advantage
of lower interest rates and retired older debt which carried higher
rates. This was accomplished through early calls and accelerated
pay-downs of fixed maturity investments.
The Company's investments are generally managed to match related
insurance and policyholder liabilities. The Company, in conjunction
with the decrease in average yield of the Company's fixed maturity
portfolio has decreased the average crediting rate for the insurance
and investment products. The comparison of investment return with
insurance or investment product crediting rates establishes an interest
spread. The minimum interest spread between earned and credited rates
is 1% on the "Century 2000" universal life insurance product, the
Company's primary product. The Company monitors investment yields,
and when necessary takes action to adjust credited interest
rates on its insurance products to preserve targeted spreads. Over 60%
of the insurance and investment product reserves are crediting 5% or
less in interest and 39% of the insurance and investment product
reserves are crediting 5.25% to 6% in interest. It is expected that
the monitoring of the interest spreads by management will provide the
necessary margin to adequately provide for associated costs on
insurance policies the Company has in force and will write in the
future.
Realized investment losses were $114,000 and $1,224,000 in 1995
and 1994, respectively. Fixed maturities and equity securities
realized net investment losses of $224,000 and real estate realized net
investment gains of $100,000 in 1995. The realized loss in 1995 can
not be attributed to any one specific transaction. In 1994, the
Company realized losses of $865,000 due to a permanent impairment of
property located in Louisiana. The permanent impairment was based on
recent appraisals and marketing analysis of surrounding properties.
The Company realized a gain of $467,000 from the sale of an
insignificant subsidiary in 1994. The Company had other gains and
losses during the period that comprised the remaining amount reported
but were routine or immaterial in nature to disclose on an individual
basis.
EXPENSES OF UTG
Total expenses increased 16% when comparing 1995 to 1994.
Life benefits, net of reinsurance benefits and claims, decreased 4%
compared to 1994. The decrease is related to the decrease in first
year premium production. Another factor that has caused life benefits
to decrease is that during 1994, the Company lowered its crediting
rates on interest sensitive products in response to financial
market conditions. This action will facilitate the appropriate
spreads between investment returns and credited interest rates. It
takes approximately one year to fully realize a change in credited
rates since a change becomes effective on each policy's next
anniversary. Please refer to discussion of net investment income for
analysis of interest spreads.
The Company experienced an increase of 6% in mortality during 1995
compared to 1994. The increase in mortality is due primarily to
settlement expenses discussed in the following paragraph:
During the third quarter of 1994, UG became aware that certain new
insurance business was being solicited by certain agents and
issued to individuals considered to be not insurable by Company
standards. These policies had a face amount of $22,700,000 and
represent 1/2 of 1% of the insurance in force. Management's analysis
indicates that the expected death claims on the business in force to
be adequately covered by the mortality assumptions inherent in the
calculation of statutory reserves. Nevertheless, management has
determined it is in the best interest of the Company to repurchase as
many of the policies as possible. As of December 31, 1995, there
remained approximately $5,738,000 of the original face amount which
have not been settled. The Company will continue its efforts to
repurchase as many of the policies as possible and
<PAGE> 17
regularly apprise the Ohio Department of Insurance regarding the status
of this situation. Through December 31, 1995, the Company spent a
total of $2,886,000 for the repurchase of these policies and for the
legal defense of related litigation. In relation to the repurchase of
insurance policies the Company incurred life benefits of $720,000 and
$1,250,000 in 1995 and 1994, respectively. The Company incurred legal
costs of $687,000 and $229,000 in 1995 and 1994, respectively.
Dividends to policyholders increased approximately 16% when
comparing 1995 to 1994. USA continued to market participating policies
through most of 1994. Management expects dividends to policyholders
will continue to increase in the future. A significant portion of
the insurance in force is participating insurance. A significant
portion of the participating business is relatively newer business,
and the dividend scale for participating policies increases in the
early durations. The dividend scale is subject to approval of
the Board of Directors and may be changed at their discretion. The
Company has discontinued its marketing of participating policies.
Commissions and amortization of deferred policy acquisition costs
increased 21% in 1995 compared to 1994. The increase is
directly attributed to the amortization of a larger asset. The increase
is also caused by the reduction in first year premium production. To
a lesser extent the increase in amortization of deferred policy
acquisition costs is directly related to the change in
products that is currently marketed. The Company revised its
portfolio of products as previously discussed in premium income.
These new products pay lower first year commissions than the products
sold in prior periods. The asset increased due to first year premium
production by the agency force. The Company did benefit from improved
persistency.
Amortization of cost of insurance acquired decreased 40% in 1995
compared to 1994. Cost of insurance acquired is amortized in
relation to expected future profits, including direct charge-offs for
any excess of the unamortized asset over the projected future profits.
The Company did not have any charge-offs during the periods covered by
this report. The decrease in amortization during the current period
is a normal fluctuation due to the expected future profits.
Amortization of cost of insurance acquired is particularly sensitive
to changes in persistency of certain blocks of insurance in force. The
Company's average persistency rate for all policies in force for
1995 and 1994 has been approximately 87.5% and 86.3%, respectively.
During 1995, the Company reported a non-recurring write down of value
of agency force of $8,297,000. The write down is directly related to
the Company's change in distribution systems. The Company has changed
its focus from primarily a broker agency distribution system to a
captive agent system. Business produced by the broker agency force in
recent years did not meet Company expectations. With the change in
focus of distribution systems, most of the broker agents were
terminated. The termination of most of the agents involved in the
broker agency force caused management to re-evaluate the value of the
agency force carried on the balance sheet. As of December 31, 1995,
the remaining value of the agency force on the balance sheet
represents the active agency forces that continue to originate premium
production.
Operating expenses increased 20% in 1995 compared to 1994. The
increase was caused by several factors. The primary factor for the
increase in operating expenses is due to the decrease in production.
The decrease in production was discussed in the analysis of premium
income. As such, the Company was positioned to handle significantly
more first year production than was produced. First year operating
expenses that were deferred and capitalized as a deferred policy
acquisition costs asset was $532,000 in 1995 compared to $1,757,000 in
1994. The difference between the policy acquisition costs deferred
in 1995 compared to 1994, effected the increase in operating expenses.
The increase in operating expenses was offset, to a lesser extent, from
a 12% reduction in staff in 1995 compared to 1994. The reduction in
staff was achieved by attrition.
Another factor that caused the increase in operating expenses is
directly related to increased legal costs. During the third quarter
of 1994, UG became aware that certain new insurance business was being
solicited by certain agents and issued to individuals considered to be
not insurable by Company standards. These policies had a face amount of
$22,700,000 and represent 1/2 of 1% of the insurance in force of the
Company. As of December 31, 1995, there remained approximately
$5,738,000 of the original face amount which have not been
settled. The Company will continue its efforts to repurchase as
many of the policies as possible and
<PAGE> 18
regularly apprise the Ohio Department of Insurance regarding the
status of this situation. The Company incurred legal costs of
$687,000 and $229,000 in 1995 and 1994, respectively, for the legal
defense of related litigation.
Interest expense increased slightly in 1995 compared to 1994. The
increase was due to the increase in the interest rate on the Company's
senior debt, which is tied to the base rate of the First Bank of
Missouri. The interest rate on the senior debt increased to 10% on
March 1, 1995 compared to 7% on March 1, 1994. The Company was able
to minimize the effect of the higher interest rate in 1995 by early
payments of principal. The Company paid $600,000 in principal payments
in early 1995. The interest rate on the senior debt has decreased
to 9.25% as of March 1, 1996.
NET LOSS OF UTG
UTG had a net loss of $5,321,000 in 1995 compared to a net loss of
$1,116,000 in 1994. The decline in 1995 is attributed to the
non-recurring write down of the value of agency force and the increase
in operating expenses.
(d) NET LOSS
The Company recorded a net loss of $2,148,000 for 1995 compared to a
net loss of $344,000 for the same period one year ago. The increase in
net loss is from the equity share of UTG's operating results for the year.
FINANCIAL CONDITION
The Company owns 47% equity interest in UTG which controls total
assets of approximately $355,000,000. Audited financial statements of UTG
are presented as Exhibit 99(d) of this filing.
REGULATORY ENVIRONMENT
The Company's insurance affiliates 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 affiliates, USA, UG,
APPL and ALIC are domiciled in the states of Ohio, Ohio, West Virginia
and Illinois, respectively.
Most states also have insurance holding company statutes which require
registration and periodic reporting by insurance companies controlled
by other corporations licensed to transact business within their
respective jurisdictions. The insurance affiliates are subject to such
legislation and are registered as controlled insurers in those jurisdictions
in which such registration is required. Statutes vary from state to state
but typically require periodic disclosure concerning the corporation that
controls the registered insurers and all affiliates 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, and payment of dividends in excess of specified
amounts by the insurance affiliate within the holding company system are
required.
<PAGE> 19
The National Association of Insurance Commissioners (NAIC) is an
association whose membership consists of the insurance commissioners or
their designees of the various states. The NAIC has no direct regulatory
authority over insurance companies however it's 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 the individual state unmodified, modified to
meet the state's own needs or requirements, or dismissed entirely.
Each year the NAIC calculates financial ratio results (commonly referred
to as IRIS ratios) for each company. These ratios compare various
financial information pertaining to the statutory balance sheet and income
statement. The results are then compared to pre-established normal ranges
determined by the NAIC. Results outside the range typically require
explanation to the domiciliary insurance department.
At year end 1996, UG had two ratios outside the normal range. The
first ratio compared commission allowances with statutory capital and
surplus. The ratio was outside the normal range due to the reinsurance
agreement with First International Life Insurance Company ("FILIC").
Management does not believe that this ratio will be outside the normal
range in future periods.
The second ratio is related to the decrease in premium income. The
ratio fell outside the normal range the last two years. The decrease in
premium income is directly attributable to the change in distribution
systems and marketing strategy. The Company changed its focus from primarily
a broker agency distribution system to a captive agent system and changed
its marketing strategy from traditional whole life insurance products to
universal life insurance products. Management is taking a long-term
approach to its recent changes to the marketing and distribution systems
and believes these changes will provide long-term benefits to the Company.
The Company receives funds from its insurance affiliates in the form of
managementand cost sharing arrangements and through dividends. Annual
dividends in excess of maximum amounts prescribed by state statutes
("extraordinary dividends") may not be paid without the prior approval of
the insurance commissioner in which an insurance affiliate is domiciled.
The NAIC has adopted Risk-Based Capital ("RBC") requirements for
life/health insurance companies to evaluate the adequacy of statutory
capital and urplus in relation to investment and insurance risks such
as asset quality, mortality and morbidity, asset and liability matching and
other business factors. The RBC formula will be used by state insurance
regulators as an early warning tool to identify, for the purpose of
initiating regulatory action, insurance companies that potentially are
inadequately capitalized. In addition, the formula defines new
minimum capital standards that will supplement the current system of low
fixed minimum capital and surplus requirements on a state-by-state basis.
Regulatory compliance is determined by a ratio of the insurance company's
regulatory total adjusted capital, as defined by the NAIC, to its authorized
control level RBC, as defined by the NAIC. Insurance companies below
specific trigger points or ratios are classified within certain
levels, each of which requires specific corrective action. The levels and
ratios are as follows:
Ratio of Total Adjusted Capital to
Authorized Control Level RBC
Regulatory Event (Less Than or Equal to)
Company action level 2*
Regulatory action level 1.5
Authorized control level 1
Mandatory control level 0.7
* Or, 2.5 with negative trend.
<PAGE> 20
At December 31, 1996, each of the Company's insurance affiliates has a
Ratio that is in excess of 300% of the authorized control level;
accordingly the Company's affiliates meet the RBC requirements.
The NAIC has recently released the Life Illustration Model Regulation.
This regulation requires products which contain non-guaranteed elements, such
as universal life and interest sensitive life, to comply with certain
actuarially established tests. These tests are intended to target future
performance and profitability of a product under various scenarios. The
regulation does not prevent a company from selling a product which does
not meet the various tests. The only implication is the way in which the
product is marketed to the consumer. A product which does not pass the
tests uses guaranteed assumptions rather than current assumptions in
presenting future product performance to the consumer.
As states in which the Company does business adopt the regulation or adopt
a modified version of the regulation, the Company will be required to
comply with this new regulation. The Company may need to modify existing
products or sales methods.
The NAIC has proposed a new Model Investment Law that may affect the
statutory carrying values of certain investments; however, the final
outcome of that proposal is not certain, nor is it possible to predict what
impact the proposal will have on the Company or whether the proposal will be
adopted in the foreseeable future.
FUTURE OUTLOOK
The Company operates in a highly competitive industry. In connection
with the development and sale of its products, the Company encounters
significant competition from other insurance companies, many of which have
financial resources or ratings greater than those of the Company.
The insurance industry is a mature industry. In recent years, the
industry has experienced virtually no growth in life insurance sales, though
the aging population has increased the demand for retirement savings
products. Management believes that the Company's ability to compete is
dependent upon, among other things, its ability to attract and retain
agents to market its insurance products and its ability to develop
competitive and profitable products.
<PAGE> 21
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
During 1996, the Company adopted Statement of Financial Accounting
Standards No. 123, accounting for stock-based compensation. The adoption of
this standard did not have a material impact on the Company's financial
statements.
Listed below are the financial statements included in this Part of the
Annual Report on SEC Form 10-K:
Page No.
UNITED INCOME, INC.
Independent Auditor's Report for the
Years ended December 31, 1996, 1995, 1994 . . . . . . . . 23
Balance Sheets . . . . . . . . . . . . . . . . . . . . . . 24
Statements of Operations . . . . . . . . . . . . . . . . . 25
Statements of Shareholders' Equity . . . . . . . . . . . . 26
Statements of Cash Flows . . . . . . . . . . . . . . . . . 27
Notes to Financial Statements . . . . . . . . . . . . 28-34
ITEM 9. DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
None
<PAGE> 22
Independent Auditors' Report
Board of Directors and Shareholders
United Income, Inc.
We have audited the accompanying balance sheets of United Income, Inc.
(an Ohio corporation) as of December 31, 1996 and 1995, and the related
statements of operations, shareholders' equity, and cash flows for each
of the three years in the period ended December 31, 1996. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of United Income, Inc. as
of December 31, 1996 and 1995, and the results of its operations and its
cash flows for each of the three years in the period ended December 31,
1996, in conformity with generally accepted accounting principles.
KERBER, ECK & BRAECKEL LLP
Springfield, Illinois
March 26, 1997
<PAGE> 23
<TABLE>
UNITED INCOME, INC.
BALANCE SHEET
As of December 31, 1996 and 1995
ASSETS
1996 1995
<S> <C> <C>
Cash and cash equivalents $ 439,676 $ 364,370
Mortgage loans 122,853 182,206
Notes receivable from affiliate 864,100 714,100
Accrued interest income 11,784 7,040
Property and equipment (net of accumulated
depreciation $92,140 and $102,208) 2,578 12,058
Investment in affiliates 11,324,947 11,985,958
Receivable from (Indebtedness to) affiliate 31,837 (87,869)
Other assets (net of accumulated
amortization $146,011 and $108,995) 83,274 120,290
TOTAL ASSETS $ 12,881,049 $ 13,298,153
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities and accruals:
Convertible debentures $ 902,300 $ 902,300
Other liabilities 1,273 40,722
TOTAL LIABILITIES 903,573 943,022
Shareholders' equity:
Common stock - no par value, stated value
$0.033 per share. 33,000,000 shares
authorized, 22,424,572 issued in 1996,
and 22,423,572 issued in 1995 740,010 739,977
Additional paid-in capital 14,634,122 14,633,455
Unrealized depreciation of investments held
for sale of affiliate (59,508) (236)
Accumulated deficit (3,253,427) (2,934,344)
12,061,197 12,438,852
Common stock in treasury, at cost
(2,537,000 shares) (83,721) (83,721)
TOTAL SHAREHOLDERS' EQUITY 11,977,476 12,355,131
TOTAL LIABILITIES AND SHAREHOLDERS'
EQUITY $ 12,881,049 $ 13,298,153
See accompanying notes
</TABLE>
<PAGE> 24
<TABLE>
UNITED INCOME, INC.
STATEMENTS OF OPERATIONS
Three Years Ended December 31, 1996
1996 1995 1994
<S> <C> <C> <C>
Revenues:
Interest income $ 13,099 $ 16,516 $ 26,520
Interest income from affiliates 79,433 71,646 71,811
Service agreement income from
affiliates 1,567,891 2,015,325 1,392,141
Other income from affiliates 127,922 129,627 171,682
Realized investment gains 2,599 905 0
Other income 3 130 5,192
1,790,947 2,234,149 1,667,346
Expenses:
Management fee to affiliate 1,240,735 1,809,195 1,210,284
Operating expenses 89,529 78,505 358,074
Interest expense 84,027 88,538 58,630
1,414,291 1,976,238 1,626,988
Income before provision for income taxes
and equity in loss of investees 376,656 257,911 40,358
Provision for income taxes 0 0 0
Equity in loss of investees (695,739) (2,405,813) (384,395)
Net loss $ (319,083)$(2,147,902) $ (344,037)
Net loss per common share $ (0.02)$ (0.11) $ (0.02)
Weighted average common
shares outstanding 19,886,920 19,886,572 19,838,931
See accompanying notes.
</TABLE>
<PAGE> 25
<TABLE>
UNITED INCOME, INC.
STATEMENTS OF SHAREHOLDERS' EQUITY
Three Years Ended December 31, 1996
1996 1995 1994
<S> <C> <C> <C>
Common stock
Balance, beginning of year $ 739,977 $ 739,977 $ 738,047
Exercise of stock options 33 0 1,930
Balance, end of year $ 740,010 $ 739,977 $ 739,977
Additional paid-in capital
Balance beginning of year $14,633,455 $14,633,455 $14,541,786
Exercise of stock options 667 0 91,669
Balance, end of year $14,634,122 $14,633,455 $14,633,455
Unrealized appreciation (depreciation)
of investments held for sale
of affiliate
Balance, beginning of year $ (236) $ (99,907) $ (16,435)
Change during year (59,272) 99,671 (83,472)
Balance, end of year $ (59,508) $ (236) $ (99,907)
Accumulated deficit
Balance, beginning of year $(2,934,344) $ (786,442) $ (442,405)
Net loss (319,083) (2,147,902) (344,037)
Balance, end of year $(3,253,427) $(2,934,344) $ (786,442)
Treasury stock $ (83,721) $ (83,721) $ (83,721)
Total shareholders' equity,
end of year $11,977,476 $12,355,131 $14,403,362
See accompanying notes
</TABLE>
<PAGE> 26
<TABLE>
UNITED INCOME, INC.
STATEMENTS OF CASH FLOWS
Three Years Ended December 31, 1996
1996 1995 1994
<S> <C> <C> <C>
Increase (decrease) in cash and
cash equivalents
Cash flows from operating activities:
Net loss $ (319,083) $(2,147,902) $ (344,037)
Adjustments to reconcile net
loss to net cash provided by
operating activities:
Depreciation and amortization 45,331 52,169 53,642
Gain on payoff of mortgage loan (2,599) 0 0
Accretion of discount on mortgage
loans (481) (1,591) 0
Compensation expense through stock
option plan 667 0 91,227
Equity in loss of investees 695,739 2,405,813 384,395
Changes in assets and liabilities:
Change in accrued interest income (4,744) (1,713) 1,181
Change in indebtedness of affiliates (119,706) 25,598 (105,249)
Change in deposits and other assets 0 0 (85,471)
Change in other liabilities (39,449) (5,469) 31,559
Net cash provided by operating activities 255,675 326,905 27,247
Cash flows from investing activities:
Change in notes receivable from
affiliate (150,000) 0 300,000
Purchase of investments in
affiliates 0 (26,091) (1,050,651)
Capital contribution to investee (94,000) (47,000) 0
Sale of investments in affiliates 0 1,810 0
Payments of principal on mortgage
loans 62,434 4,480 0
Purchase of mortgage loan 0 (126,000) (60,000)
Proceeds from sale of property
and equipment 1,164 0 0
Net cash used in investing activities (180,402) (192,801) (810,651)
Cash flows from financing activities:
Proceeds from sale of debentures 0 0 902,300
Proceeds from sale of common stock 33 0 2,371
Net cash provided by financing activities 33 0 904,671
Net increase in cash and cash
equivalents 75,306 134,104 121,267
Cash and cash equivalents at
beginning of year 364,370 230,266 108,999
Cash and cash equivalents at
end of year $ 439,676 $ 364,370 $ 230,266
</TABLE>
See accompanying notes
<PAGE> 27
UNITED INCOME, INC.
NOTES TO FINANCIAL STATEMENTS
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A. ORGANIZATION - At December 31, 1996, the affiliates of United Income,
Inc. were as depicted on the following organizational chart.
United Trust, Inc. ("UTI") is the ultimate controlling company. UTI owns
53% of United Trust Group ("UTG") and 30% of United Income, Inc. ("UII").
UII owns 47% of UTG. UTG owns 72% of First Commonwealth Corporation
("FCC"). FCC owns 100% of Universal Guaranty Life Insurance Company
("UG"). UG owns 100% of United Security Assurance Company ("USA"). USA
owns 84% of Appalachian Life Insurance Company ("APPL") and APPL owns 100%
of Abraham Lincoln Insurance Company ("ABE").
<PAGE> 28
A summary of the Company's significant accounting policies
consistently applied in the preparation of the accompanying consolidated
financial statements follows.
B. NATURE OF OPERATIONS - United Income, Inc. ("UII"), referred to as the
("Company"), was incorporated November 2, 1987, and commenced its
activities January 20, 1988. UII is an insurance holding company that
through its insurance affiliates sells individual life insurance
products. UII is an affiliate of UTI, an Illinois insurance holding
company. UTI owns 29.7% of UII.
C. MORTGAGE LOANS - at unpaid balances, adjusted for amortization premium
or discount, less allowance for possible losses.
Realized gains and losses on sales of mortgage loans are recognized in
net income on a specific identification basis.
D. PROPERTY AND EQUIPMENT - Property and equipment is recorded at cost.
Depreciation is provided using both straight-line and accelerated
methods. Accumulated depreciation was $92,140 in 1996 and $102,208 in
1995. Depreciation expense for the years ended December 1996, 1995,
and 1994 was $8,315, $11,265, and $17,080 respectively.
E. CASH AND CASH EQUIVALENTS - The Company considers certificates of
deposit and other short-term investment instruments with an original
purchased maturity of three months or less as cash equivalents.
F. EARNINGS PER SHARE - Earnings per share are based upon the weighted
average number of common shares outstanding during the respective
period.
G. USE OF ESTIMATES - In preparing financial statements in conformity
with generally accepted accounting principles, management is required
to make estimates and assumptions that affect the reported amounts of
assets and liabilities, the disclosure of contingent assets and
liabilities at the date of the financial statements, and the reported
amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates.
H. RECLASSIFICATIONS - Certain prior year amounts have been reclassified
to conform with the current year presentation. Such reclassifications
had no effect on previously reported net income, total assets, or
shareholders' equity.
2. DISCLOSURES ABOUT FAIR VALUES OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used to estimate the fair value
of each class of financial instrument required to be valued by SFAS 107 for
which it is practicable to estimate that value:
(a) Mortgage loans
Mortgage loans are carried at the unpaid principal balances net of
unamortized purchase discounts. Yields on these loans exceed current
mortgage loan rates in the market. Therefore, management believes the
market value of these loans is at least equal to carrying value.
<PAGE> 29
(b) Notes receivable from affiliate
For notes receivable from affiliate, which is subject to a floating rate of
interest, carrying value is a reasonable estimate of fair value.
(c) Convertible debentures
For the convertible debentures, which are subject to a floating rate of
interest, carrying value is a reasonable estimate of fair value.
3. RELATED PARTY TRANSACTIONS
Effective November 8, 1989, United Security Assurance Company ("USA")
entered into a service agreement with its then direct parent, UII, for
certain administrative services. The Company recognized service agreement
income of $1,568,000, $2,015,000 and $1,392,000 in 1996, 1995 and 1994,
respectively.
Effective September 1, 1990, the Company entered into a service agreement
with United Trust, Inc. (UTI) for certain administrative services. Through
its personnel, UTI performs such services as may be mutually agreed upon
between the parties. In compensation for its services, the Company pays
UTI a contractually established fee. The Company incurred expenses of
approximately $941,000, $1,209,000 and $835,000 during 1996, 1995 and 1994,
respectively, pursuant to the terms of the service agreement with UTI. In
addition, the Company incurred $300,000, $600,000 and $375,000 during 1996,
1995 and 1994, respectively, as reimbursement for services performed on its
behalf by FCC.
At December 31, 1996, the Company owns a $864,000 note receivable from
affiliate. In December 1993, the Company acquired $1,000,000 of FCC, an
affiliate, senior debt from outside third parties. The notes carry
interest at a rate of 1% above prime. Interest is received quarterly.
During 1994, the Company sold $300,000 of the debt to UTI for cash.
4. STOCK OPTION PLANS
The Company has a stock option plan under which certain directors, officers
and employees may be issued options to purchase up to 450,000 shares of
common stock at $.915 per share. Options become exercisable at 25%
annually beginning one year after date of grant and expire generally in
five years. In November 1992, 149,100 option shares were granted. At
December 31, 1996, options for 155,550 shares were exercisable and options
for 293,950 shares were available for grant. No options were exercised
during 1996.
On January 15, 1991, the Company adopted an additional Non-Qualified Stock
Option Plan under which certain employees and sales personnel may be
granted options. The plan provides for the granting of up to 600,000
options at an exercise price of $.033 per share. The options generally
expire five years from the date of grant. Options for 146,000 shares of
common stock were granted in 1991, options for 19,000 shares were granted
in 1993 and options for 4,300 shares were granted in 1995. A total of
166,000 option shares have been exercised as of December 31, 1996. At
December 31, 1996, 3,300 options have been granted and are exercisable.
Options for 1,000 and 0 shares were exercised during 1996 and 1995,
respectively.
During 1996, the Company adopted Statement of Financial Accounting
Standards No. 123, accounting for stock-based compensation. The adoption
of this standard did not have a material impact on the Company's financial
statements.
<PAGE> 30
5. FEDERAL INCOME TAXES
The Company has net operating loss carryforwards for federal income tax
purposes expiring as follows:
UII
2006 $ 319,000
2007 532,000
TOTAL $ 851,000
The Company has established a deferred tax asset of $298,000 for its
operating loss carryforwards and has established an allowance of $298,000
against this asset. The Company has no other deferred tax components which
would be reflected in the consolidated balance sheets.
The provision for income taxes shown in the statements of operations does
not bear the normal relationship to pre-tax income as a result of certain
permanent differences. The sources and effects of such differences are
summarized in the following table:
1996 1995 1994
Income tax at statutory rate of
35% of income before income taxes $ 132,000 $ 90,000 $ 14,000
Dividends received deduction 0 0 (3,000)
Amortization of start up costs 0 0 (11,000)
Utilization of net operating loss
carryforward (134,000) (92,000) 0
Depreciation 2,000 2,000 0
Provision for income taxes $ 0 $ 0 $ 0
<PAGE> 31
<TABLE>
6. SUMMARIZED FINANCIAL INFORMATION OF UNITED TRUST GROUP, INC.
The following provides summarized financial information for the Company's
50% or less owned affiliate:
December 31, December 31,
ASSETS 1996 1995
<S> <C> <C>
Total investments $ 223,964,687 $ 244,815,985
Cash and cash equivalents 16,903,789 12,024,668
Cost of insurance acquired 41,362,973 59,601,720
Other assets 72,768,173 38,831,261
Total assets $ 354,999,622 $ 355,273,634
LIABILITIES AND SHAREHOLDERS' EQUITY
Policy liabilities $ 268,771,766 $ 261,796,945
Notes payable 19,839,853 21,463,328
Deferred taxes 11,591,086 16,100,283
Other liabilities 6,335,866 5,315,613
Total liabilities 306,538,571 304,676,169
Minority interests in
consolidated subsidiaries 13,332,034 13,881,640
Shareholders' equity
Common stock no par value 45,926,705 45,726,705
Authorized 10,000 shares - 100 issued
Unrealized depreciation of investment
in stocks (126,612) (501)
Accumulated deficit (10,671,076) (9,010,379)
Total shareholders' equity 35,129,017 36,715,825
Total liabilities and
shareholders' equity $ 354,999,622 $ 355,273,634
1996 1995 1994
Premiums, net of reinsurance $ 27,618,892 $ 29,998,125 $ 32,404,489
Net investment income 15,902,107 15,497,547 14,325,243
Other 2,955,112 3,101,648 1,678,268
46,476,111 48,597,320 48,408,000
Benefits, claims and
settlement expenses 30,326,032 29,855,764 29,661,234
Other expenses 22,953,093 30,725,908 22,379,433
53,279,125 60,581,672 52,040,667
Loss before income tax and
minority interest (6,803,014) (11,984,352) (3,632,667)
Income tax credit (provision) 4,643,961 4,724,792 2,005,207
Minority interest in loss of
consolidated subsidiaries 498,356 1,938,684 511,178
Net loss $ (1,660,697) $ (5,320,876) $ (1,116,282)
</TABLE>
<PAGE> 32
7. SHAREHOLDER DIVIDEND RESTRICTION
At December 31, 1996, substantially all of consolidated shareholders'
equity represents investment in affiliates. The payment of cash dividends
to shareholders by UII and UTG is not legally restricted. UG's dividend
limitations are described below.
Ohio domiciled insurance companies require five days prior notification to
the insurance commissioner for the payment of an ordinary dividend.
Ordinary dividends are defined as the greater of: a) prior year statutory
earnings or b) 10% of statutory capital and surplus. For the year ended
December 31, 1996, UG had a statutory gain from operations of $8,006,000.
At December 31, 1996, UG 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.
8. CONVERTIBLE DEBENTURES
In early 1994, UII received $902,300 from the sale of Debentures. The
Debentures were issued pursuant to an indenture between the Company and
First of America Bank - Southeast Michigan, N.A., as trustee. The
Debentures are general unsecured obligations of UII, subordinate in right
of payment to any existing or future senior debt of UII. The Debentures
are exchangeable and transferrable, and are convertible at any time prior
to March 31, 1999 into UII's Common Stock at a conversion price of $1.75
per share, subject to adjustment in certain events. The Debentures bear
interest from March 31, 1994, payable quarterly, at a variable rate equal
to one percentage point above the prime rate published in the Wall Street
Journal from time to time. On or after March 31, 1999, the Debentures will
be redeemable at UII's option, in whole or in part, at redemption prices
declining from 103% of their principal amount. No sinking fund will be
established to redeem Debentures. The Debentures will mature on March 31,
2004. The Debentures are not listed on any national securities exchange or
the NASDAQ National Market System.
9. PENDING CHANGE IN CONTROL OF UNITED INCOME, INC.
On September 23, 1996, UII and UTI entered into a stock purchase agreement
with LaSalle Group, Inc., a Delaware corporation ("LaSalle"), whereby
LaSalle will acquire 12,000,000 shares of authorized but unissued shares of
UTI for $1.00 per share and 10,000,000 shares of authorized but unissued
shares of UII for $0.70 per share. Additionally, LaSalle intends,
contemporaneously with the closing of the above transaction, to purchase in
privately negotiated transactions additional shares of UTI and UII so that
LaSalle will own not less than 51% of the outstanding common stock of UTI
and indirectly control 51% of UII.
The agreement requires and is pending approval of the Commissioner of
Insurance of the State of Ohio, Illinois and West Virginia, (the states of
domicile of the insurance affiliates). It is anticipated the transaction
will be completed during the second quarter of 1997.
<PAGE> 33
<TABLE>
10. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
<S> <C> <C> <C> <C>
1996
1st 2nd 3rd 4th
Net investment income $ 3,673 $ 3,793 $ 2,893 $ 2,740
Interest income/affil. 18,078 20,717 20,249 20,389
Service agreement income 536,604 459,454 406,952 164,881
Total revenues 583,627 535,094 456,715 215,511
Management fee 421,963 425,672 294,170 98,930
Operating expenses 51,804 14,514 12,045 11,166
Interest expense 21,430 20,865 20,866 20,866
Operating income 88,430 74,043 129,634 84,549
Net income (loss) 235,469 50,795 (583,728) (21,619)
Net income (loss) per
share 0.01 0.00 (0.03) 0.00
1995
1st 2nd 3rd 4th
Net investment income $ 1,431 $ 7,283 $ 4,064 $ 3,738
Interest income/affil. 22,111 13,830 17,778 17,927
Service agreement income 505,118 529,411 494,867 485,929
Total revenues 570,284 587,002 540,031 536,832
Management fee 437,041 483,677 452,935 435,542
Operating expenses 46,264 23,951 12,243 (3,953)
Interest expense 21,485 22,676 22,384 21,993
Operating income 65,494 56,698 52,469 83,250
Net income (loss) 137,752 (530,781) 132,804 (1,887,677)
Net income (loss)
per share 0.01 (0.03) 0.01 (0.11)
1994
1st 2nd 3rd 4th
Net investment income $ 3,567 $ 16,569 $ 4,901 $ 1,483
Investment income/affil. 17,994 19,890 17,574 16,353
Service agreement income 313,531 369,475 330,001 379,134
Total revenues 371,022 463,826 415,056 417,442
Management fee 288,119 321,685 295,999 304,481
Operating expenses 75,334 65,305 108,768 108,667
Interest expense 1,281 35,282 2,314 19,753
Operating income (loss) 6,288 41,554 7,975 (15,459)
Net income (loss) 280,796 (73,133) (393,095) (158,605)
Net income (loss)
per share 0.01 (0.00) (0.02) (0.01)
</TABLE>
<PAGE> 34
PART III
With respect to Items 10 through 13, the Company will file with the
Securities and Exchange Commission, within 120 days of the close of the
fiscal year, a definitive proxy statement pursuant to Regulation 14-A.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information regarding directors of the Company will be set forth in the
Company's proxy statement relating to the annual meeting of shareholders to
be held during 1997 and is incorporated herein by reference.
Information regarding executive officers of the Company is set forth under
the caption "Executive Officers".
ITEM 11. EXECUTIVE COMPENSATION
Information regarding executive compensation will be set forth in the
Company's proxy statement relating to the annual meeting of shareholders to
be held during 1997 and is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information regarding security ownership of certain beneficial owners and
management will be set forth in the Company's proxy statement relating to
the annual meeting of shareholders to be held during 1997 and is
incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information regarding certain relationships and related transactions will
be set forth in the Company's proxy statement relating to the annual
meeting of shareholders to be held during 1997 and is incorporated
herein by reference.
<PAGE> 35
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) The following documents are filed as a part of the report:
(1) Financial Statements:
See Item 8, Index to Financial Statements
NOTE: Schedules other than those listed above are omitted for the
reasons they are not required or the information is disclosed in
the financial statements or footnotes.
(b) Reports on Form 8-K filed during fourth quarter.
None
(c) Exhibits:
Index to Exhibits (See Page 37).
<PAGE> 36
INDEX TO EXHIBITS
Exhibit
Number
3(i) (1) Articles of Incorporation for the Company dated November 2,
1987.
3(i) (1) Amended Articles of Incorporation for the Company dated
January 27, 1988.
3(ii) (1) Code of Regulations for the Company.
10(a) (1) Service Agreement between United Income, Inc. and United
Security Assurance Company dated November 8, 1989.
10(b) (2) Subcontract Service Agreement between United Income, Inc. and
United Trust, Inc. dated September 1, 1990.
10(c) (2) Non-Qualified Stock Option Plan
10(d) (2) Stock Option Plan
10(e) Credit Agreement dated May 8, 1996 between First of America
Bank - Illinois, N.A., as lender and First Commonwealth
Corporation, as borrower.
10(f) $8,900,000 Term Note of First Commonwealth Corporation to
First of America Bank - Illinois, N.A. dated May 8, 1996.
10(g) Coinsurance Agreement dated September 30, 1996 between
Universal Guaranty Life Insurance Company and First
International Life Insurance Company, including assumption
reinsurance agreement exhibit and amendments.
99(a) (1) Order of Ohio Division of Securities registering United's
Securities dated March 9, 1988.
99(b) (1) Order of Ohio Division of Securities registering United
Income, Inc.'s Securities dated April 5, 1989.
99(c) (1) Order of Ohio Division of Securities registering United
Income, Inc.'s Securities dated April 23, 1990.
99(d) Audited financial statements of United Trust Group, Inc.
FOOTNOTE
(1) Incorporated by reference from the Company's
Registration Statement on Form 10, File No. 0-
18540, filed on April 30, 1990.
(2) Incorporated by reference from the Company's
Annual Report on Form 10-K, File No. 0-18540, as
of December 31, 1991.
<PAGE> 37
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
UNITED INCOME, INC.
Registrant
/s/ Vincent T. Aveni Date: March 25, 1997
Vincent T. Aveni, Director
/s/ Marvin W. Berschet Date: March 25, 1997
Marvin W. Berschet, Director
/s/ John K. Cantrell Date: March 25, 1997
John K. Cantrell, Director
/s/ Gertrude W. Donahey Date: March 25, 1997
Gertrude W. Donahey, Director
/s/ Thomas F. Morrow Date: March 25, 1997
Thomas F. Morrow, Chief Operating
Officer, Vice Chairman, and Director
/s/ Charlie E. Nash Date: March 25, 1997
Charlie E. Nash, Director
/s/ Larry E. Ryherd Date: March 25, 1997
Larry E. Ryherd, Chairman of the Board,
Chief Executive Officer, President,
and Director
/s/ Robert W. Teater Date: March 25, 1997
Robert W. Teater, Director
/s/ James E. Melville Date: March 25, 1997
James E. Melville, Chief Financial Officer
and Senior Executive Vice President
<PAGE> 38
EXHIBIT 99(d)
AUDITED FINANCIAL STATEMENTS OF
UNITED TRUST GROUP, INC.
<PAGE> 39
Independent Auditors' Report
Board of Directors and Shareholders
United Trust Group, Inc.
We have audited the accompanying consolidated balance sheets of United
Trust Group, Inc. (an Illinois corporation) and subsidiaries as of December
31, 1996 and 1995, and the related consolidated statements of operations,
shareholders' equity, and cash flows for each of the three years in the
period ended December 31, 1996. These financial statements are the
responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of United
Trust Group, Inc. and subsidiaries as of December 31, 1996 and 1995, and
the consolidated results of their operations and their consolidated cash
flows for each of the three years in the period ended December 31, 1996,
in conformity with generally accepted accounting principles.
We have also audited Schedule I as of December 31, 1996, and Schedules
II, IV and V as of December 31, 1996 and 1995, of United Trust Group, Inc.
and subsidiaries and Schedules II, IV and V for each of the three years in
the period then ended. In our opinion, these schedules present fairly,
in all material respects, the information required to be set forth therein.
KERBER, ECK & BRAECKEL LLP
Springfield, Illinois
March 26, 1997
<PAGE> 40
UNITED TRUST GROUP, INC.
CONSOLIDATED BALANCE SHEETS
As of December 31, 1996 and 1995
<TABLE>
<S> <C> <C>
ASSETS
1996 1995
Investments:
Fixed maturities at amortized cost (market
$181,815,225 and $197,006,257) $ 179,926,785 $ 191,074,220
Investments held for sale:
Fixed maturities, at market
(cost $1,984,661 and $3,224,039) 1,961,166 3,226,175
Equity securities, at market
(cost $2,086,159 and $2,086,159) 1,794,405 1,946,481
Mortgage loans on real estate at
amortized cost 11,022,792 13,891,762
Investment real estate, at cost, net
of accumulated depreciation 10,543,490 11,978,575
Real estate acquired in satisfaction
of debt, at cost, net of accumulated
depreciation 3,846,946 5,332,413
Policy loans 14,438,120 16,941,359
Short term investments 430,983 425,000
223,964,687 244,815,985
Cash and cash equivalents 16,903,789 12,024,668
Investment in affiliates 350,000 350,000
Accrued investment income 3,459,748 3,655,569
Reinsurance receivables:
Future policy benefits 38,745,013 13,540,413
Policy claims and other benefits 3,856,124 861,488
Other accounts and notes receivable 1,734,321 1,803,468
Cost of insurance acquired 47,536,812 59,601,720
Deferred policy acquisition costs 11,325,356 11,436,728
Cost in excess of net assets purchased,
net of accumulated amortization 5,496,808 5,661,462
Other assets 1,626,964 1,522,133
Total assets $ 354,999,622 $ 355,273,634
LIABILITIES AND SHAREHOLDERS' EQUITY
Policy liabilities and accruals:
Future policy benefits $ 248,879,317 $ 243,044,963
Policy claims and benefits payable 3,193,806 3,110,378
Other policyholder funds 2,784,967 3,004,655
Dividend and endowment accumulations 13,913,676 12,636,949
Income taxes payable:
Current 70,663 215,200
Deferred 11,591,086 16,100,283
Notes payable 19,839,853 21,463,328
Indebtedness to (from) affiliates, net 62,084 (162,388)
Other liabilities 6,203,119 5,262,801
Total liabilities 306,538,571 304,676,169
Minority interests in consolidated
subsidiaries 13,332,034 13,881,640
Shareholders' equity:
Common stock no par value.
Authorized 10,000 shares - 100
shares issued 45,926,705 45,726,705
Unrealized depreciation of investments
held for sale (126,612) (501)
Accumulated deficit (10,671,076) (9,010,379)
Total shareholders' equity 35,129,017 36,715,825
Total liabilities and
shareholders' equity $ 354,999,622 $ 355,273,634
</TABLE>
See accompanying notes.
41
UNITED TRUST GROUP, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
Three Years Ended December 31, 1996
<TABLE>
1996 1995 1994
<S> <C> <C> <C>
Revenues:
Premium income $ 32,386,635 $ 35,200,815 $ 38,063,186
Reinsurance premium (4,767,743) (5,202,690) (5,658,697)
Other considerations 3,504,974 3,280,823 2,969,131
Other considerations paid
to reinsurers (179,408) (180,412) (229,093)
Net investment income 15,902,107 15,497,547 14,325,243
Realized investment gains
and (losses), net (465,879) (114,235) (1,224,274)
Other income 95,425 115,472 162,504
46,476,111 48,597,320 48,408,000
Benefits and expenses:
Benefits, claims and settlement expenses:
Life 26,568,062 26,680,217 27,479,315
Reinsurance benefits
and claims (2,283,827) (2,850,228) (2,766,776)
Annuity 1,892,489 1,797,475 1,314,384
Dividends to policyholders 4,149,308 4,228,300 3,634,311
Commissions and amortization of
deferred policy acquisition
costs 4,224,885 4,907,653 4,060,425
Amortization of cost of
insurance acquired 5,690,069 4,509,755 7,128,247
Amortization of agency force 0 396,852 382,006
Non-recurring write down of
value of agency force 0 8,296,974 0
Operating expenses 11,285,566 10,634,314 8,859,740
Interest expense 1,752,573 1,980,360 1,949,015
53,279,125 60,581,672 52,040,667
Loss before income taxes
and minority interest (6,803,014) (11,984,352) (3,632,667)
Credit for income taxes 4,643,961 4,724,792 2,005,207
Minority interest in loss
of consolidated subsidiaries 498,356 1,938,684 511,178
Net loss $ (1,660,697) $ (5,320,876) $ (1,116,282)
Net loss per
common share $ (16,607) $ (53,209) $ (11,163)
Weighted average common
shares outstanding 100 100 100
</TABLE>
See accompanying notes
42
UNITED TRUST GROUP, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Three Years Ended December 31, 1996
<TABLE>
1996 1995 1994
<S> <C> <C> <C>
Common stock
Balance, beginning of year $ 45,726,705 $ 45,626,705 $ 43,078,761
Capital contribution 200,000 100,000 2,547,944
Balance, end of year $ 45,926,705 $ 45,726,705 $ 45,626,705
Unrealized appreciation
(depreciation) of
investments held for sale
Balance, beginning of year $ (501) $ (212,567) $ (34,968)
Change during year (126,111) 212,066 (177,599)
Balance, end of year $ (126,612) $ (501) $ (212,567)
Accumulated deficit
Balance, beginning of year $ (9,010,379) $ (3,689,503) $ (2,573,221)
Net loss (1,660,697) (5,320,876) (1,116,282)
Balance, end of year $(10,671,076) $ (9,010,379) $ (3,689,503)
Total shareholders' equity,
end of year $ 35,129,017 $ 36,715,825 $ 41,724,635
</TABLE>
See accompanying notes.
43
UNITED TRUST GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Three Years Ended December 31, 1996
<TABLE>
1996 1995 1994
<S> <C> <C> <C>
Increase (decrease) in cash
and cash equivalents
Cash flows from operating
activities:
Net loss $ (1,660,697) $ (5,320,876) $ (1,116,282)
Adjustments to reconcile
net loss to net cash provided
by operating activities net of
changes in assets and
liabilities resulting from the
sales and purchases of
subsidiaries:
Amortization/accretion of
fixed maturities 899,445 803,696 1,173,981
Realized investment (gains)
losses, net 465,879 114,235 1,224,274
Policy acquisition costs
deferred (1,276,000) (2,370,000) (4,939,000)
Amortization of deferred
policy acquisition costs 1,387,372 1,567,748 1,137,923
Amortization of cost of
insurance acquired 5,690,069 4,509,755 7,128,247
Amortization of value of
agency force 0 396,852 382,006
Non-recurring write down
of value of agency force 0 8,296,974 0
Amortization of costs in
excess of net assets
purchased 185,279 423,192 297,676
Depreciation 371,991 694,194 466,213
Minority interest 498,356 (1,938,684) (511,178)
Change in accrued investment
income 195,821 (173,517) (572,900)
Change in reinsurance
receivables 83,871 (482,275) (1,009,745)
Change in policy liabilities
and accruals 3,326,651 3,581,928 4,487,982
Charges for mortality and
administration of universal
life and annuity products (10,239,476) (9,757,354) (9,178,363)
Interest credited to account
balances 7,075,921 6,644,282 5,931,019
Change in income taxes
payable (4,653,734) (4,749,335) (2,160,132)
Change in indebtedness (to)
from affiliates, net 224,472 (3,023) 158,606
Change in other assets and
liabilities, net 41,277 (1,562,548) (342,382)
Net cash provided by operating
activities 2,616,497 675,244 2,557,945
Cash flows from investing
activities:
Proceeds from investments
sold and matured:
Fixed maturities held
for sale 1,152,736 619,612 250,000
Fixed maturities sold 18,736,612 0 0
Fixed maturities matured 20,787,782 16,265,140 23,894,954
Equity securities 8,990 104,260 49,557
Mortgage loans 3,364,427 2,252,423 4,029,630
Real estate 3,219,851 1,768,254 2,640,025
Policy loans 3,937,471 4,110,744 4,064,602
Short term 825,000 25,000 1,103,856
Total proceeds from investments
sold and matured 52,032,869 25,145,433 36,032,624
Cost of investments acquired:
Fixed maturities (29,365,111) (25,112,358) (52,768,480)
Equity securities 0 (1,000,000) (249,925)
Mortgage loans (503,113) (322,129) (5,611,967)
Real estate (841,793) (1,927,413) (3,321,599)
Policy loans (4,329,124) (4,713,471) (3,886,821)
Short term (830,983) (100,000) (650,000)
Total cost of investments acquired (35,870,124) (33,175,371) (66,488,792)
Cash of subsidiary at date of sale 0 0 (3,134,343)
Cash received in sale of subsidiary 0 0 4,995,804
Net cash provided by (used in)
investing activities 16,162,745 (8,029,938) (28,594,707)
Cash flows from financing
activities:
Policyholder contract deposits 22,245,369 25,021,983 23,110,031
Policyholder contract
withdrawals (15,433,644) (16,008,462) (14,893,221)
Net cash transferred from
coinsurance ceded (19,088,371) 0 0
Proceeds from notes payable 9,300,000 300,000 0
Payments of principal on
notes payable (10,923,475) (1,205,861) (2,005,687)
Net cash provided by (used in)
financing activities (13,900,121) 8,107,660 6,211,123
Net increase (decrease) in cash
and cash equivalents 4,879,121 752,966 (19,825,639)
Cash and cash equivalents at
beginning of year 12,024,668 11,271,702 31,097,341
Cash and cash equivalents at
end of year $ 16,903,789 $ 12,024,668 $ 11,271,702
</TABLE>
See accompanying notes.
44
<PAGE>
UNITED TRUST GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A. ORGANIZATION - At December 31, 1996, the parent, significant
majority-owned subsidiaries and affiliates of United Trust
Group, Inc. were as depicted on the following organizational
chart.
United Trust, Inc. ("UTI") is the ultimate controlling company. UTI owns
53% of United Trust Group ("UTG") and 30% of United Income, Inc. ("UII").
UII owns 47% of UTG. UTG owns 72% of First Commonwealth Corporation
("FCC"). FCC owns 100% of Universal Guaranty Life Insurance Company
("UG"). UG owns 100% of United Security Assurance Company ("USA"). USA
owns 84% of Appalachian Life Insurance Company ("APPL") and APPL owns 100%
of Abraham Lincoln Insurance Company ("ABE").
<PAGE> 45
A summary of the Company's significant accounting policies
consistently applied in the preparation of the accompanying
consolidated financial statements follows.
B. NATURE OF OPERATIONS - United Trust Group, Inc. is an
insurance holding company that through its insurance
subsidiaries sells individual life insurance products. The
Company's principal market is the midwestern United States.
The primary focus of the Company has been the servicing of
existing insurance business in force, the solicitation of new
life insurance products and the acquisition of other
companies in similar lines of business.
C. PRINCIPLES OF CONSOLIDATION - The consolidated financial
statements include the accounts of the Company and its
majority-owned subsidiaries. All significant intercompany
accounts and transactions have been eliminated.
D. BASIS OF PRESENTATION - The financial statements of United
Trust Group, Inc.'s life insurance subsidiaries have been
prepared in accordance with generally accepted accounting
principles which differ from statutory accounting practices
permitted by insurance regulatory authorities.
E. USE OF ESTIMATES - In preparing financial statements in
conformity with generally accepted accounting principles,
management is required to make estimates and assumptions that
affect the reported amounts of assets and liabilities, the
disclosure of contingent assets and liabilities at the date
of the financial statements, and the reported amounts of
revenues and expenses during the reporting period. Actual
results could differ from those estimates.
F. INVESTMENTS - Investments are shown on the following bases:
Fixed maturities -- at cost, adjusted for amortization of
premium or discount and other-than-temporary market value
declines. The amortized cost of such investments differs
from their market values; however, the Company has the
ability and intent to hold these investments to maturity, at
which time the full face value is expected to be realized.
Investments held for sale -- at current market value,
unrealized appreciation or depreciation is charged directly
to shareholders' equity.
Mortgage loans on real estate -- at unpaid balances, adjusted
for amortization of premium or discount, less allowance for
possible losses.
Real estate -- at cost, less allowances for depreciation and
any impairment which would result in a carrying value below
net realizable value. Foreclosed real estate is adjusted for
any impairment at the foreclosure date. Accumulated
depreciation on real estate was $1,340,746 and $1,049,652 as
of December 31, 1996 and 1995, respectively.
Policy loans -- at unpaid balances including accumulated
interest but not in excess of the cash surrender value.
Short-term investments -- at cost, which approximates current
market value.
Realized gains and losses on sales of investments are
recognized in net income on the specific identification
basis.
<PAGE> 46
G. RECOGNITION OF REVENUES AND RELATED EXPENSES - Premiums for
traditional life insurance products, which include those
products with fixed and guaranteed premiums and benefits,
consist principally of whole life insurance policies,
limited-payment life insurance policies, and certain
annuities with life contingencies are recognized as revenues
when due. Accident and health insurance premiums are
recognized as revenue pro-rata over the terms of the
policies. Benefits and related expenses associated with the
premiums earned are charged to expense proportionately over
the lives of the policies through a provision for future
policy benefit liabilities and through deferral and
amortization of deferred policy acquisition costs. For
universal life and investment products, generally there is no
requirement for payment of premium other than to maintain
account values at a level sufficient to pay mortality and
expense charges. Consequently, premiums for universal life
policies and investment products are not reported as revenue,
but as deposits. Policy fee revenue for universal life
policies and investment products consists of charges for the
cost of insurance, policy administration, and surrenders
assessed during the period. Expenses include interest
credited to policy account balances and benefit claims
incurred in excess of policy account balances.
H. DEFERRED POLICY ACQUISITION COSTS - Commissions and other
costs of acquiring life insurance products that vary with and
are primarily related to the production of new business have
been deferred. Traditional life insurance acquisition costs
are being amortized over the premium-paying period of the
related policies using assumptions consistent with those used
in computing policy benefit reserves.
For universal life insurance and interest sensitive life
insurance products, acquisition costs are being amortized
generally in proportion to the present value of expected
gross profits from surrender charges and investment,
mortality, and expense margins. Under SFAS No. 97,
"Accounting and Reporting by Insurance Enterprises for
Certain Long-Duration Contracts and for Realized Gains and
Losses from the Sale of Investments," the Company makes
certain assumptions regarding the mortality, persistency,
expenses, and interest rates it expects to experience in
future periods. These assumptions are to be best estimates
and are to be periodically updated whenever actual experience
and/or expectations for the future change from initial
assumptions. The amortization is adjusted retrospectively
when estimates of current or future gross profits to be
realized from a group of products are revised.
The following table summarizes deferred policy acquisition
costs and related data for the years shown.
1996 1995 1994
Deferred, beginning of year $ 11,437,000 $ 10,634,000 $ 7,160,000
Acquisition costs deferred:
Commissions, net of
reinsurance of $0 $0
and $1,837,000 845,000 1,838,000 3,182,000
Marketing, salaries and
other expenses 431,000 532,000 1,757,000
Total 1,276,000 2,370,000 4,939,000
Interest accretion 408,000 338,000 181,000
Amortization charged to income (1,796,000) (1,905,000) (1,319,000)
Net amortization (1,388,000) (1,567,000) (1,138,000)
Deferred acquisition costs
disposed of at sale
of subsidiary 0 0 (327,000)
Change for the year (112,000) 803,000 3,474,000
Deferred, end of year $ 11,325,000 $ 11,437,000 $ 10,634,000
<PAGE> 47
The following table reflects the components of the income
statement for the line item Commissions and amortization of
deferred policy acquisition costs:
1996 1995 1994
Net amortization of deferred
policy acquisition costs $ 1,388,000 $ 1,567,000 $ 1,138,000
Commissions 2,837,000 3,341,000 2,922,000
Total $ 4,225,000 $ 4,908,000 $ 4,060,000
Estimated net amortization expense of deferred policy
acquisition costs for the next five years is as follows:
Interest Net
Accretion Amortization Amortization
1997 $ 400,000 $ 1,600,000 $ 1,200,000
1998 400,000 1,500,000 1,100,000
1999 300,000 1,300,000 1,000,000
2000 300,000 1,200,000 900,000
2001 300,000 1,000,000 700,000
I. COST OF INSURANCE ACQUIRED - When an insurance company is
acquired, the Company assigns a portion of its cost to the
right to receive future cash flows from insurance contracts
existing at the date of the acquisition. The cost of
policies purchased represents the actuarially determined
present value of the projected future cash flows from the
acquired policies. Cost of Insurance Acquired is amortized
with interest in relation to expected future profits,
including direct charge-offs for any excess of the
unamortized asset over the projected future profits. The
interest rates utilized in the amortization calculation are
9% on approximately 30% of the balance and 15% on the
remaining balance. The interest rates vary due to
differences in the blocks of business.
1996 1995 1994
Cost of insurance acquired,
beginning of year $ 59,602,000 $ 64,111,000 $ 73,237,000
Additions from
acquisitions 0 0 0
Interest accretion 6,649,000 7,044,000 7,593,000
Amortization (12,339,000) (11,553,000) (14,722,000)
Net amortization (5,690,000) (4,509,000) (7,129,000)
Balance attributable to
coinsurance agreement (6,375,000) 0 0
Balance attributable to
subsidiary at date
of sale 0 0 (1,379,000)
Balance attributable to
down-stream merger of
subsidiary 0 0 (618,000)
Write-offs due to impairment 0 0 0
Cost of insurance acquired,
end of year $ 47,537,000 $ 59,602,000 $ 64,111,000
<PAGE> 48
Estimated net amortization expense of cost of insurance
acquired for the next five years is as follows:
Interest Net
Accretion Amortization Amortization
1997 $ 5,800,000 $ 9,700,000 $ 3,900,000
1998 5,500,000 8,700,000 3,200,000
1999 5,100,000 7,600,000 2,500,000
2000 4,900,000 7,200,000 2,300,000
2001 4,700,000 7,100,000 2,400,000
J. COST IN EXCESS OF NET ASSETS PURCHASED - Cost in excess of
net assets purchased is the excess of the amount paid to
acquire a company over the fair value of its net assets.
Cost in excess of net assets purchased are amortized over
periods not exceeding forty years using the straight-line
method. Management reviews the valuation and amortization of
goodwill on an annual basis. As part of this review, the
Company estimates the value of and the estimated undiscounted
future cash flows expected to be generated by the related
subsidiaries to determine that no impairment has occurred.
Accumulated amortization of cost in excess of net assets
purchased was $1,265,146 and $1,079,867 as of December 31,
1996 and 1995, respectively.
K. FUTURE POLICY BENEFITS AND EXPENSES - The liabilities for
traditional life insurance and accident and health insurance
policy benefits are computed using a net level method. These
liabilities include assumptions as to investment yields,
mortality, withdrawals, and other assumptions based on the
life insurance subsidiaries' experience adjusted to reflect
anticipated trends and to include provisions for possible
unfavorable deviations. The Company makes these assumptions
at the time the contract is issued or, in the case of
contracts acquired by purchase, at the purchase date.
Benefit reserves for traditional life insurance policies
include certain deferred profits on limited-payment policies
that are being recognized in income over the policy term.
Policy benefit claims are charged to expense in the period
that the claims are incurred. Current mortality rate
assumptions are based on 1975-80 select and ultimate tables.
Withdrawal rate assumptions are based upon Linton B or Linton
C.
Benefit reserves for universal life insurance and interest
sensitive life insurance products are computed under a
retrospective deposit method and represent policy account
balances before applicable surrender charges. Policy
benefits and claims that are charged to expense include
benefit claims in excess of related policy account balances.
Interest crediting rates for universal life and interest
sensitive products range from 5.0% to 6.0% in 1996, 1995 and
1994.
L. POLICY AND CONTRACT CLAIMS - Policy and contract claims
include provisions for reported claims in process of
settlement, valued in accordance with the terms of the
policies and contracts, as well as provisions for claims
incurred and unreported based on prior experience of the
Company.
M. PARTICIPATING INSURANCE - Participating business represents
30% and 34% of the ordinary life insurance in force at
December 31, 1996 and 1995, respectively. Premium income
from participating business represents 52%, 55%, and 53% of
total premiums for the years ended December 31, 1996, 1995
and 1994, respectively. The amount of dividends to be paid
is determined annually by the respective insurance
subsidiary's Board of Directors. Earnings allocable to
participating policyholders are based on legal requirements
which vary by state.
<PAGE> 49
N. INCOME TAXES - Income taxes are reported under Statement of
Financial Accounting Standards Number 109. Deferred income
taxes are recorded to reflect the tax consequences on future
periods of differences between the tax bases of assets and
liabilities and their financial reporting amounts at the end
of each such period.
O. BUSINESS SEGMENTS - The Company operates principally in the
individual life insurance business.
P. EARNINGS PER SHARE - Earnings per share are based upon the
weighted average number of common shares outstanding during
the year.
Q. CASH EQUIVALENTS - The Company considers certificates of
deposit and other short term instruments with an original
purchased maturity of three months or less as cash equivalents.
R. RECLASSIFICATIONS - Certain prior year amounts have been
reclassified to conform with the current year presentation.
Such reclassifications had no effect on previously reported
net income, total assets, or shareholders' equity.
S. REINSURANCE - In the normal course of business, the Company
seeks to limit its exposure to loss on any single insured and
to recover a portion of benefits paid by ceding reinsurance
to other insurance enterprises or reinsurers under excess
coverage and co-insurance contracts. The Company retains a
maximum of $125,000 of coverage per individual life.
Amounts paid or deemed to have been paid for reinsurance
contracts are recorded as reinsurance receivables.
Reinsurance premiums, commissions, expense reimbursements,
and reserves on reinsured business are accounted for on a
basis consistent with those used in accounting for the
original policies issued and the terms of the reinsurance
contracts. Expense reimbursements received in connection
with reinsurance ceded have been accounted for as a reduction
of the related policy acquisition costs or, to the extent
such reimbursements exceed the related acquisition costs, as
revenue.
Reinsurance contracts do not relieve the Company from its
obligations to policyholders. Failure of reinsurers to honor
their obligations could result in losses to the Company;
consequently, allowances are established for amounts deemed
uncollectible. The Company evaluates the financial condition
of its reinsurers and monitors concentrations of credit risk
arising from similar geographic regions, activities, or
economic characteristics of the reinsurers to minimize its
exposure to significant losses from reinsurer insolvencies.
2. SHAREHOLDER DIVIDEND RESTRICTION
At December 31, 1996, substantially all of consolidated shareholders'
equity represents net assets of UTG's subsidiaries. The payment of cash
dividends to shareholders by UTG is not legally restricted. UG's dividend
limitations are described below.
Ohio domiciled insurance companies require five days prior notification to
the insurance commissioner for the payment of an ordinary dividend.
Ordinary dividends are defined as the greater of: a) prior year statutory
earnings or b) 10% of statutory capital and surplus. For the year ended
December 31, 1996, UG had a statutory gain from operations of $8,006,000.
At December 31, 1996, UG's statutory capital and surplus amounted to
$10,227,000. Extraordinary dividends (amounts in excess of ordinary
dividend limitations) require prior approval of the insurance commissioner
and are not restricted to a specific calculation.
<PAGE>
3. FEDERAL INCOME TAXES
Until 1984, the insurance companies were taxed under the provisions of the
Life Insurance Company Income Tax Act of 1959 as amended by the Tax Equity
and Fiscal Responsibility Act of 1982. These laws were superseded by the
Deficit Reduction Act of 1984. All of these laws are based primarily upon
statutory results with certain special deductions and other items available
only to life insurance companies. If certain of the life companies pay
shareholder dividends in excess of "shareholders' surplus" they will be
required to pay taxes on income not taxed under the pre-1984 acts.
The following table summarizes the companies with this situation and the
maximum amount of income which has not been taxed in each.
Shareholders' Untaxed
Company Surplus Balance
ABE $ 5,242,000 $ 1,150,000
APPL 4,943,000 1,525,000
UG 24,038,000 4,364,000
USA 981,000 0
The payment of taxes on this income is not anticipated; and, accordingly,
no deferred taxes have been established.
The life insurance company subsidiaries file a consolidated federal income
tax return. The holding companies of the group file separate returns.
Life insurance company taxation is based primarily upon statutory results
with certain special deductions and other items available only to life
insurance companies. Income tax expense consists of the following
components:
1996 1995 1994
Current tax expense (credit) $ (148,000) $ 2,000 $ 51,000
Deferred tax expense (credit) (4,496,000) (4,727,000) (2,056,000)
$(4,644,000) $(4,725,000) $(2,005,000)
The Companies have net operating loss carryforwards for federal income tax
purposes expiring as follows:
UG FCC
2002 $ 0 $ 527,000
2003 0 285,000
2004 0 283,000
2005 0 139,000
2006 2,109,000 33,000
2007 783,000 676,000
2008 940,000 4,000
2009 0 169,000
2010 0 19,000
TOTAL $ 3,832,000 $ 2,135,000
<PAGE> 51
The Company has established a deferred tax asset of $2,088,000 for its
operating loss carryforwards and has established an allowance of
$2,088,000.
The provision or (credit) for income taxes shown in the statements of
operations does not bear the normal relationship to pre-tax income as a
result of certain permanent differences. The sources and effects of such
differences are summarized in the following table:
1996 1995 1994
Tax computed at standard corporate rate $(2,381,000) $(4,195,000) $(1,271,000)
Changes in taxes due to:
Cost in excess of net assets purchased 65,000 61,000 104,000
Special insurance deductions 0 0 (24,000)
Benefit of prior losses (2,393,000) (599,000) (649,000)
Other 65,000 8,000 (165,000)
Income tax expense (credit) $(4,644,000 )$(4,725,000) $(2,005,000)
The following table summarizes the major components which comprise the
deferred tax liability as reflected in the balance sheets:
1996 1995
Investments $ (122,251) $ (48,918)
Cost of insurance acquired 16,637,883 20,860,602
Deferred policy acquisition
costs 3,963,875 4,002,855
Agent balances (65,609) (71,625)
Furniture and equipment (37,683) (82,257)
Discount of notes 922,766 1,003,038
Management/consulting fees (733,867) (841,991)
Future policy benefits (5,906,087) (5,039,938)
Other liabilities (1,151,405) (818,484)
Federal tax DAC (1,916,536) (2,862,999)
Deferred tax liability $ 11,591,086 $ 16,100,283
<PAGE> 52
4. ANALYSIS OF INVESTMENTS, INVESTMENT INCOME AND INVESTMENT GAIN
A. NET INVESTMENT INCOME - The following table reflects net investment income
by type of investment:
December 31,
1996 1995 1994
Fixed maturities and fixed
maturities held for sale $ 13,326,312 $ 13,253,122 $ 12,185,941
Equity securites 88,661 52,445 3,999
Mortgage loans 1,047,461 1,257,189 1,423,474
Real estate 794,844 975,080 990,857
Policy loans 1,121,538 1,041,900 1,014,723
Short-term investments 512,322 498,496 419,416
Other 233,872 143,753 202,641
Total consolidated investment
income 17,125,010 17,221,985 16,241,051
Investment expenses (1,222,903) (1,724,438) (1,915,808)
Consolidated net investment
income $ 15,902,107 $ 15,497,547 $ 14,325,243
At December 31, 1996, the Company had a total of $6,025,000 of
investments, comprised of $5,325,000 in real estate including its home
office property and $700,000 in equity securities, which did not produce
income during 1996.
The following tabel summarizes the Company's fixed maturity holdings, and
investments held for sale by major classifications:
Carrying Value
1996 1995
Investments held for sale:
Fixed maturities $ 1,961,166 $ 3,226,175
Equity securities 1,794,405 1,946,481
Fixed maturities:
U.S. Government, government
agencies and authorities 28,554,631 27,488,188
State, municipalities and
political subdivisions 14,421,735 6,785,476
Collateralized mortgage obligations 13,246,781 15,395,913
Public utilities 51,821,989 59,136,696
All other corporate bonds 71,881,649 82,267,947
$183,682,356 $196,246,876
By insurance statute, the majority of the Company's investment portfolio
is required to be invested in investment grade securities to provide
ample protection for policyholders. The Company does not invest in
so-called "junk bonds" or derivative investments.
<PAGE> 53
Below investment grade debt securities generally provide higher yields
and involve greater risks than investment grade debt securities
because their issuers typically are more highly leveraged and
more vulnerable to adverse economic conditions than investment grade
issuers. In addition, the trading market for these securities is
usually more limited than for investment grade debt securities.
Debt securities classified as below-investment grade are those
that receive a Standard & Poor's rating of BB or below.
The following table summarizes by category securities held that
are below investment grade at amortized cost:
Below Investment
Grade Investments 1996 1995 1994
State, Municipalities and
Political Subdivisions $ 10,042 $ 0 $ 32,370
Public Utilities 117,609 116,879 168,869
Corporate 813,717 819,010 848,033
Total $941,368 $935,889 $1,049,272
<PAGE> 54
B. INVESTMENT SECURITIES
The amortized cost and estimated market values of investments in
securities including investments held for sale are as follows:
Cost or Gross Gross Estimated
Amortized Unrealized Unrealized Market
1996 Cost Gains Losses Value
Investments Held for Sale:
U.S. Government and govt.
agencies and authorities $ 1,461,068 $ 0 $ 17,458 $ 1,443,609
States, municipalities and
political subdivisions 145,199 665 6,397 139,467
Collateralized mortgage
obligations 0 0 0 0
Public utilities 119,970 363 675 119,658
All other corporate bonds 258,424 4,222 4,215 258,432
1,984,661 5,250 28,745 1,961,166
Equity securities 2,086,159 37,000 328,754 1,794,405
Total $ 4,070,820 $ 42,250 $ 357,499 $ 3,755,571
Held to Maturity Securities:
U.S. Government and govt.
agencies and authorities $28,554,631 $ 421,523 $ 136,410 $ 28,839,744
States, municipalities and
political subdivisions 14,421,735 318,682 28,084 14,712,333
Collateralized mortgage
obligations 13,246,780 175,163 157,799 13,264,145
Public utilities 51,821,990 884,858 381,286 52,325,561
All other corporate bonds 71,881,649 1,240,230 448,437 72,673,442
Total $179,926,785 $3,040,456 $1,152,016 $181,815,225
<PAGE> 55
Cost or Gross Gross Estimated
Amortized Unrealized Unrealized Market
1995 Cost Gains Losses Value
Investments Held for Sale:
U.S. Government and govt.
agencies and authorities $ 2,001,860 $ 2,579 $ 621 $ 2,003,818
States, municipalities and
political subdivisions 812,454 14,313 3,749 823,018
Collateralized mortgage
obligations 32,177 506 0 32,683
Public utilities 119,379 572 2,123 117,828
All other corporate bonds 258,169 337 9,678 248,828
3,224,039 18,307 16,171 3,226,175
Equity securities 2,086,159 80,721 220,399 1,946,481
Total $ 5,310,198 $ 99,028 $ 236,570 $ 5,172,656
Held to Maturity Securities:
U.S. Government and govt.
agencies and authorities $ 27,488,188 $ 841,786 $ 76,417 $ 28,253,557
States, municipalities and
political subdivisions 6,785,476 305,053 10,895 7,079,634
Collateralized mortgage
obligations 15,395,913 295,344 67,472 15,623,785
Public utilities 59,136,696 2,279,509 134,091 61,282,114
All other corporate bonds 82,267,947 2,974,553 475,333 84,767,167
Total $191,074,220 $6,696,245 $ 764,208 $ 197,006,257
The amortized cost of debt securities at December 31, 1996, by
contractual maturity, are shown below. Expected maturities will differ
from contractual maturities because borrowers may have the right to call
or prepay obligations with or without call or prepayment penalties.
Fixed Maturities Held for Sale Amortized
December 31, 1996 Cost
Due in one year or less $ 139,724
Due after one year through five years 1,569,804
Due after five years through ten years 115,183
Due after ten years 159,950
$ 1,984,661
Fixed Maturities Held to Maturity Amortized
December 31, 1996 Cost
Due in one year or less $ 13,222,084
Due after one year through five years 74,120,886
Due after five years through ten years 77,222,430
Due after ten years 15,361,385
$179,926,785
<PAGE> 56
Proceeds from sales, calls and maturities of investments in debt securities
during 1996 were $40,677,000. Gross gains of $101,000 and gross losses of
$276,000 were realized on those sales, calls and maturities.
Proceeds from sales, calls and maturities of investments in debt securities
during 1995 were $16,885,000. Gross gains of $126,000 and gross losses of
$246,000 were realized on those sales, calls and maturities.
Proceeds from sales, calls and maturities of investments in debt securities
during 1994 were $24,145,000. Gross gains of $84,000 and gross losses of
$554,000 were realized on those sales, calls and maturities.
C. INVESTMENTS ON DEPOSIT - At December 31, 1996, investments carried
at approximately $18,016,000 were on deposit with various state insurance
departments.
5. DISCLOSURES ABOUT FAIR VALUES OF FINANCIAL INSTRUMENTS
The financial statements include various estimated fair value information
at December 31, 1996 and 1995, as required by Statement of Financial
Accounting Standards 107, Disclosure about Fair Value of Financial
Instruments ("SFAS 107"). Such information, which pertains to the
Company's financial instruments, is based on the requirements set forth in
that Statement and does not purport to represent the aggregate net fair
value of the Company.
The following methods and assumptions were used to estimate the fair value
of each class of financial instrument required to be valued by SFAS 107 for
which it is practicable to estimate that value:
(a) Cash and Cash equivalents
The carrying amount in the financial statements approximates fair value
because of the relatively short period of time between the origination of
the instruments and their expected realization.
(b) Fixed maturities and investments held for sale
Quoted market prices, if available, are used to determine the fair value.
If quoted market prices are not available, management estimates the fair
value based on the quoted market price of a financial instrument with
similar characteristics.
(c) Mortgage loans on real estate
An estimate of fair value is based on management's review of the portfolio
in relation to market prices of similar loans with similar credit ratings,
interest rates, and maturity dates. Management conservatively estimates
fair value of the portfolio is equal to the carrying value.
(d) Investment real estate and real estate acquired in satisfaction of debt
An estimate of fair value is based on management's review of the individual
real estate holdings. Management utilizes sales of surrounding properties,
current market conditions and geographic considerations. Management
conservatively estimates the fair value of the portfolio is equal to the
carrying value.
<PAGE> 57
(e) Policy loans
It is not practicable to estimate the fair value of policy loans as they
have no stated maturity and their rates are set at a fixed spread to
related policy liability rates. Policy loans are carried at the aggregate
unpaid principal balances in the consolidated balance sheets, and earn
interest at rates ranging from 4% to 8%. Individual policy liabilities in
all cases equal or exceed outstanding policy loan balances.
(f) Short term investments
For short term instruments, the carrying amount is a reasonable estimate of
fair value. All short term instruments represent certificates of deposit
with various banks and all are protected under FDIC.
(g) Notes and accounts receivable and uncollected premiums
The Company holds notes receivable of $1,680,066 for which the
determination of fair value is estimated by discounting the future cash
flows using the current rates at which similar loans would be made to
borrowers with similar credit ratings and for the same remaining
maturities. Accounts receivable and uncollected premiums are primarily
insurance contract related receivables which are determined based upon the
underlying insurance liabilities and added reinsurance amounts, and thus
are excluded for the purpose of fair value disclosure by paragraph 8(c) of
SFAS 107.
(h) Notes payable
For borrowings under the senior loan agreement, which is subject to
floating rates of interest, carrying value is a reasonable estimate of fair
value. For subordinated borrowings fair value was determined based on the
borrowing rates currently available to the Company for loans with similar
terms and average maturities.
The estimated fair values of the Company's financial instruments required
to be valued by SFAS 107 are as follows as of December 31:
1996 1995
Estimated Estimate
Carrying Fair Carrying Fair
Assets Amount Value Amount Value
Fixed maturities $179,926,785 $181,815,225 $191,074,220 $197,006,257
Fixed maturities
held for sale 1,961,166 1,961,166 3,226,175 3,226,175
Equity securities 1,794,405 1,794,405 1,946,481 1,946,481
Mortgage loans on
real estate 11,022,792 11,022,792 13,891,762 13,891,762
Policy loans 14,438,120 14,438,120 16,941,359 16,941,359
Short-term
investments 430,983 430,983 425,000 425,000
Investment in real
estate 10,543,490 10,543,490 11,978,575 11,978,575
Real estate
acquired in
satisfaction of
debt 3,846,946 3,846,946 5,332,413 5,332,413
Notes receivable 1,680,066 1,566,562 1,680,066 1,550,742
Liabilities
Notes payable 19,839,853 18,671,155 21,463,328 20,763,009
<PAGE> 58
6. STATUTORY EQUITY AND GAIN FROM OPERATIONS
The Company's insurance subsidiaries are domiciled in Ohio, Illinois and
West Virginia and prepare their statutory-based financial statements in
accordance with accounting practices prescribed or permitted by the
respective insurance department. These principles differ significantly
from generally accepted accounting principles. "Prescribed" statutory
accounting practices include state laws, regulations, and general
administrative rules, as well as a variety of publications of the National
Association of Insurance Commissioners ("NAIC"). "Permitted" statutory
accounting practices encompass all accounting practices that are not
prescribed; such practices may differ from state to state, from company to
company within a state, and may change in the future. The NAIC currently
is in the process of codifying statutory accounting practices, the result
of which is expected to constitute the only source of "prescribed"
statutory accounting practices. Accordingly, that project, which is
expected to be completed in 1997, will likely change prescribed statutory
accounting practices, and may result in changes to the accounting practices
that insurance enterprises use to prepare their statutory financial
statements. UG's total statutory shareholders' equity was $10,227,000 and
$7,274,000 at December 31, 1996 and 1995, respectively. The combined
statutory gain from operations (exclusive of intercompany dividends) was
$10,692,000, $4,076,000 and $3,071,000 for 1996, 1995 and 1994,
respectively.
7. REINSURANCE
The Company assumes risks from, and reinsures certain parts of its risks
with other insurers under yearly renewable term and coinsurance agreements
which are accounted for by passing a portion of the risk to the reinsurer.
Generally, the reinsurer receives a proportionate part of the premiums less
commissions and is liable for a corresponding part of all benefit payments.
While the amount retained on an individual life will vary based upon age
and mortality prospects of the risk, the Company generally will not carry
more than $125,000 individual life insurance on a single risk.
The Company has reinsured approximately $1.109 billion, $1.088 billion and
$1.217 billion in face amount of life insurance risks with other insurers
for 1996, 1995 and 1994, respectively. Reinsurance receivables for future
policy benefits were $38,745,000 and $13,540,000 at December 31, 1996 and
1995, respectively, for estimated recoveries under reinsurance treaties.
Should any of the reinsurers be unable to meet its obligation at the time
of the claim, obligation to pay such claim would remain with the Company.
The Company's insurance subsidiary ("UG") entered into a coinsurance
agreement with First International Life Insurance Company ("FILIC") as of
September 30, 1996. Under the terms of the agreement, UG ceded to FILIC
substantially all of its paid-up life insurance policies. Paid-up life
insurance generally refers to non-premium paying life insurance policies.
A.M. Best, an industry rating company, assigned a Best's Rating of A++
(Superior) to The Guardian Life Insurance Company of America ("Guardian"),
parent of FILIC, based on the consolidated financial condition and
operating performance of the company and its life/health subsidiaries. The
agreement with FILIC accounts for approximately 66% of the reinsurance
receivables as of December 31, 1996.
As a result of the FILIC coinsurance agreement, effective September 30,
1996, UG received a reinsurance credit in the amount of $28,318,000 in
exchange for an equal amount of assets. UG also received $6,375,000 as a
commission allowance.
Currently, the Company is utilizing reinsurance agreements with Business
Men's Assurance Company, ("BMA") and Life Reassurance Corporation, ("LIFE
RE") for new business. BMA and LIFE RE each hold an "A+" (Superior) rating
from A.M. Best, an industry rating company. The reinsurance agreements
were effective December 1, 1993, and cover all new business of the Company.
The agreements are a yearly renewable term ("YRT") treaty where the Company
cedes amounts above its retention limit of $100,000 with a minimum cession
of $25,000.
<PAGE> 59
The Company does not have any short-duration reinsurance contracts. The
effect of the Company's long-duration reinsurance contracts on premiums
earned in 1996, 1995 and 1994 was as follows:
Shown in thousands
1996 1995 1994
Premiums Premiums Premiums
Earned Earned Earned
Direct $ 32,387 $ 35,201 $ 38,063
Assumed 0 0 0
Ceded (4,768) (5,203) (5,659)
Net premiums $ 27,619 $ 29,998 $ 32,404
8. COMMITMENTS AND CONTINGENCIES
The insurance industry has experienced a number of civil jury verdicts
which have been returned against life and health insurers in the
jurisdictions in which the Company does business involving the insurers'
sales practices, alleged agent misconduct, failure to properly supervise
agents, and other matters. Some of the lawsuits have resulted in the award
of substantial judgments against the insurer, including material amounts of
punitive damages. In some states, juries have substantial discretion in
awarding punitive damages in these circumstances.
Under insurance guaranty fund laws in most states, insurance companies
doing business in a participating state can be assessed up to prescribed
limits for policyholder losses incurred by insolvent or failed insurance
companies. Although the Company cannot predict the amount of any future
assessments, most insurance guaranty fund laws currently provide that an
assessment may be excused or deferred if it would threaten an insurer's
financial strength. Those mandatory assessments may be partially recovered
through a reduction in future premium taxes in some states. The Company
does not believe such assessments will be materially different from amounts
already provided for in the financial statements.
The Company and its subsidiaries are named as defendants in a number of
legal actions arising primarily from claims made under insurance policies.
Those actions have been considered in establishing the Company's
liabilities. Management and its legal counsel are of the opinion that the
settlement of those actions will not have a material adverse effect on the
Company's financial position or results of operations.
9. RELATED PARTY TRANSACTIONS
United Income, Inc. ("UII") has a service agreement with its affiliate,
USA, to perform services and provide personnel and facilities. The
services included in the agreement are claim processing, underwriting,
processing and servicing of policies, accounting services, agency services,
data processing and all other expenses necessary to carry on the business
of a life insurance company.
UII's service agreement states that USA is to pay UII monthly fees equal to
22% of the amount of collected first year premiums, 20% in second year and
6% of the renewal premiums in years three and after. UII's subcontract
agreement with UTI states that UII is to pay UTI monthly fees equal to 60%
of collected service fees from USA as stated above.
USA paid $1,568,000, $2,015,000 and $1,357,000 under their agreement with
UII for 1996, 1995 and 1994, respectively. UII paid $941,000, $1,209,000
and $814,000 under their agreement with UTI for 1996, 1995 and 1994,
respectively.
<PAGE> 60
The agreements of the insurance companies have been approved by their
respective domiciliary insurance departments and it is Management's opinion
that where applicable, costs have been allocated fairly and such
allocations are based upon generally accepted accounting principles. The
costs paid by UTI and its subsidiaries for these services include costs
related to the production of new business which are deferred as policy
acquisition costs and charged off to the income statement through
"Amortization of deferred policy acquisition costs". Also included are
costs associated with the maintenance of existing policies which are
charged as current period costs and included in "general expenses".
10. NOTES PAYABLE
At December 31, 1996, the Company has $19,840,000 in long term debt
outstanding. The debt is comprised of the following components:
1996 1995
Senior debt $ 8,400,000 $ 10,400,000
Subordinated 10 yr. notes 6,209,000 6,209,000
Subordinated 20 yr. notes 3,831,000 3,831,000
Other notes payable 1,400,000 1,000,000
Encumbrance on real estate 0 23,000
$19,840,000 $ 21,463,000
On May 8, 1996, FCC refinanced its senior debt of $8,900,000. The
refinancing was completed through First of America Bank - NA and is subject
to a credit agreement. The refinanced debt bears interest to a rate equal
to the "base rate" plus nine-sixteenths of one percent. The Base rate is
defined as the floating daily, variable rate of interest determined and
announced by First of America Bank from time to time as its "base lending
rate". The base rate at issuance of the loan was 8.25%, and has remained
unchanged through March 1, 1997. Interest is paid quarterly. Principal
payments of $1,000,000 are due in May of each year beginning in 1997, with
a final payment due May 8, 2005. On November 8, 1996, the Company prepaid
$500,000 of the May 8, 1997 principal payment.
The credit agreement contains certain covenants with which the Company must
comply. The covenants contain provisions common to a loan of this type and
include such items as: a minimum consolidated net worth of FCC to be no
less than 400% of the outstanding balance of the debt, Statutory capital
and surplus of Universal Guaranty Life Insurance Company be maintained at
no less than $6,500,000; an earnings covenant requiring the sum of the pre-
tax earnings plus non-cash charges of FCC (based on parent only GAAP
practices) shall not be less than two hundred percent (200%) of the
Company's interest expense on all of its debt service. The Company is
current and in compliance with all of the terms on all of its outstanding
debt and does not foresee any problem in maintaining compliance in the
future.
United Income, Inc. (UII) and First Fidelity Mortgage Company through an
assignment from United Trust, Inc. owned a participating interest of
$700,000 and $300,000 respectively of the senior debt. At the date of the
refinance, these obligations were converted from participations of senior
debt to promissory notes. These notes bear interest at the rate of 1%
above the variable per annum rate of interest most recently published by
the Wall Street Journal as the prime rate. Interest is payable quarterly
with principal due at maturity on May 8, 2006. In February 1996, FCC
borrowed an additional $150,000 from UII and $250,000 from UTI to provide
additional cash for liquidity. The note bears interest at the rate
of 1% over prime as published in the Wall Street Journal, with interest
payments due quarterly and principal due upon maturity of the note on
June 1, 1999.
The subordinated debt was incurred June 16, 1992 as a part of an
acquisition. The 10 year notes bear interest at the rate of 7 1/2% per
annum, payable semi-annually beginning December 16, 1992. These notes
provide for principal payments equal to 1/20th of the principal balance due
with each interest installment beginning June 16,
<PAGE> 61
1997, with a final payment due June 16, 2002. During 1995, the Company
refinanced $300,695 of 10 year notes to 20 year notes bearing interest at
the rate of 8.75%. The repayment terms of these notes are similar to the
original 20 year notes. The 20 year notes bear interest at the rate of
8 1/2% per annum, payable semi-annually beginning December 16, 1992,
with a lump sum principal payment due June 16, 2012. The Company's
subordinated debt consists of $4,495,000 and $3,532,000 of ten year and
twenty year notes, respectively, owed to current officers and directors of
the Company or its affiliates.
Scheduled principal reductions on the Company's debt for the next five
years is as follows:
Year Amount
1997 $ 1,037,000
1998 1,537,000
1999 1,937,000
2000 1,537,000
2001 1,537,000
11. OTHER CASH FLOW DISCLOSURE
On a cash basis, the Company paid $1,700,973, $1,934,326 and $1,937,123 in
interest expense for the years 1996, 1995 and 1994, respectively. The
Company paid $17,634, $25,821 and $190 in federal income tax for 1996, 1995
and 1994, respectively.
The Company's insurance subsidiary ("UG") entered into a coinsurance
agreement with First International Life Insurance Company ("FILIC") as of
September 30, 1996. At closing of the transaction, UG received a
coinsurance credit of $28,318,000 for policy liabilities covered under the
agreement. UG transferred assets equal to the credit received. This
transfer included policy loans of $2,855,000 associated with policies under
the agreement and a net cash transfer of $19,088,000 after deducting the
ceding commission due UG of $6,375,000.
12. DEFERRED COMPENSATION PLAN
UTI and FCC established a deferred compensation plan during 1993 pursuant
to which an officer or agent of FCC, UTI or affiliates of UTI, could defer
a portion of their income over the next two and one-half years in return
for a deferred compensation payment payable at the end of seven years in
the amount equal to the total income deferred plus interest at a rate of
approximately 8.5% per annum and a stock option to purchase shares of
common stock of UTI. An officer or agent received an immediately
exercisable option to purchase 23,000 shares of UTI common stock at $1.75
per share for each $25,000 ($10,000 per year for two and one-half years) of
total income deferred. The option expires on December 31, 2000. A total
of 1,050,000 options were granted in 1993 under this plan. As of December
31, 1996 no options were exercised. At December 31, 1996 and 1995, the
Company held a liability of $1,268,000 and $1,167,000, respectively,
relating to this plan.
13. NON-RECURRING WRITE DOWN OF VALUE OF AGENCY FORCE ACQUIRED
The Company recognized a non-recurring write down of $8,297,000 on its
value of agency force acquired for the year ended December 31, 1995. The
write down released $2,904,000 of the deferred tax liability and $1,495,000
was attributed to minority interest in loss of consolidated subsidiaries.
The effect of this write down resulted in an increase in the net loss of
$3,898,000. This write down is directly related to the Company's change in
distribution systems. Due to the broker agency force not meeting
management's expectations and lack of production, the Company has changed
its focus from primarily broker agency distribution system to a captive
agent system. With the change in focus, most of the broker agents were
terminated and therefore, management re-evaluated the value of the agency
force carried on the balance sheet. For purposes of the write-down, the
broker agency force has
<PAGE> 62
no future expected cash flows and therefore warranted a write-off of
the value. The write down is reported as a separate line item
"non-recurring write down of value of agency force acquired" and the
release of the deferred tax liability is reported in the credit for income
taxes payable in the Statement of Operations.
14. CONCENTRATION OF CREDIT RISK
The Company maintains cash balances in financial institutions which at
times may exceed federally insured limits. The Company has not experienced
any losses in such accounts and believes it is not exposed to any
significant credit risk on cash and cash equivalents.
15. PENDING CHANGE IN CONTROL OF UNITED TRUST, INC.
On September 23, 1996, UTI and UII entered into a stock purchase agreement
with LaSalle Group, Inc., a Delaware corporation ("LaSalle"), whereby
LaSalle will acquire 12,000,000 shares of authorized but unissued shares of
UTI for $1.00 per share and 10,000,000 shares of authorized but unissued
shares of UII for $0.70 per share. Additionally, LaSalle intends,
contemporaneously with the closing of the above transaction, to purchase in
privately negotiated transactions additional shares of UTI and UII so that
LaSalle will own not less than 51% of the outstanding common stock of UTI
and indirectly control 51% of UII.
The agreement requires and is pending approval of the Commissioner of
Insurance of the State of Ohio, Illinois and West Virginia, (the states of
domicile of the insurance subsidiaries). It is anticipated the transaction
will be completed during the second quarter of 1997.
<PAGE> 63
16. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
<TABLE>
1996
1st 2nd 3rd 4th
<S> <C> <C> <C> <C>
Premium income and
other considerations, net $ 7,637,503 $ 8,514,175 $ 7,348,199 $ 7,444,581
Net investment income 3,974,407 3,930,487 4,002,258 3,994,955
Total revenues 12,513,692 12,187,077 11,331,283 10,444,059
Policy benefits including
dividends 6,528,760 7,083,803 8,378,710 8,334,759
Commissions and
amortization of DAC 2,567,921 2,298,549 1,734,048 3,314,436
Operating expenses 3,616,660 3,072,535 3,685,600 910,771
Operating loss (198,649) (267,810) (2,467,075) (3,869,480)
Net income (loss) 268,675 (93,640) (1,563,817) (271,915)
Net income (loss) per
share 2,686.75 (936.40) (15,638.17) (2,719.15)
1995
1st 2nd 3rd 4th
Premium income and
other considerations, net $ 8,703,332 $ 9,507,694 $ 7,868,803 $ 7,018,707
Net investment income 3,857,562 3,849,212 3,757,605 3,918,933
Total revenues 13,385,477 12,566,391 11,514,869 11,130,583
Policy benefits including
dividends 8,097,830 9,113,933 5,978,795 6,665,206
Commissions and
amortization of DAC 2,451,030 2,860,032 3,044,057 1,459,141
Operating expenses 3,449,062 2,742,174 2,498,472 3,924,966
Operating loss (612,445) (2,149,748) (6,455) (9,215,704)
Net income (loss) 95,608 (1,305,599) 126,751 (4,237,636)
Net income (loss) per
share 956.08 (13,055.99) 1,267.51 (42,376.60)
1994
1st 2nd 3rd 4th
Premium income and
other considerations, net $ 8,370,746 $ 9,270,226 $ 9,326,855 $ 8,176,700
Net investment income 3,358,729 3,515,440 3,632,044 3,819,030
Total revenues 12,001,846 13,765,861 10,671,956 11,968,337
Policy benefits including
dividends 6,927,743 7,496,765 7,483,568 7,753,158
Commissions and
amortization of DAC 1,756,091 4,169,240 3,141,884 2,503,463
Operating expenses 2,598,764 2,138,533 2,574,920 1,547,523
Operating income (loss) 719,248 38,677 (2,528,416) (1,784,822)
Net income (loss) 506,003 (165,957) (1,083,563) (372,765)
Net income (loss) per
share 5060.03 (1,659.57) (10,835.63) (3,727.65)
</TABLE>
<PAGE> 64
UNITED TRUST GROUP, INC. Schedule I
SUMMARY OF INVESTMENTS - OTHER THAN
INVESTMENTS IN RELATED PARTIES
As of December 31, 1996
<TABLE>
Column A Column B Column C Column D
Amount at
Which Shown
in Balance
Cost Value Sheet
<S> <C> <C> <C>
Fixed maturities:
United States Goverment and
government agencies and authorities $ 28,554,631 $ 28,839,743 $ 28,554,631
State, municipalities, and political
subdivisions 14,421,735 14,712,334 14,421,735
Collateralized mortgage obligations 13,246,780 13,264,145 13,246,780
Public utilities 51,821,990 52,325,561 51,821,990
All other corporate bonds 71,881,649 72,673,442 71,881,649
Total fixed maturities 179,926,785 $181,815,225 179,926,785
Investments held for sale:
Fixed maturities:
United States Goverment and
government agencies and authorities 1,461,068 $ 1,443,609 1,443,609
State, municipalities, and political
subdivisions 145,199 139,467 139,467
Public utilities 119,970 119,658 119,658
All other corporate bonds 258,424 258,432 258,432
1,984,661 $ 1,961,166 1,961,166
Equity securities:
Public utilities 82,073 $ 56,053 56,053
All other corporate securities 2,004,086 1,738,352 1,738,352
2,086,159 $ 1,794,405 1,794,405
Mortgage loans on real estate 11,022,792 11,022,792
Investment real estate 10,543,490 10,543,490
Real estate acquired in
satisfaction of debt 3,846,946 3,846,946
Policy loans 14,438,120 14,438,120
Short term investments 430,983 430,983
Total investments $224,279,936 $223,964,687
</TABLE>
<PAGE> 65
UNITED TRUST GROUP, INC.
CONDENSED FINANCIAL INFORMATION
PARENT ONLY BALANCE SHEETS
As of December 31, 1996 and 1995 Schedule II
<TABLE>
1996 1995
<S> <C> <C>
ASSETS
Investment in affiliates $ 35,548,414 $ 37,265,534
Notes receivable from affiliates 10,039,853 10,039,853
Accrued interest income 35,202 35,202
Cash and cash equivalents 39,529 45,031
Total assets $ 45,662,998 $ 47,385,620
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Notes payable $ 10,009,853 $ 10,009,853
Notes payable to affiliate 30,000 30,000
Income taxes payable 6,663 3,221
Accrued interest payable 35,202 35,202
Other liabilities 452,263 591,519
Total liabilities 10,533,981 10,669,795
Shareholders' equity:
Common stock 45,926,705 45,726,705
Unrealized depreciation of
investments held for sale of affiliates (126,612) (501)
Accumulated deficit (10,671,076) (9,010,379)
Total shareholders' equity 35,129,017 36,715,825
Total liabilities and shareholders'
equity $ 45,662,998 $ 47,385,620
</TABLE>
<PAGE> 66
UNITED TRUST GROUP, INC.
CONDENSED FINANCIAL INFORMATION
PARENT ONLY STATEMENTS OF OPERATIONS
Three Years Ended December 31, 1996 Schedule II
<TABLE>
1996 1995 1994
<S> <C> <C> <C>
Revenues:
Interest income from affiliates $ 792,046 $ 790,334 $ 790,477
Other income 34,600 31,774 4,481
826,646 822,108 794,958
Expenses:
Interest expense 789,496 787,784 787,920
Interest expense to affiliates 2,550 2,550 2,557
Operating expenses 4,624 3,341 13
796,670 793,675 790,490
Operating income 29,976 28,433 4,468
Provision for income taxes (4,664) (3,221) 0
Equity in loss of subsidiaries (1,686,009) (5,346,088) (1,120,750)
Net loss $(1,660,697) $(5,320,876) $(1,116,282)
</TABLE>
<PAGE> 67
UNITED TRUST GROUP, INC.
CONDENSED FINANCIAL INFORMATION
PARENT ONLY STATEMENTS OF CASH FLOWS
Three Years Ended December 31, 1996 Schedule II
<TABLE>
1996 1995 1994
<S> <C> <C> <C>
Increase (decrease) in cash and
cash equivalents
Cash flows from operating activities:
Net loss $(1,660,697) $(5,320,876) $(1,116,282)
Adjustments to reconcile
net loss to net cash provided
by operating activities:
Equity in loss of subsidiaries 1,686,009 5,346,088 1,120,750
Change in accrued interest
income 0 (167) (2,189)
Change in accrued interest
payable 0 167 2,189
Change in income taxes payable 3,442 3,221 0
Change in other liabilities (139,256) (96,843) (21,599)
Net cash used in operating activities (110,502) (68,410) (17,131)
Cash flows from investing activities:
Cost of investments acquired:
Purchase of stock of affiliates (95,000) (200) 0
Net cash used in investing activities (95,000) (200) 0
Cash flows from financing activities:
Capital contribution from affiliates 200,000 100,000 0
Net cash provided by financing
activities 200,000 100,000 0
Net increase (decrease) in cash
and cash equivalents (5,502) 31,390 (17,131)
Cash and cash equivalents at
beginning of year 45,031 13,641 30,772
Cash and cash equivalents at
end of year $ 39,529 $ 45,031 $ 13,641
</TABLE>
<PAGE> 68
UNITED TRUST GROUP, INC.
REINSURANCE
As of December 31, 1996 and the year ended December 31, 1996 Schedule IV
<TABLE>
Column A Column B Column C Column D Column E Column F
Percentage
Ceded to Assumed of amount
other from other assumed to
Gross amount companies companies* Net amount net
<S> <C> <C> <C> <C> <C>
Life insurance
in force $3,952,958,000 $1,108,534,000 $1,271,766,000 $4,116,190,000 30.9%
Premiums:
Life
insurance $ 32,128,258 $ 4,717,488 $ 0 $ 27,410,770 0.0%
Accident and
health
insurance 258,377 50,255 0 208,122 0.0%
$ 32,386,635 $ 4,767,743 $ 0 $ 27,618,892 0.0%
* All assumed business represents the Company's participation in the
Servicemen's Group Life Insurance Program (SGLI).
</TABLE>
<PAGE> 69
UNITED TRUST GROUP, INC.
REINSURANCE
As of December 31, 1995 and the year ended December 31, 1995 Schedule IV
<TABLE>
Column A Column B Column C Column D Column E Column F
Percentage
Ceded to Assumed of amount
other from other assumed to
Gross amount companies companies* Net amount net
<S> <C> <C> <C> <C> <C>
Life insurance
in force $4,207,695,000 $1,087,774,000 $1,039,517,000 $4,159,438,000 25.0%
Premiums:
Life
insurance $ 34,952,367 $ 5,149,939 $ 0 $ 29,802,428 0.0%
Accident
and health
insurance 248,448 52,751 0 195,697 0.0%
$ 35,200,815 $ 5,202,690 $ 0 $ 29,998,125 0.0%
*All assumed business represents the Company's participation in the
Servicemen's Group Life Insurance Program (SGLI).
</TABLE>
<PAGE> 70
UNITED TRUST GROUP, INC.
REINSURANCE
As of December 31, 1994 and the year ended December 31, 1994 Schedule IV
<TABLE>
Column A Column B Column C Column D Column E Column F
Percentage
Ceded to Assumed of amount
other from other assumed to
Gross amount companies companies* Net amount net
<S> <C> <C> <C> <C> <C>
Life insurance
in force $4,543,746,000 $1,217,119,000 $1,077,413,000 $4,404,040,000 24.5%
Premiums:
Life
insurance $ 37,800,871 $ 5,597,512 $ 0 $ 32,203,359 0.0%
Accident
and health
insurance 262,315 61,185 0 201,130 0.0%
$ 38,063,186 $ 5,658,697 $ 0 $ 32,404,489 0.0%
* All assumed business represents the Company's participation in the
Servicemen's Group Life Insurance Program (SGLI).
</TABLE>
<PAGE> 71
UNITED TRUST GROUP, INC.
VALUATION AND QUALIFYING ACCOUNTS
For the years ended December 31, 1996, 1995, & 1994 Schedule V
<TABLE>
Balance at Additions Balances
Beginning Charges at End
Description Of Period and Expenses Deductions of Period
<S> <C> <C> <C> <C>
December 31, 1996
Allowance for doubtful
accounts - mortgage loans $ 10,000 $ 0 $ 0 $ 10,000
Accumulated depreciation on
property and equipment and
EDP conversion costs 35,413 80,897 0 116,310
Accumulated amortization of
costs in excess of net
assets purchased 1,079,867 185,279 0 1,265,146
Accumulated depreciation on
real estate 1,049,652 291,094 0 1,340,746
Total $2,174,932 $ 557,270 $ 0 $ 2,732,202
December 31, 1995
Allowance for doubtful
accounts - mortgage loans $ 26,000 $ 0 $ 16,000 $ 10,000
Accumulated depreciation
on property and equipment
and EDP conversion costs 391,615 393,798 750,000 35,413
Accumulated amortization
of costs in excess of net
assets purchased 656,675 423,192 0 1,079,867
Accumulated depreciation
on real estate 802,476 300,396 53,220 1,049,652
Total $1,876,766 $1,117,386 $ 819,220 $ 2,174,932
December 31, 1994
Allowance for doubtful
accounts - mortgage loans $ 300,000 $ 0 $ 274,000 $ 26,000
Accumulated depreciation
on property and equipment
and EDP conversion costs 226,545 165,070 0 391,615
Accumulated amortization
of costs in excess of net
assets purchased 426,999 297,676 68,000 656,675
Accumulated depreciation
on real estate 501,333 301,143 0 802,476
Total $1,454,877 $ 763,889 $ 342,000 $1,876,766
</TABLE>
<PAGE> 72
<TABLE> <S> <C>
<ARTICLE> 7
<S> <C> <C>
<PERIOD-TYPE> 12-MOS 12-MOS
<FISCAL-YEAR-END> DEC-31-1996 DEC-31-1995
<PERIOD-END> DEC-31-1996 DEC-31-1995
<DEBT-HELD-FOR-SALE> 0 0
<DEBT-CARRYING-VALUE> 0 0
<DEBT-MARKET-VALUE> 0 0
<EQUITIES> 0 0
<MORTGAGE> 122,853 182,206
<REAL-ESTATE> 0 0
<TOTAL-INVEST> 122,853 182,206
<CASH> 439,676 364,370
<RECOVER-REINSURE> 0 0
<DEFERRED-ACQUISITION> 0 0
<TOTAL-ASSETS> 12,881,049 13,298,153
<POLICY-LOSSES> 0 0
<UNEARNED-PREMIUMS> 0 0
<POLICY-OTHER> 0 0
<POLICY-HOLDER-FUNDS> 0 0
<NOTES-PAYABLE> 902,300 902,300
0 0
0 0
<COMMON> 740,010 739,977
<OTHER-SE> 11,237,466 11,615,154
<TOTAL-LIABILITY-AND-EQUITY> 12,881,049 13,298,153
0 0
<INVESTMENT-INCOME> 92,532 88,162
<INVESTMENT-GAINS> 2,599 905
<OTHER-INCOME> 1,695,816 2,145,082
<BENEFITS> 0 0
<UNDERWRITING-AMORTIZATION> 0 0
<UNDERWRITING-OTHER> 1,414,291 1,976,238
<INCOME-PRETAX> 376,656 257,911
<INCOME-TAX> 0 0
<INCOME-CONTINUING> 376,656 257,911
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (319,083) (2,147,902)
<EPS-PRIMARY> (.02) (.11)
<EPS-DILUTED> (.02) (.11)
<RESERVE-OPEN> 0 0
<PROVISION-CURRENT> 0 0
<PROVISION-PRIOR> 0 0
<PAYMENTS-CURRENT> 0 0
<PAYMENTS-PRIOR> 0 0
<RESERVE-CLOSE> 0 0
<CUMULATIVE-DEFICIENCY> 0 0
</TABLE>
COINSURANCE AGREEMENT
between
UNIVERSAL GUARANTY LIFE INSURANCE COMPANY
and
FIRST INTERNATIONAL LIFE INSURANCE COMPANY
<PAGE>
TABLE OF CONTENTS
Page
ARTICLE I - DEFINITIONS 2
ARTICLE II - COVERAGE 5
ARTICLE III - GENERAL PROVISIONS 5
ARTICLE IV - REINSURANCE AND POLICY PREMIUMS 9
ARTICLE V - EXPENSE ALLOWANCE 11
ARTICLE VI - DEATH BENEFITS AND OTHER PAYMENTS 11
ARTICLE VII - DIVIDENDS 12
ARTICLE VIII - ACCOUNTING 12
ARTICLE IX - DURATION AND TERRITORY 13
ARTICLE X - INSOLVENCY 14
ARTICLE XI - ARBITRATION 14
ARTICLE XII - REINSURING CLAUSE AND CONTRACTUAL
CONDITIONS 16
ARTICLE XIII -EXECUTORY CONTRACT AND INSOLVENCY-SETOFF. 17
ARTICLE XIV - REPRESENTATIONS AND WARRANTIES 18
ARTICLE XV - CONDITIONS PRECEDENT 19
ARTICLE XVI - ASSUMPTION REINSURANCE 20
ARTICLE XVII - INDEMNIFICATION 21
ARTICLE XVIII - ESTABLISHMENT OF AN ASSET TRUST 21
ARTICLE XIX - MISCELLANEOUS PROVISIONS 22
SCHEDULE A - ADMINISTRATIVE SERVICE
AND STANDARDS A-1
SCHEDULE B - EXPENSE ALLOWANCE B-1
SCHEDULE C - INITIAL REINSURANCE REPORT C-1
SCHEDULE D - PART I - MONTHLY PERIOD REINSURANCE
REPORTS D-1
SCHEDULE D - PART II - QUARTERLY POLICY EXHIBIT D-2
SCHEDULE D - PART III - ANNUAL REPORTS D-3
SCHEDULE E - RECAPTURE PROVISIONS E-1
SCHEDULE F - DAC TAX ELECTION F-1
EXHIBIT 1 - ASSUMPTION REINSURANCE AGREEMENT [ ]
<PAGE>
COINSURANCE AGREEMENT
This Coinsurance Agreement (the "Agreement") is made and
entered into as of the 30th day of September, 1996 between UNIVERSAL
GUARANTY LIFE INSURANCE COMPANY, a life insurance company (the
"Company"), and FIRST INTERNATIONAL LIFE INSURANCE COMPANY, a
life insurance company (the "Reinsurer").
WHEREAS, the Company has agreed to cede to the Reinsurer,
and the Reinsurer has agreed to accept on a coinsurance basis, 100% of
the Reserves and Liabilities (as hereinafter defined) arising under or
with respect to the Reinsured Policies (as hereinafter defined) issued
by the Company on or before the Effective Date (as hereinafter
defined); and
WHEREAS, the Reinsurer, is simultaneously entering into an
Assumption Reinsurance Agreement (the "Assumption Reinsurance
Agreement") with the Company, pursuant to which, contingent upon
certain events specified in Article XVI below, the Reinsurer may elect
to assumption reinsure the Reinsured Policies, with a concurrent
novation and complete release of the Company from any liability under
such Reinsured Policies, on a state by state basis upon the receipt of
any and all applicable regulatory approvals and notice to relevant
Policyholders followed by expiration of the applicable period with no
opt out by such Policyholders or the obtaining of required consents
from such Policyholders, as the case may be; and
WHEREAS, should the Reinsurer elect to assumption reinsure
the Reinsured Policies pursuant to the Assumption Reinsurance
Agreement, certain of the Company's Policyholders may opt out of or not
consent to the assumption of their policies by the Reinsurer, in which
event the Company will remain primarily obligated to such Policyholders
under the Non-Assumed Policies (as hereinafter defined); and
WHEREAS, the Reinsurer acknowledges and agrees that it
shall be bound to perform its obligations as Reinsurer to the Company
as primary insurer under this Agreement with respect to the Non-Assumed
Policies subsequent to the Effective Date of the Assumption Reinsurance
Agreement;
WHEREAS, the Reinsurer acknowledges and agrees that it shall
be bound to perform its obligations as Reinsurer to the Company as
primary insurer under this Agreement with respect to the Non-Assumed
Policies subsequent to the Effective Date of the Assumption Reinsurance
Agreement;
NOW, THEREFORE, in consideration of the foregoing the
Company and the Reinsurer mutually agree that they shall enter into
this Agreement under the terms and conditions stated herein.
This Coinsurance Agreement is between the Company and the
Reinsurer, or their assignees or successors, and the performance of the
obligations of each party under this Agreement shall be rendered solely
to the other party or parties. In no instance shall anyone other than
the Company or the Reinsurer, or their assignees or successors, have
any rights under this Agreement. Until the Reinsurer has reinsured a
Reinsured Policy on an assumption reinsurance basis pursuant to Article
XVI below, the Reinsurer shall not be liable to any insured, contract
owner, or beneficiary under any insurance policy or contract reinsured
hereunder.
ARTICLE I
DEFINITIONS
As used in this Agreement, the following capitalized terms
shall have the following meanings (definitions are applicable to both
the singular and the plural forms of each term defined in this
Article):
"Accounting Period" means the calendar month, except that
the first Accounting Period shall be the period commencing with the
Effective Date and ending with the last day of the then current
calendar month, and the final Accounting Period shall be the period
commencing with the first day of the calendar month that includes the
day on which the last Reinsured Policy terminates, and ending on such
day.
"Administration Cost" shall have the meaning set forth in
Section 3.01.
"Annual Report" means the report required to be prepared in
accordance with Section 8.05 and providing the data as shown on
Schedule D - Part III.
"Benefits" shall have the meaning set forth in Section
6.01.
"Business Day" means any day other than a Saturday, Sunday
or a day on which banking institutions in the States of New York, Ohio
and Delaware are permitted or obligated by law to be closed.
"Closing Date" shall be that date ten (10) Business Days
following receipt of notice from the Company to the Reinsurer that all
of the conditions in Article XV hereunder have been satisfied.
"Effective Date" means the date specified in Section 2.01.
"Expense Allowance" shall mean the ceding commission
payable in connection with the acquisition of the Reinsured Policies
and as described in Schedule B.
"Extra Contractual Liabilities" means all liabilities,
other than the express obligations set forth in the Reinsured Policies,
including, without limitation, any liability for consequential,
exemplary, punitive or similar damages, relating to the Reinsured
Policies, which liability arises from any act, error or omission by the
Company, its directors, officers, employees or agents prior to the
Effective Date, whether intentional or otherwise, or from any bad faith
prior to the Effective Date in connection with the handling of any
claim or obligation under any of the Reinsured Policies or in
connection with the issuance, delivery or cancellation of any of the
Reinsured Policies.
"Dividends" shall have the meaning set forth in Section
7.01.
"Gross Premiums" means the premiums collected on or after
the Effective Date from Policyholders for the Reinsured Policies.
"Initial Reinsurance Consideration" shall mean the
difference between the Initial Reinsurance Premium and the Expense
Allowance, as described in Schedule B.
"Initial Reinsurance Premium" shall have the meaning set
forth in Section 4.02.
"Initial Reinsurance Report" shall have the meaning set
forth in Section 8.02.
"Insolvency Proceedings" shall have the meaning set forth
in Section 13.05.
"Monthly Report" means the report required to be prepared
in accordance with Section 8.03 and providing the data as shown on
Schedule D - Part I.
"Monthly Settlement" means the net amount due and payable
to either party with respect to any Accounting Period.
"Non-Assumed Policies" means Reinsured Policies that shall
not have been novated to the Reinsurer under the terms of the
Assumption Reinsurance Agreement, and under which the Company retains
primary liability.
"Other Amounts" shall have the meaning set forth in Section
4.02.
"Policyholder" means the holder of any Reinsured Policy.
"Policy Loan" shall have the meaning set forth in Section
2.05.
"Policy Loan Interest or Repayments" shall have the
meaning set forth in Section 2.05.
"Quarterly Report" means the report required to be prepared
in accordance with Section 8.04 and providing the data as shown on
Schedule D - Part II.
"Reinsurance Agreement" means any reinsurance agreement
between the Company as cedent and any third party reinsurer under which
the Company's Reserves and Liabilities with respect to the Reinsured
Policies or some portion thereof are transferred, whether or not such
contract of reinsurance is also applicable to business other than the
Reinsured Policies.
"Reinsurance Premiums" shall have the meaning set forth in
Section 4.02.
"Reinsured Policies" means all paid-up insurance policies,
contracts, binders or certificates of insurance, and all riders,
endorsements and amendments thereto, whether written or oral, issued or
assumed by the Company, that are in force on the Effective Date, except
those offered in settlement to so called "HIV" policyholders and paid-up
business associated with the Company's Jr./Sr. Plan Single Premium
Interest Sensitive Whole Life policies, including, without limitation,
policy loans.
"Reserves and Liabilities" means the statutory reserves
required to be held by the Company as of the Effective Date (subject to
the provisions of Section 4.01 hereof)in support of the policy
liabilities arising under the Reinsured Policies and payable after the
Effective Date (determined by reference to lines 1, 5, 7 and 8 on page
3 of the 1995 Annual Statement Blank) less Policy Loans.
"Risk Based Capital" shall mean the National Association
of Insurance Commissioners Risk Based Capital Model Act as codified in
the Ohio Insurance Code at Sections 3903.81 to 3903.93.
ARTICLE II
COVERAGE
2.01. Coverage. As of September 30, 1996 (the
"Effective Date"), upon the terms and conditions, including, but not
limited to, the Company's satisfaction on or before the Closing Date of
all the conditions contained in Article XV hereunder, and for the
considerations hereinafter contained, the Company agrees to cede and
transfer to the Reinsurer, and the Reinsurer agrees to accept and
reinsure, 100% of the Reserves and Liabilities, which excludes all
claim liabilities, arising under the Reinsured Policies.
2.02. Conditions. The reinsurance hereunder is subject
to the same limitations, terms and conditions as the Reinsured
Policies, except as otherwise provided in this Agreement.
2.03. Exclusions. This Agreement does not apply to and
specifically excludes from coverage any Extra Contractual Liabilities.
2.04. Plan of Reinsurance. This reinsurance shall be on
the coinsurance basis.
2.05. Policy Loans. The Reinsurer shall participate in
any policy loan ("Policy Loan") effected by the Company with respect
to a Reinsured Policy, and shall receive all policy loan repayments and
interest ("Policy Loan Repayments and Interest") thereon.
2.06. Maintenance of Licenses. The Company shall use its
reasonable efforts to maintain its licenses and other approvals in all
jurisdictions to the extent necessary for the Company to insure and
cede the Reinsured Policies.
ARTICLE III
GENERAL PROVISIONS
3.01. Administration. (a) So long as this Agreement is
in effect, the Company shall remain responsible for the administration
of each and every Reinsured Policy reinsured hereunder. The Company
shall be compensated at the rate of $7.50 per Reinsured Policy per
calendar year (the "Administration Cost"), payable at the rate of
$0.625 per policy per month based upon the beginning of quarter in
force.
(b) Should the Reinsurer exercise its rights under Article
XVI to assumption reinsure the business reinsured hereunder, the
Reinsurer shall then be responsible for the administration and shall no
longer be obligated to pay the Administration Cost for such policies.
The Reinsurer reserves the right to appoint a subcontractor to perform
part or all of the services set forth above as the agent of the
Reinsurer.
(c) Notwithstanding 3.01(a), above, should service
standards not meet those specified in Schedule A, the Reinsurer shall
notify the Company as to which standards the Company has not satisfied.
The Company shall have thirty (30) days to meet standards specified in
such notice. Should any such standards not be met within the thirty
(30) day cure period, the administration fee shall be reduced to $7.00
per Reinsured Policy per year. If standards are not met for any three
(3) consecutive months in a calendar year or four (4) months in any
rolling twelve (12) month ending period the Reinsurer shall have the
right to take over administration.
(d) Notwithstanding any other provisions of this Section
3.01, the Reinsurer reserves the right to purchase the administrative
capabilities of the Company, for a price to be agreed upon by the
parties hereto, if the Reinsurer determines that administration of the
Reinsured Policies should be transferred from the Company.
3.02. Inspection. The Reinsurer or its designated
representative may inspect, at the offices of the Company where such
records are located, the papers and any and all other books or
documents of the Company reasonably relating to the Reinsured Policies,
during normal business hours for such period as this Agreement is in
effect or for as long thereafter as the Company seeks performance by
the Reinsurer pursuant to the terms of this Agreement. The information
obtained shall be used only for purposes relating to reinsurance under
this Agreement. The Reinsurer's rights under this Section shall
survive termination of this Agreement.
3.03. Misunderstandings and Oversights. If any delay,
omission, error or failure to pay amounts due or to perform any other
act required by this Agreement is unintentional and caused by
misunderstanding or oversight, the Company and the Reinsurer will
adjust the situation to what it would have been had the misunderstanding
or oversight not occurred. The party first discovering such
misunderstanding or oversight, or act resulting from the
misunderstanding or oversight, will notify the other party in writing
promptly upon discovery thereof, and the parties shall act to correct
such misunderstanding or oversight within twenty (20) Business Days of
receipt of such notice. However, this Section shall not be construed
as a waiver by either party of its right to enforce strictly the terms
of this Agreement.
3.04. Age, Sex and Other Adjustments. If the Company's
liability under any of the Reinsured Policies is changed because of a
misstatement of age or sex or any other material fact, the Reinsurer
will share in the change proportionately to the amount reinsured
hereunder.
3.05. Reinstatements. If a Reinsured Policy that is or
has been put on paid-up status is reinstated to a premium paying basis
while this Agreement is in force, the reinsurance for such Reinsured
Policy shall be recaptured under the terms specified in Schedule E
attached.
3.06. Non-Compete. The Company shall take no direct or
indirect action to induce any policyholder of a Reinsured Policy to
terminate, reinstate, lapse or exchange such policy.
3.07. Contract Changes or Reserve Assumption Changes.
The Company, on its own initiative, shall not change (i) the terms and
conditions of any Reinsured Policies or (ii) the assumptions, including
the statutory reserve accumulation rate assumption, used by the Company
to establish the Reserves and Liabilities with respect to such
Reinsured Policies. The Reinsurer shall share proportionately in any
change in contract or in Reserves and Liabilities required by any
regulatory authority having jurisdiction over the Company in the
ordinary course of exercising its powers or otherwise required by law
and in any such changes made by the Company and consented to by the
Reinsurer.
3.08. Compliance with Applicable Laws and Regulations.
(a) Intent of Parties. It is the intention of the
parties that this Agreement shall be interpreted in accordance with the
laws as of the date of execution hereof by both parties and comply with
all existing applicable state and federal laws and regulations, and as
from time to time are or may be in effect, in such a way that the
Reinsured Policies remain reinsured on the coinsurance plan.
(b) Procedures to Reflect Changes in Laws or
Regulations. In the event that it is determined by an insurance
regulatory authority or the Internal Revenue Service or by either party
upon the advice of an insurance regulatory authority or the Internal
Revenue Service that this Agreement fails to conform to the
requirements of existing applicable laws and regulations and that the
Agreement may be brought into conformity with said requirements only by
means of a material change to the Agreement, or in the event that such
laws or regulations are changed subsequent to the Effective Date and
such change has a material adverse affect on either party or requires a
material change to the Agreement in order for the Agreement to conform
with applicable laws and regulations, the parties shall exercise
reasonable efforts to reach an agreement to amend the Agreement so as
to return the parties to the economic position that they would have been
in had no such change occurred or so that both parties share the
economic position that they would have been in had no such change
occurred or so that both parties share the economic detriment of such
change equally. If the parties are unable to reach an agreement to
amend the Agreement, then the differences between the parties shall be
resolved through arbitration in accordance with the provisions of
Article XI. In the event that any change required to conform the
Agreement to the requirements of applicable law or regulation is not
material, the Agreement shall be amended accordingly. In no event,
however, shall this provision prevent either party from exercising any
right it otherwise has under this Agreement. For purposes of this
Section 3.08(b), the word "material" shall mean, when used with
respect to (i) any change in law or regulation, or any change into the
Agreement necessary to bring the Agreement into conformity with the
requirements of any law or regulation; or (ii) any delay, omission,
error or failure to pay amounts due or to perform any other act required
under this Agreement; or (iii) any default, that the effect or effects
of any of (i), (ii) or (iii) above (either individually or
cumulatively) results in a deviation from a projected return under
this Agreement (absent the occurrence of (i), (ii) or (III) above,
either individually or cumulatively) by at least five percent (5%),
measured from the first day that the occurrence of (i), (ii) or (iii)
above, or series thereof, taken into account on a cumulative basis,
occurred or becomes effective.
(c) Notification of Disapproval or Change in Law.
The Company shall promptly notify the Reinsurer of any disapprovals,
recommended changes or statements regarding the Agreement that are made
by any insurance regulatory or tax authorities and of any change in
law, regulation or rulings affecting the Agreement. The Reinsurer
shall be allowed to make its own defense of the Agreement with said
authorities.
3.09. Payments. All payments made pursuant to this
Agreement (other than the Initial Reinsurance Premium described in
Section 4.01 of this Agreement) shall be made in immediately available
funds.
3.10. Investigations. The Company shall notify the
Reinsurer immediately, in writing, of any and all investigations of the
Company or its principal officers or shareholders conducted by any
federal, state or local governmental or regulatory agency.
3.11. Conduct of Business. Between the Effective Date
and the Closing Date, the Company shall continue the operations of its
business with respect to the Reinsured Policies in accordance with
prior practices and will not engage in any additional Reinsurance
Agreements.
3.12. Duty of Cooperation. Each party hereto shall
cooperate fully with the other in all reasonable respects in order to
accomplish the objectives of, and consummate the transactions
contemplated under, this Agreement. This duty to cooperate shall
include, but not be limited to, making all necessary insurance
regulatory filings and obtaining all insurance regulatory approvals
required, making available any Reinsured Policy records which either
party subsequently may require to resolve issues related to claims or
Reserves and Liabilities.
3.13. Compliance. The Company covenants to maintain the
Reinsured Policies in compliance with all applicable requirements of
law and on forms approved in all material respects by the appropriate
governmental authorities except to the extent that such failure to be in
compliance therewith does not have a material adverse effect.
ARTICLE IV
REINSURANCE AND POLICY PREMIUMS
4.01. Initial Reinsurance Consideration. On the Closing
Date, as consideration for the assumption by the Reinsurer of the
Reserves and Liabilities under the Reinsured Policies, the Company
shall transfer to the Reinsurer assets ("Assets") with an aggregate
market value equal to one hundred percent (100%) of Reserves and
Liabilities as of the Effective Date, which excludes all claim
liabilities, (the "Initial Reinsurance Premium"), less the Expense
Allowance described in Article V below (such net amount being the
"Initial Reinsurance Consideration" as described in Schedule C
attached hereto). The Assets being transferred shall be based upon
valuations and estimates made three (3) Business Days prior to the
Closing Date. Both the Assets and the Initial Reinsurance Premium
(shown on Schedule C) shall be subject to further and final adjustment
as follows: (1) within 90 days after the Closing Date, the Reinsurer
shall send a notice to the Company advising the Company of the final
valuation of both the Assets (valued as of the Closing Date) and the
Initial Reinsurance Premium (valued as of the Effective Date), (2)
the Company shall then have five (5) Business Days from receipt of the
aforementioned notice to make an adjustment to the Assets, including
any additional transfers to the Reinsurer, in order to reflect the
final valuation of the Assets and Initial Reinsurance Consideration
pursuant to this Section 4.01.
4.02. Reinsurance Premium. As additional consideration
for the assumption by the Reinsurer of the Reserves and Liabilities
under the Reinsured Policies, the Reinsurer shall be entitled to
collect and retain 100% of all Gross Premiums, Policy Loan Interest or
Repayments and any other amounts ("Other Amounts") received from
Policyholders or others on and after the Effective Date with respect to
the Reinsured Policies less Dividends paid in cash, as described in
Article VII, less reinsurance premiums payable under the Reinsurance
Agreements, less Administration Costs, as described in Article III.
The Company will promptly remit to the Reinsurer all other amounts that
may be remitted to it by Policyholders or others with respect to the
Reinsured Policies. Furthermore, with respect to any such
remittances, the Company shall also promptly furnish the Reinsurer with
all pertinent information that the Company receives on and after the
Effective Date pertaining thereto (e.g., the nature of payment, source
of funds, policy number or agreement (as appropriate) and period(s) to
which it relates and any instructions accompanying same), in a form
acceptable to the Reinsurer.
4.03. Credit for Recoverables from Ceded Reinsurance.
From the Effective Date, in any Monthly Settlements, the computation
of Benefits paid on Reinsured Policies shall include a credit in favor
of the Reinsurer in the amount of reinsurance that is recoverable
pursuant to the terms of any Reinsurance Agreement for any payments
made to Policyholders pursuant to the terms of the Reinsured Policies.
The Company shall continue to pay any premiums or other charges for any
such Reinsurance Agreements until termination of this Agreement, and
the Company shall continue to collect reinsurance recoverables, if any,
made pursuant to such Reinsurance Agreements.
4.04. Reserves. The Reinsurer shall establish and
maintain appropriate reserves with respect to the Reinsured Policies.
ARTICLE V
EXPENSE ALLOWANCE
5.01. Expense Allowance. On the Closing Date, the
Reinsurer shall pay the Company an expense allowance (the "Expense
Allowance") in the amount as set forth in Schedule B.
ARTICLE VI
DEATH BENEFITS AND OTHER PAYMENTS
6.01. Death Benefits and Payments under Settlement
Options. The Reinsurer shall assume liability for, subject to Section
2.03, all death benefits, all periodic or lump sum payments on
settlement options or withdrawals from Dividends on deposit, and all
surrender and endorsement payments to Policyholders with respect to
Reinsured Policies (such death benefits and other payments are referred
to collectively as "Benefits"), and shall indemnify the Company with
respect to any such Benefits paid by the Company incurred after the
Effective Date.
6.02. Claims. The reinsurance claim and copies of
notification, claim papers, and proofs will be furnished by the Company
to the Reinsurer upon request.
6.03. Liability and Payment. The Reinsurer shall be
responsible for the handling of, and all costs and expenses relating
to, the contest, compromise or litigation of claims under the Reinsured
Policies which arise after the Effective Date. The Company will not
contest, compromise, or litigate a claim with respect to a Reinsured
Policy unless delegated to do so in writing by the Reinsurer.
Notwithstanding the foregoing, the Reinsurer shall have no liability
for costs and expenses for any litigation arising out of or based on any
bad faith claims practices, willful misconduct, fraud or gross
negligence of the Company (without attributing to the Company the
actions of the Reinsurer).
ARTICLE VII
DIVIDENDS AND COUPONS
7.01. Participation. The Reinsurer shall participate in
the dividend and coupon ("Dividends") scales in effect on the
Effective Date of this Agreement. Should the Company desire to change
said scales, it shall do so only upon the consent of the Reinsurer,
which shall not be unreasonably withheld. The Reinsurer shall only
reimburse those Dividends that are incurred after the Effective Date.
7.02. Options. The Reinsurer shall participate in all
Dividend options provided under Reinsured Policies.
ARTICLE VIII
ACCOUNTING
8.01. Amounts Due the Reinsurer or the Company. Except
as otherwise specifically provided herein, all amounts due the
Reinsurer or the Company under this Agreement shall be determined on a
net basis, giving full effect to Article XII hereof.
The Initial Reinsurance Premium, as described on the
Initial Insurance Report described below, is due on the Closing Date.
If positive the Initial Reinsurance Premium shall be paid to the
Reinsurer, and if negative it shall be paid to the Company. The
Initial Reinsurance Premium is subject to further and final adjustment
pursuant to the procedures set forth in Section 4.01 hereunder.
The Monthly Settlement shall be paid to the party to whom a
balance is owed within seven (7) days of receipt of the Monthly Report
described below.
8.02. Initial Reinsurance Report. The Company shall
deliver to the Reinsurer, on or before the Closing Date, a report (the
"Initial Reinsurance Report") that shall provide the data required in
Schedule C.
8.03. Monthly Reports. Within seven (7) Business Days
of the end of each Accounting Period the Company shall supply the
Reinsurer with a report that shall provide the data required in
Schedule D - Part I, attached hereto (the "Monthly Report").
8.04. Quarterly Reports. Within ten (10) Business Days
after the end of each calendar quarter the Company shall supply the
Reinsurer with a report that shall provide the data required in
Schedule D- Part II, attached hereto (the "Quarterly Report").
8.05. Annual Reports. Within ten (10) Business Days
after the end of each calendar year the Company shall supply the
Reinsurer with a report that shall provide the data required in
Schedule D - Part III, attached hereto (the "Annual Report").
8.06. Best Efforts to Supply Actual Data. In preparing
all Reports required in this Agreement, the Company shall make its best
efforts to supply the actual data. If the actual data cannot be
supplied with the appropriate Report, the Company shall produce best
estimates, and shall provide amended reports based on actual data no
more than twenty (20) Business Days after such Report was originally
due.
8.07. Survival of Article. This Article shall survive
termination of this Agreement.
ARTICLE IX
DURATION AND TERRITORY
9.01. Duration. Except as otherwise provided herein,
this Agreement shall be unlimited in duration.
9.02. The Reinsurer's Liability. The Reinsurer's
liability hereunder with respect to any Reinsured Policy will terminate
on the earlier of the date on which the Reinsured Policy is terminated
by death, recapture, surrender, lapse or expiry.
9.03. New Business. This Agreement shall not apply to
any business of the Company entered into after the Effective Date or
entering paid-up status after the Effective Date.
9.04. Novated Policies. This Agreement shall cease to
apply to any Reinsured Policy on the date that such Reissued Policy
becomes assumed by the Reinsurer by novation pursuant to the Assumption
Reinsurance Agreement.
9.05. Territory. This Agreement shall apply to Reinsured
Policies covering lives and risks wherever resident or situated.
9.06. Recapture. Upon a Reinsured Policy reinstating to
a premium paying basis, such Reinsured Policy shall be recaptured based
upon the terms in Schedule E.
ARTICLE X
INSOLVENCY
10.01. Payments by the Reinsurer. The Reinsurer hereby
agrees that, as to all reinsurance made, ceded or otherwise becoming
effective hereunder, the reinsurance shall be payable by the Reinsurer
on the basis of the liability of the Company under the Non-Assumed
Policies, without diminution because of the insolvency, liquidation or
rehabilitation of the Company or the appointment of a conservator,
receiver, liquidator or statutory successor of the Company, directly to
the Company or to its conservator, liquidator, receiver or other
statutory successor.
10.02. Claims. It is agreed that the conservator,
receiver, liquidator or statutory successor of the Company shall give
prompt written notice to the Reinsurer of the pendency or submission of
a claim under any Non-Assumed Policies. During the pendency of such
claim, the Reinsurer may investigate such claim and interpose, at its
own expense, in the proceeding where such claim is to be adjudicated
any defense available to the Company or its conservator, receiver,
liquidator or statutory successor. The expense thus incurred by the
Reinsurer is chargeable against the Company as a part of the expense of
insolvency, liquidation or rehabilitation to the extent of a
proportionate share of the benefit which accrues to the Company solely
as a result of the defense undertaken by the Reinsurer. If two or more
assuming reinsurers are involved in the same claim and a majority in
interest elect to interpose defenses to such claim, the expense shall
be apportioned in accordance with the terms of this Agreement as though
such expense had been incurred by the Company.
ARTICLE XI
ARBITRATION
11.01. Appointment of Arbitrators. In the event of any
disputes or differences arising under or relating in any way to this
Agreement as to which agreement between the parties hereto cannot be
reached, then either party can give notice, pursuant to Section 19.02
hereunder, to the other party that such dispute or difference shall be
decided by arbitration. Three arbitrators will decide any dispute or
difference. The arbitrators must be disinterested officers or retired
officers of life insurance or life reinsurance companies other than the
two parties to this Agreement or their affiliates. Each of the
contracting parties agrees to appoint one of the arbitrators with the
third, the "Umpire," to be chosen by the two party-appointed
arbitrators. In the event that either party should fail to choose its
arbitrator within twenty (20) Business Days following written
notification by the other party to do so, the requesting party may
choose the second arbitrator before entering upon arbitration. The two
arbitrators shall select a third arbitrator to act as "Umpire." In the
event that the two arbitrators shall not be able to agree on the choice
of the Umpire within twenty (20) Business Days following the
appointment of the second, each arbitrator shall nominate candidates
within the five (5) Business Days thereafter, four of whom the other
shall decline, and the Umpire shall be chosen from the two remaining
candidates by drawing lots. Should the chosen Umpire decline to serve,
the candidate whose lot was not drawn shall be appointed. This process
shall continue until a candidate has agreed to serve.
11.02. Decision. The arbitrators shall consider
customary and standard practices in the life reinsurance business.
They shall decide by a majority vote of the arbitrators. There shall
be no appeal from their written decision. Judgment may be entered on
the decision of the arbitrators by any court having jurisdiction.
11.03. Expenses of Arbitration. Each party shall bear
the expense of its own arbitrator (whether selected by that party, or
by the other party pursuant to the procedures set out in Section
11.01) and related outside attorneys' fees, and shall equally bear
with the other party the expenses of the third arbitrator and of the
arbitration.
11.04. Site and Applicable Rules of Arbitration. Any
arbitration instituted pursuant to this Article shall be held in New
York, New York and, to the extent applicable, the Federal Arbitration
Act shall govern the interpretation and application of this Article.
11.05. Survival of Article. This Article shall survive
termination of this Agreement.
ARTICLE XII
REINSURING CLAUSE AND CONTRACTUAL CONDITIONS
12.01. Reinsuring Clause. The amount owed the Company
for any accounting period shall be the excess, if any, of Benefits less
Reinsurance Premiums, and the amount owed the Reinsurer for any
accounting period shall be the excess, if any, of Reinsurance Premiums
over Benefits. If such amounts cannot be determined at such date on an
exact basis, such payments may be determined on an estimated basis and
any final adjustments are to be made within twenty (20) Business Days
after the end of the Accounting Period.
12.02. Consideration. The performance of all promises of
one party shall be deemed the consideration for the performance of all
the promises of the other party.
12.03. Conditions Precedent. It is a condition precedent
to the Reinsurer's liability to pay any amount for the current or
future Monthly Settlements that the Company shall pay all amounts due
the Reinsurer from prior Monthly Settlements.
12.04 Utmost Good Faith. Both parties promise "utmost
good faith" and each is under the affirmative duty to report any
adverse information with respect to its solvency or with respect to the
particular facts which relate to the Reinsured Policies.
12.05. Recoupment and Failure of Consideration. If
either party to this Agreement fails to perform this Agreement in full,
then the other party has the right to suspend performance, and if the
defaults cannot be cured, within one hundred and twenty (120) days
following delivery of written notice from the non-defaulting party to
the defaulting party, to terminate this Agreement. Alternatively, the
non-defaulting party can recoup damages (including, without limitation,
the amount owed plus interest from the date owed and calculated at the
Chase Bank prime rate plus two points) from future Monthly
Settlements.
12.06. Gain or Loss Clause. The various items of
account (e.g., Reinsurance Premium and Benefits) shall not be deemed
to be separate debts but shall be used to determine the Monthly
Settlements.
12.07. No Waiver. The acceptance of the net accounting
reports and the sums due under this Agreement shall never constitute a
waiver by either party with regard to fraud or other rights.
12.08. Limitations on Assignment. No assignment of
rights or delegation of duties of the Company shall be effective unless
approved by the other party in writing, signed in duplicate.
Furthermore, such assignment shall not operate as a novation, but
merely as a delegation of duties, and the assignor shall remain liable
to the other party as a surety and such other party shall have no duties
to the assignee beyond that as specified in this Agreement.
ARTICLE XIII
EXECUTORY CONTRACT AND INSOLVENCY-SETOFF
13.01. Insolvency-Setoff (or Offset). In the event
either party to the Agreement shall be the subject of insolvency
proceedings ("Insolvency Proceedings") all independent debts on
unrelated contracts between the parties shall be setoff to the extent:
(a) the debt from the creditor to the insolvent arose
pre-petition.
(b) the debt from the insolvent to the creditor arose
pre-petition.
(c) the debts are mutual, meaning they are between the two
parties to this Agreement, and in the same right and the same capacity.
The cash payment due on each reinsurance agreement between the parties
shall constitute the "debt" on such agreement.
13.02. Adequate Assurance. In the event of Insolvency
Proceedings involving the Company, the Reinsurer's future performance
is conditioned on receiving adequate assurance of future performance,
as defined in the Uniform Commercial Code, 2-206, and the Official
Comments thereunder.
13.03. Ipso Facto Clause. If the receiver, including
any liquidator or rehabilitator, of one of the parties assigns the
rights or delegates the duties of this Agreement, and the assignee is
the subject of Insolvency Proceedings then the other party may
immediately terminate the Agreement without further performance.
13.04. Executory Contract. In the event either party to
the Agreement is the subject of Insolvency Proceedings, the receiver of
the insolvent, with respect to future Monthly Settlements, may affirm
or reject the Agreement, but not affirm the rewards and reject the
burdens. If this Agreement is neither affirmed nor rejected within one
hundred and twenty (120) days after a party becomes the subject of
Insolvency Proceedings, then the Agreement shall be deemed to be
rejected.
If either party is the subject of Insolvency Proceedings
other than liquidation proceedings, then the other party may request
adequate assurance of continued performance and the first priority
administrative expense with respect to future performance prior to the
time the Agreement is either affirmed or rejected, and if such is not
provided, then, after one hundred and twenty (120) days, the other
party may treat its future performance as terminated.
13.05. Insolvency Proceedings. For purposes of this
Agreement the term "Insolvency Proceedings" shall include, but not be
limited to, any action by a state insurance regulatory authority to
place a party in, or the actual commencement of, delinquency
proceedings, including conservatorship, receivership, rehabilitation,
reorganization, "adjustment of debts," "voluntary supervision," or
liquidation.
ARTICLE XIV
REPRESENTATIONS AND WARRANTIES
14.1. Representations and Warranties of the Company. The
Company hereby represents and warrants to the Reinsurer that:
14.1.a. The Company has made available to the
Reinsurer copies of all forms, applications, rates, and values with
respect to the policies and shall keep the Reinsurer promptly informed
with respect to any changes or modifications to such forms,
applications, or rates;
14.1.b. The Company is licensed in good standing in
all jurisdictions in which Reinsured Policies were issued or assumed
and all Policies are in full compliance with applicable laws,
regulations and rules. The Company has not been placed in, nor does it
have any reason to believe that it is about to be placed in
supervision, rehabilitation, receivership, revocation, suspension or
liquidation by any insurance department;
14.1.c. The Company is duly organized, validly
existing and in good standing under the laws of the State of Ohio, and
has all necessary corporate power and authority to entitle it to use its
name, to own, lease or otherwise hold its properties and assets, to
carry on its business as currently conducted, and to perform its
obligations;
14.1.d. The Reinsured Policies are in compliance
with all applicable requirements of law and are on forms approved in all
material respects by the appropriate governmental authorities except to
the extent that failure to be in compliance therewith does not have a
material adverse effect; and
14.1.e. Appropriate, reasonable and adequate
statutory reserves are being held by the Company in support of the
Reinsured Policies.
14.2. Representations and Warranties of the Reinsurer.
The Reinsurer hereby represents and warrants to the Company that:
14.2.a. The Reinsurer is duly organized, validly
existing and in good standing under the laws of its state of domicile,
and has all necessary corporate power and authority to entitle it to use
its name, to own, lease or otherwise hold its properties and assets, to
carry on its business as currently conducted, and to perform its
obligations; and
14.2.b. The Reinsurer is an authorized reinsurer in
the State of Ohio.
ARTICLE XV
CONDITIONS PRECEDENT
15.1. Conditions. The obligations of the Company and the
Reinsurer to consummate the transactions described hereunder are
expressly subject to:
15.1.a. On or before the Closing Date, except for
the assumption reinsurance contemplated under Article XVI hereunder,
the approvals of the insurance commissioners, directors, or
superintendents, as the case may be, of the insurance regulatory
authorities necessary for the consummation of the transactions
contemplated by the Agreement, and such approvals shall be in full
force and effect, and shall not impose upon either the Company or the
Reinsurer any material conditions or the requirements that would impose
upon either party any material additional costs;
15.1.b. On or before the Closing Date, the
Reinsurer having discovered no material errors, omissions or
liabilities previously undisclosed to it in the due diligence
investigation and documentation provided the Reinsurer by the Company
prior to the date hereof;
15.1.c. All of the representations and warranties
made by the parties hereto in Article XIV hereunder shall be true and
correct in all material respects on the date hereof and on the Closing
Date as if made on such date; and
15.1.d. On or before the Closing Date, each of the
parties obtaining full corporate power and authority to execute,
deliver and perform their respective obligations under this Agreement
and taking all necessary corporate and other action to authorize the
reinsurance of the Reinsured Policies under the terms of this
Agreement.
ARTICLE XVI
ASSUMPTION REINSURANCE
16.1. Conditions. Should any of the conditions outlined
below occur, the Reinsurer reserves the right to assumption reinsure
all covered policies. Such assumption shall take effect subject to the
terms of the Assumption Reinsurance Agreement executed and attached
hereto as Exhibit I:
16.1.a. The Company's total adjusted Risk Based
Capital becomes lower than 225% of the Company's authorized control
level and remains so for more than sixty (60) days;
16.1.b. Any state regulatory authority initiates
any proceeding against the Company on the ground that the Company is
impaired or insolvent or in hazardous financial condition;
16.1.c. The Company defaults on any obligation set
forth in this Agreement or any other contract or agreement to which it
is a party and fails to cure within ten (10) Business Days of receipt
of notice of such default;
16.1.d. The Company fails three (3) or more IRIS
ratios developed by the National Association of Insurance Commissioners
and utilized by any insurance regulatory authority;
16.1.e. The senior management team in place on the
Effective Date of this Agreement changes; or
16.1.f. The Company is technically insolvent or
admits in writing its inability to pay its debts as they mature.
ARTICLE XVII
INDEMNIFICATION
17.01. The Reinsurer. The Reinsurer hereby agrees on
demand to indemnify and hold harmless the Company and its respective
officers, directors and employees from and against any and all demands,
actions, proceedings, suits (by any person, entity or group,
including, without limitation, any governmental entity) and
liabilities, paid or incurred (including reasonable attorneys' fees),
resulting from or arising out of the breach of or failure to perform any
of the duties, obligations, covenants or agreements of the Reinsurer
contained in this Agreement.
17.02. The Company. The Company hereby agrees on
demand to indemnify and hold harmless the Reinsurer and its officers,
directors and employees from and against any and all demands, actions,
proceedings, suits (by any person, entity or group, including, without
limitation, any governmental entity) and liabilities, paid or incurred
(including reasonable attorneys' fees), resulting from or arising out
of the breach of or failure to perform any of the duties, obligations,
covenants or agreements of the Company contained in this Agreement.
17.03. Survival of Article. This Article shall survive
termination of this Agreement.
ARTICLE XVIII
ESTABLISHMENT OF AN ASSET TRUST
18.01. Asset Trust. If for any reason the Reinsurer
shall cease to be an authorized reinsurer in the Company's state of
domicile, or, if for any reason the Company is unable to offset its
primary reserve liability for the liabilities assumed by the Reinsurer
hereunder, then the Reinsurer shall place assets equal to the
liabilities assumed hereunder into a trust with provisions satisfactory
to the insurance regulators of the Company's state of domicile. Such
assets shall be satisfactory to such regulators.
ARTICLE XIX
MISCELLANEOUS PROVISIONS
19.01. Headings and Schedules. Headings used herein are
not a part of this Agreement and shall not affect the terms hereof.
The attached Schedules are a part of this Agreement.
19.02. Notices. All notices and communications hereunder
shall be in writing and shall be deemed to have been received three (3)
Business Days after mailing, or if by telefax or by hand, when
received, and if by overnight mail, on the next Business Day. Any
written notice shall be by either certified or registered mail, return
receipt requested, or overnight delivery service (providing for
delivery receipt) or delivered by hand. All notices or communications
with the Reinsurer under this Agreement shall be addressed as follows:
First International Life Insurance Company
c/o The Guardian Life Insurance Company of America
201 Park Avenue South
New York, New York 10003
Attention: Jeremy Starr
Telefax No.: (212) 598-8659
All notices and communications with the Company under this
Agreement shall be directed to:
Universal Guaranty Life Insurance Company
5250 South Sixth Street
Springfield, Illinois 62705-5147
Attention: James Melville
Telefax No.: (217) 786-4372
19.03. Severability. If any term or provision of this
Agreement shall be held void, illegal, or unenforceable, the validity
of the remaining portions or provisions shall not be affected thereby;
provided, however, that to the extent that such remaining portions or
provisions affect the economic positions of the parties hereunder, this
Agreement shall be amended by the parties so as to return the parties
to the economic positions that they would have been in had no such
severance occurred or so that both parties share the economic detriment
of such severance equally.
19.04. Successors and Assigns. This Agreement may not
be assigned by either party without the prior written consent of the
other. The provisions of this Agreement shall be binding upon and
inure to the benefit of and be enforceable by the parties hereto and
their respective successors and assigns as permitted herein.
19.05. Execution in Counterpart. This Agreement may be
executed by the parties hereto in any number of counterparts, and by
each of the parties hereto in separate counterparts, each of which
counterparts, when so executed and delivered, shall be deemed to be an
original, but all such counterparts shall together constitute but one
and the same instrument.
19.06. Currency. All payments and accounts shall be made
in United States Dollars, and all fractional amounts shall be rounded
to the nearest whole dollar. For the purposes of this Agreement, if
the Company receives premiums or pays Benefits in currencies other than
United States Dollars, such premiums and Benefits shall be converted
into United States Dollars at the actual rates of exchange at which
such premiums and Benefits are entered in the Company's books.
19.07. Amendments; Entire Agreement. This Agreement may
be amended only by written agreement of the parties. This Agreement,
the annexed Exhibit 1 and the Schedules, supersede all prior
discussions and written and oral agreements and constitute the sole and
entire agreement between the parties with respect to the subject matter
hereof.
19.08. Investigations. The Company will notify the
Reinsurer immediately, in writing, of any and all investigations of the
Company or its directors, principal officers or shareholders conducted
by any Federal, state or local governmental or regulatory agency other
than routine state insurance department examinations.
19.09. Governing Law and Forum. This Agreement shall be
governed by the laws of the State of New York, without giving effect to
the principles of conflicts of law thereof. Both parties hereunder
hereby irrevocably and unconditionally submit themselves to the
exclusive jurisdiction of the courts of the State of New York for any
actions, suits or proceedings of or relating to this Agreement and the
transactions contemplated thereby that cannot be resolved pursuant to
the provisions of Article XI hereof.
19.10. Interpretation. No provision of this Agreement
shall be construed against any party on the ground that such party
drafted the provision or caused it to be drafted.
19.11. Confidentiality. Except as required by law or
regulatory authority, neither the Company nor the Reinsurer shall
publicly disclose the purchase price or other terms of the transfer
proposed herein, but this restriction shall terminate if such price and
terms shall otherwise become public knowledge. In the event that the
Reinsurer or its representatives are requested or required by oral
questions, interrogatories, requests for information or documents,
subpoena, civil investigation, demand or similar process to disclose
any terms or information regarding the herein transfer it may disclose
any terms or information regarding such transfer provided, however,
that to the extent practicable under the circumstances the Reinsurer
shall give the Company reasonable notice of the order or request before
making the disclosure provided that such notice can be provided without
cost to the Reinsurer. The provisions of this Section 19.11 shall
survive termination of this Agreement.
IN WITNESS WHEREOF, the parties hereto have caused this
Agreement to be executed by their duly authorized representatives on
the date first above written.
UNIVERSAL GUARANTY LIFE
INSURANCE COMPANY
By: James E. Melville
Title: President
Date: 10/18/96
Attest:
By: Theodore C. Miller
Title: Vice President
Date: 10/18/96
FIRST INTERNATIONAL LIFE
INSURANCE COMPANY
By: Jeremy Starr
Title: Vice President, Reinsurance
Date: October 18, 1996
Attest:
By: Benjamin H. Mitchell
Title: Actuary
Date: October 18, 1996
<PAGE>
SCHEDULE A
ADMINISTRATIVE SERVICE AND STANDARDS
On and after the date hereof, the Company will continue to service
the Reinsured Policies by providing the following functions which shall
be performed by the Company in the same timely manner as currently
being performed and with the same diligence provided to the Company's
other policies:
Policy Service, Cash Loans and Cash Dividends, Change Dividend Option,
Address Change, Ownership Change, Assignment, Benefits Change,
Correspondence (to Policyholders), Coverage Changes and Conversions
(No Underwriting Required), Reinstatements, Cash Surrenders/Partial
Withdrawals, Coverage Changes and Conversions (Underwriting
Required), Claims, Noncontestable Life.
<PAGE>
A. Policy Service
1. Receipt and processing of Reinsured Policy service requests within
the Service Standards specified herein.
2. Updating of computer record and other files as needed to reflect
requested changes.
3. Preparation and mailing of Reinsured Policy annual statement to
Policyholder for applicable plans of insurance.
B. Policy Loan and Surrender Processing
1. Receipt and processing of loan and surrender requests.
2. Updating of computer record and other files as needed to reflect the
change.
3. Preparation and mailing of checks to Policyholders.
4. Generation and mailing of IRS 1099 forms to Policyholders when
applicable.
C. Claims Adjudication/Complaints
1. Adherence to applicable state fair claims settlement regulations.
2. Receipt, review, and processing of all complaints filed with respect
to the Reinsured Policies with the various Departments of
Insurance.
3. Oversee appropriate action to be taken with regard to a complaint
within guidelines established by the Reinsurer.
D. Accounting/Banking/Auditing
1. Providing of all accounting functions related to Reinsured Policy
administration for the Reinsured Policies being serviced.
2. Processing of all receipts, disbursements, and associated Reinsured
Policy related accounting transactions.
3. Preparation of daily accounting reports reflecting monetary
transactions (checks received, checks paid, monies deposited,
etc.).
4. Managing the appropriate bank accounts, including balancing and
editing of daily bank deposits.
5. Retention of system generated accounting and Reinsured Policy
transaction data and reports on a mutually agreed upon schedule.
6. Access to Reinsured Policy, and payment information as needed to
support the Reinsurer's and regulatory audits.
7. Providing of information of annual statement schedules in annual
statement format (for the information to which the Company has
access).
8. Providing of information with respect to state business pages of
Annual Statement, and any other information required to prepare
premium tax returns.
9. Prepare cash trial balances and accrual trial balances on business
assumed.
E. Financial Reporting
1. Performance of all functions necessary to support statutory
reporting. Preparation of accounting reports on Policies in blue
book format to be used by the Reinsurer.
2. Performance of all functions necessary to support other regulatory
reporting requirements on the Policies to include:
. IRS Form 1099 (Reinsured Policy related)
. Other Policyholders IRS reporting requirements.
3. Performance of all reasonable analyses to assure accuracy of reported
information at monthly, quarterly, and year-end periods.
4. Assist the Reinsurer in interfacing with the Company systems and
processing to allow the Reinsurer to consolidate reported
results.
5. Capacity to download certain information (to be defined by mutual
agreement of the parties) into a personal computer to allow the
Reinsurer to perform forecasting of future experience.
6. Provide necessary support for GAAP reporting purposes.
F. Actuarial
1. Determination of statutory reserves on a quarterly basis for the
Policies.
2. Determination of tax reserves quarterly in accordance with factors
determined by the Reinsurer. On an annual basis, the Company
will provide the required reserve reporting with appropriate
reserve schedules summarized for tax returns.
3. Preparation of the agreed upon annual statement schedules in annual
statement format (for the information to which the Company has
access).
4. General support of Policyholder administration.
G. Reinsurance Processing
1. Maintenance of required reinsurance records on Reinsured Policies.
2. Receipt, reconciliation, and payment of invoices from reinsurers
assuming risk on Policies.
H. Compliance
1. Monitoring statutes and regulations of the Departments of Insurance
in the various states in which the owners of Reinsured Policies
are located to ensure continued compliance.
2. Monitoring the statutes and regulations of the Department of
Insurance in the various states in which the owners of Reinsured
Policies are located to ensure that any communications required
by such regulations or statutes are implemented.
3. Responding to inquiries from the Departments of Insurance of the
various states in which the owners of Reinsured Policies are
located.
SCHEDULE B
EXPENSE ALLOWANCE
Expense Allowance = Base Allowance - Closing Interest
Base Allowance = P x Reserves and Liabilities +
Interest Adjustment Factor
Interest Adjustment Factor = $1,600,000 x (A - B)
Closing Interest = (Reserves and Liabilities - Policy Loans
on the Effective Date - Base Allowance)
x D x B/365
Where:
P = 23.7% for Paid-up permanent policies
43.4% for Paid-up term policies
23.0% for Dividends on deposit, endowments
on deposit and reserves on Paid-up
additions bought by Dividends
0.0% for provisions for policyholder
Dividends payable in the following year
100.0% for immediate payment of claim
reserves
A = 30 Year Treasury Rate on the Closing Date
B = 30 Year Treasury Rate on September 6, 1996
(which is 7.12%)
D = Calendar Days between Closing Date and
Effective Date
Records with:
First Character In-Force
"class base" Code
Paid-up Term
ETI A,N,T D
Other Term 4,5,8 B or C
Paid-up Permanent 1,2,3 B or C
Dividend Options amounts in any record
<PAGE>
SCHEDULE C
INITIAL REINSURANCE REPORT
1. In Force by Policy Form
i. Policy Count
ii. Amount Ceded
iii. Reserves
iv. Loans
2. Accounting Transaction - Initial Reinsurance
Consideration equals net of:
i. Due First International Life Insurance Company
Initial Reinsurance Premium
ii. Due Universal Guaranty Life Insurance Company
Expense Allowance
iii. Initial Reinsurance Consideration
= (i) - (ii)
<PAGE>
SCHEDULE D - PART I
MONTHLY PERIOD REINSURANCE REPORT
From First International Life Insurance Company
to Universal Guaranty Life Insurance Company
for the Month ending .
REINSURANCE PREMIUMS
1. Gross Premiums
2. a. Policy Loan Interest
b. Policy Loan Repayments
c. Other Amounts
d. YRT Premiums Payable
Subtotal (a + b + c - d)
3. Dividends
4. Administration Costs
5. Reinsurance Premiums
(1)+(2)-(3)-(4)
BENEFITS
1. Death Benefits (net of reinsurance)
2. Other Benefits under Death
Benefit Settlement Options
3. Surrender and Endowment
Payments to Policyholders
4. Policy Loans Made
5. Dividend withdrawals ( = 2c + 2d
from Schedule D - Part I (Continued))
6. Benefits = (1) + (2) + (3) + (4) + (5)
MONTHLY SETTLEMENT
Reinsurance Premiums received by the
Company - Benefits paid by the
Company
NOTE: If Positive, payment to the Reinsurer
If Negative, payment to the Company
<PAGE>
SCHEDULE D - PART I (Continued)
MONTHLY PERIOD REINSURANCE REPORT
1. Policy loans in force
2. a. Dividends on Deposit
Beginning of Period
b. Deposits made during
period
c. Withdrawal of
principle
d. Withdrawal of
interest
e. Dividends on Deposit
End of Period
3. Risk Based Capital
4. Number of IRIS Audits
failed (attach details)
<PAGE>
SCHEDULE D - PART II
QUARTERLY POLICY EXHIBIT
Policies
a. In force beginning of year
b. Increases
c. Deaths
d. Surrenders
e. Maturities
f. Lapse
g. Expirations
h. Decreases
i. In force end of period
j. Reserves (attach details by basis)
<PAGE>
SCHEDULE D - PART III
ANNUAL REPORTS
Analysis of Increase in Reserves
1. Reserve December 31 of prior year
2. Total Net Premiums
4. Tabular Interest
5. Tabular less Actual Reserves Released
11. Reserves Released by Other Termination (net)
12. Annuity, Supplementary contract, disability and accumulated
dividend payments
15. Reserves December 31 of current year
New York State Analysis of Reserves (Exhibit 8 with face amounts)
Total Industrial Ordinary Group
I. Annuities Res No. of Res. No. of Res. No. of Res. No. of
Pol. Pol. Pol. Pol.
A. Other than Co. Retirement Plan
B. Co. Retirement Plan
II. Supplemental Contracts
III. Deficiency and Miscellaneous Reserves
Tabular detail by Reinsured Policy showing age, sex, Reinsured Policy
number, annual income, reserve factor and reserves for all reserves
ceded on a coinsurance plan. Such detail shall be supplied in
duplicate in either paper, microfiche or machine readable. If the
latter is chosen, it must be formatted according to New York State
requirements.
Tax Reserves by Plan and Reserve Basis
DAC Charge Premiums by Plan
<PAGE>
SCHEDULE E
RECAPTURE PROVISIONS
Should the provisions of Section 9.06 be invoked, the following
accounting would transpire for policies being recaptured:
Due to Company:
A. Reserves on Recaptured
Policies on the Effective Date
Due to Reinsurer:
B. Recapture fee
Net Due
(A - B)
Where:
B = A x C
C = Appropriate percentage from chart below:
Years from
Effective Date* Permanent Dividend Option Term
0 23.7% 23% 43.4%
1 21 20 35
2 18 18 29
3 15 15 23
4 13 13 19
5 11 11 15
6 9 9 12
7 7 7 9
8 5 5 6
9 3 3 3
10 0 0 0
* Years from Effective Date represents the integral number of years
since September 30, 1996. Thus, any recapture occurring before
September 30, 1997 will use the factor from the row marked 0.
<PAGE>
SCHEDULE F
DAC TAX ELECTION
The Company and the Reinsurer hereby agree to the following pursuant to
Section 1.848-2(g)(8) of the Income Tax Regulations issued December
29, 1992, under Section 848 of the Internal Revenue Code 1986, as
amended. This election shall be effective for 1991 and all subsequent
taxable years for which this Agreement remains in effect.
a. The term "party" will refer to either the Company or the
Reinsurer as appropriate.
b. The terms used in this Schedule F are defined by
reference to Treasury Regulations Section 1.848-2 in
effect as of December 29, 1992.
c. The party with the net positive consideration for this
Agreement for each taxable year will capitalize
specified policy acquisition expenses with respect to
this Agreement without regard to the general deductions
limitation of IRC Section 848(c)(1).
d. Both parties agree to exchange information pertaining to
the amount of net consideration under this Agreement
each year to ensure consistency. The parties also agree
to exchange information which may be otherwise required
by the IRS.
e. The Company will submit a schedule to the Reinsurer by
April 1 of each year of its calculation of the net
consideration of the preceding calendar year. This
schedule will be accompanied by a statement signed by an
officer of the Company stating that the Company will
report such net consideration in its tax return for the
preceding calendar year.
f. The Reinsurer may contest such calculation by providing
an alternate calculation to the Company in writing
within 30 days of the Reinsurer's receipt of the
Company's calculation. If the Reinsurer does not so
notify the Company, the Reinsurer will report the net
consideration as determined by the Company in the
Reinsurer's tax return for the previous calendar year.
F-1
<PAGE>
g. If the Reinsurer contests the Company's calculation of
the net consideration, the parties will act in good
faith to reach an agreement as to the correct amount
within 30 days of the date the Reinsurer submits its
alternate calculation. If the Reinsurer and the Company
reach an agreement on an amount of net consideration,
each party shall report such amount in their respective
tax returns for the previous calendar year.
h. If the Company and the Reinsurer both disagree upon the
final net consideration then the parties shall seek a
remedy as set forth in Article XI of this Agreement.
F-2
<PAGE>
ASSUMPTION REINSURANCE AGREEMENT
between
UNIVERSAL GUARANTY LIFE INSURANCE COMPANY
and
FIRST INTERNATIONAL LIFE INSURANCE COMPANY
<PAGE>
TABLE OF CONTENTS
Page
ARTICLE I DEFINITIONS 1
ARTICLE II BUSINESS ASSUMED 3
ARTICLE III ASSUMPTION CERTIFICATES 5
ARTICLE IV GENERAL PROVISIONS 7
ARTICLE V CONSIDERATION FOR ASSUMPTION
REINSURANCE 10
ARTICLE VI DUTY OF COOPERATION 10
ARTICLE VII ARBITRATION 11
ARTICLE VIII INDEMNIFICATION 11
ARTICLE IX EXECUTORY CONTRACT AND INSOLVENCY-
SETOFF 12
ARTICLE X MISCELLANEOUS PROVISIONS 13
EXHIBITS
A Policyholder Notice
B Certificate of Assumption
C Notice of Objection to Assumption
<PAGE>
ASSUMPTION REINSURANCE AGREEMENT
This Assumption Reinsurance Agreement (the
"Assumption Agreement"), is made and entered into as of
September 30, 1996, by and between Universal Guaranty Life
Insurance Company, a life insurance company (the "Company"),
and First International Life Insurance Company, a life insurance
company (the "Reinsurer").
WHEREAS, the Company and the Reinsurer have
entered into a Coinsurance Agreement, as of the date hereof
(the "Coinsurance Agreement"), pursuant to which the Company
has agreed to cede to the Reinsurer, and the Reinsurer has
agreed to accept and indemnity reinsure, on a 100%
coinsurance basis, all of the Reserves and Liabilities (as
hereinafter defined), but not reserves for incurred but not
reported claims and immediate payment of claims, arising
under or with respect to the Reinsured Policies (as
hereinafter defined); and
WHEREAS, the Coinsurance Agreement provides that,
upon the occurrence of certain events as specified in
Article XVI therein, the Reinsurer shall have the right, in
its sole discretion, to elect to assumption reinsure the
Reinsured Policies, with a concurrent novation and complete
release of the Company from any liability under such
Reinsured Policies, on a state by state basis after the
Effective Date upon the receipt of any and all applicable
regulatory approvals and notice to relevant Policyholders
followed by expiration of the applicable period with no opt
out by such Policyholders or the obtaining of required
consents from such Policyholders, as the case may be, under
the terms and conditions set forth herein;
NOW THEREFORE, in consideration of the foregoing
and the mutual agreements set forth herein, the Company and
the Reinsurer mutually agree as follows:
ARTICLE I
DEFINITIONS
As used in this Assumption Agreement, the
following capitalized terms shall have the following
meanings (definitions are applicable to both the singular
and the plural forms of each term defined in this
Article I):
"ASSUMPTION DATE" shall have the meaning set forth
in Section 2.4.
"BUSINESS DAY" means any day other than a Saturday
or Sunday or a day on which banking institutions in the
States of New York, Ohio and Delaware are permitted or
obligated by law to be closed.
"CERTIFICATE OF ASSUMPTION" shall have the meaning
set forth in Section 3.1.
"COINSURANCE AGREEMENT" shall have the meaning set
forth in the first recital hereof.
"EFFECTIVE DATE" shall have the same meaning as in
the Coinsurance Agreement.
"EXTRA CONTRACTUAL LIABILITIES" shall have the
same meaning as in the Coinsurance Agreement.
"INSOLVENCY PROCEEDINGS" shall have the meaning
set forth in Section 9.5.
"NOTICE OF OBJECTION" shall have the meaning set
forth in Section 3.1.
"NOVATED POLICIES" means the Reinsured Policies
with respect to which no rejection of assumption has been
filed by a Policyholder pursuant to the terms of Section 3.2
of this Assumption Agreement (or with respect to which other
applicable regulatory requirements have been met), and with
respect to which the terms of Section 3.4 apply.
"PERSON" means any corporation, individual, joint
stock company, joint venture, partnership, unincorporated
association, governmental regulatory entity, country, state
or political subdivision thereof, trust or other entity.
"POLICYHOLDER" means a holder of a Reinsured
Policy.
"POLICYHOLDER NOTICE" shall have the meaning set
forth in Section 3.1.
"POLICY LOANS" shall have the same meaning as set
forth in the Coinsurance Agreement.
<PAGE>
"REINSURED POLICIES" means all paid-up insurance
policies, issued by the Company, that are in force on the
Effective Date, except policies offered in settlement to so
called "HIV" policyholders and paid-up business associated
with the Company's Jr./Sr. Plan Single Premium Interest
Sensitive Whole Life Policies, including, without
limitation, policy loans.
"RESERVES AND LIABILITIES" means the statutory
reserves held by the Company as of the Effective Date in
support of the policy liabilities arising under the
Reinsured Policies and payable after the Effective Date
(determined by reference to lines 1, 5, 7 and 8 on page 3 of
its 1995 Annual Statement Blank) less Policy Loans.
"REINSURANCE AGREEMENT" shall have the same
meaning as in the Coinsurance Agreement.
ARTICLE II
BUSINESS ASSUMED
2.1. COVERAGE. After the Effective Date and upon
the terms and subject to the conditions, including Section
XVI of the Coinsurance Agreement, and other provisions of
this Assumption Agreement and any required governmental and
regulatory consents and approvals, the Company, if requested
to do so by the Reinsurer, hereby agrees to cede to the
Reinsurer and the Reinsurer hereby agrees to accept and
reinsure, on an assumption basis, any Reinsured Policy.
Reinsurance pursuant to this Section 2.1 shall occur no less
frequently than on a monthly basis until all Reinsured
Policies have been assumed pursuant to the provisions of
Article III hereunder; provided, however, that reinsurance
may occur more frequently if the parties hereto agree.
2.2. EXCLUSIONS. This Assumption Agreement does
not apply to and specifically excludes from coverage any
Extra Contractual Liabilities. In addition, the Reinsurer
shall not assume, and shall be indemnified by the Company
for, all guaranty fund assessments and premium taxes or
similar charges imposed on or with respect to the Reinsured
Policies to the extent that such assessments, taxes or
charges are based on premiums remitted prior to the
Effective Date.
2.3. TRANSFER OF RESERVES. Notwithstanding the
provisions of Section 2.1 hereof, the Reinsurer will not be
<PAGE>
deemed to have accepted and reinsured, on an assumption
basis, any Reinsured Policy unless the Reserves and
Liabilities underlying such Reinsured Policy shall have been
ceded by the Company to the Reinsurer, and accepted by the
Reinsurer, pursuant to Article II of the Coinsurance
Agreement, effective as of the Effective Date.
2.4. ASSIGNMENT OF CEDED REINSURANCE.
(a) Regardless of whether reinsurance
novation agreements are entered into between the Reinsurer
and any reinsurer, the Reinsurer shall be substituted for
and succeed to all of the rights and liabilities of the
Company, and shall, as between the parties hereto, be
recognized for all purposes as the "Company" thereunder in
substitution for the Company, under any Reinsurance
Agreements in effect as of the date that the provisions of
Section 2.1 hereunder take effect (the "Assumption Date")
with any reinsurer relating to the Reinsured Policies. For
consideration which has already been provided for in Article
IV of the Coinsurance Agreement, as of the Assumption Date,
the Company shall assign, transfer and convey, and the
Reinsurer shall be bound by and assume, any and all rights
and obligations of the Company under any Reinsurance
Agreement including amounts held by or which may become due
from reinsurers for policy liabilities under the Reinsured
Policies or for benefits or other amounts paid by the
Company prior to the Assumption Date. The Company and the
Reinsurer shall use their best efforts to effect, as
promptly as possible, an endorsement to each Reinsurance
Agreement substituting the Reinsurer for the Company and to
amend the Ceded Reinsurance Agreement to comply with the
credit for reinsurance provisions of (i) the Delaware
Insurance Law and (ii) any other statute or regulation
applicable to the cession of reinsurance by foreign life
insurance companies. The Company agrees to enter into such
endorsements and, if reasonably requested by the Reinsurer,
aid the Reinsurer, at the Reinsurer's expense, in obtaining
any such endorsement.
(b) From the Assumption Date, the Company
hereby agrees that all amounts due the Reinsurer hereunder
pursuant to the Reinsurance Agreements shall be paid
directly to the Reinsurer by reinsurers and reinsurance
brokers. The Company shall, if reasonably requested by the
Reinsurer, aid the Reinsurer, at the Reinsurer's expense, in
collection of all amounts due from reinsurers. From the
Assumption Date, the collectibility of such reinsurance
<PAGE>
shall be the ultimate responsibility of the Reinsurer and
shall be at the risk and for the account of the Reinsurer in
the event such reinsurance is not collected.
(c) From the Assumption Date, the Reinsurer
shall have full power and authority as attorney-in-fact for
the Company to act for and on behalf of the Company with
respect to any and all letters of credit and trust funds
outstanding for the benefit of the Company pursuant to the
terms of any of the Reinsurance Agreements. The Company and
the Reinsurer shall, at the expense of the Reinsurer, each
use their best efforts to the extent mutually agreed to be
necessary, to cause the reinsurers of the Company under the
Reinsurance Agreements to post replacement letters of credit
or establish replacement trust funds to be issued or
established directly in favor and for the benefit of the
Reinsurer in the same or a greater amount and on terms
equally as favorable to the Reinsurer, unless the Reinsurer
shall otherwise consent. The Company agrees to transfer to
the Reinsurer all funds withheld from reinsurers under the
Reinsurance Agreements.
ARTICLE III
ASSUMPTION CERTIFICATES
3.1. POLICYHOLDER NOTICES. Upon the request of
the Reinsurer to reinsure, on an assumption basis, a
Reinsured Policy pursuant to Section 2.1 hereof, and to the
extent that the reinsurance of such Reinsured Policy is
permitted or approval therefore has been granted under
applicable laws, rules or regulations or positions of
insurance regulatory authorities, the Reinsurer shall
prepare, with the cooperation of the Company, a Policyholder
notice ("Policyholder Notice"), certificate of assumption
("Certificate of Assumption") and objection form ("Objection
Form"), and mail them to the Policyholder of such Reinsured
Policy. Subject to regulatory requirements of the various
states, the Policyholder Notices, Certificates of Assumption
and Objection Forms to be delivered to Policyholders
pursuant to this Section 3.1 shall be substantially in the
forms attached hereto as Exhibits A, B and C, respectively.
3.2. RIGHT TO OBJECT. Subject to regulatory
requirements of the various states, the Company and the
Reinsurer agree that a Policyholder will be allowed to
remain a Policyholder of the Company if such Policyholder
<PAGE>
refuses to effect the assumption of its Reinsured Policy in
accordance with this Article III during the applicable
period set forth in the Policyholder notice, and all of the
rights and obligations of the Company and the Policyholder
under such Reinsured Policy and of the Company and the
Reinsurer under the Coinsurance Agreement with respect to
such Reinsured Policy, shall remain the same.
3.3. NOVATED POLICIES. In the event that a
Reinsured Policy defined herein as a Novated Policy is
determined by applicable regulatory authorities or by
judicial decision (in either case, following the exhaustion
of all rights of appeal) not to have been novated, such
Reinsured Policy shall, for all purposes of this Assumption
Agreement, be deemed never to have been a Novated Policy.
Notwithstanding the foregoing, the fact that a Reinsured
Policy has not been or cannot be assumed and novated by the
Reinsurer pursuant to the terms and conditions of this
Assumption Agreement, for whatever reason, shall in no event
cause it not to be a Reinsured Policy under the Coinsurance
Agreement.
3.4. DIRECT OBLIGATIONS. The Reinsurer shall be
the successor to the Company under the Novated Policies as
if the Novated Policies were direct obligations originally
issued by the Reinsurer. The Reinsurer shall be substituted
in the place and stead of the Company, and each
Policyholder, insured or beneficiary under a Novated Policy
shall disregard the Company as a party thereto and treat the
Reinsurer as if it had been originally obligated thereunder.
Such Persons shall have the right to file claims or take
other actions under the Novated Policies on or after the
effective date of such novation directly with the Reinsurer,
and shall have a direct right of action for insurance
liabilities reinsured thereunder against the Reinsurer, and
the Reinsurer hereby consents to be subject to direct action
taken by any such Persons under a Novated Policy. The
Reinsurer accepts and assumes the Novated Policies subject
to any and all defenses, setoffs and counterclaims to which
the Company would be entitled with respect to such insurance
liabilities, it being expressly understood and agreed by the
parties hereto that no such defenses, setoffs or
counterclaims are waived by the execution of this Assumption
Agreement or the consummation of the transactions
contemplated hereby and that the Reinsurer shall be fully
subrogated to all such defenses, setoffs and counterclaims.
<PAGE>
3.5. RELEASE OF COMPANY; INDEMNITY. Upon the
consummation of the assumption reinsurance of a Reinsured
Policy from the Company to the Reinsurer under this
Reinsurance Agreement, the Company shall be released from
any and all liability, except for Extra Contractual
Liabilities, with respect to such Reinsured Policy. From
and after the consummation of the assumption reinsurance of
a Reinsured Policy pursuant to this Assumption Agreement,
the Reinsurer agrees to indemnify the Company for any and
all damages, costs and expenses, including reasonable legal
counsel fees and disbursements, arising out of, based upon
or relating to such Novated Policy; provided, however, that
the Reinsurer shall be under no obligation to indemnify the
Company for any Extra Contractual Liabilities.
ARTICLE IV
GENERAL PROVISIONS
4.1. POLICY ADMINISTRATION. To the extent that
such transfers have not already taken place pursuant to the
terms and conditions of the Coinsurance Agreement, the
Company agrees to cooperate fully with the Reinsurer in the
transfer of all books, records, papers or any other
documents relating to such Novated Policies.
4.2. BILLING AND COLLECTIONS. Effective on the
respective dates on which the novation of any Reinsured
Policy is effective, the Reinsurer shall have sole
responsibility for billing and collecting policy loan
repayments, interest and the making of payments of dividends
in respect of the Novated Policies, subject to the terms of
any administrative or other agreements between the parties
hereto that have been or heretofore may be entered into and
the terms of agreements between the Reinsurer and its agents
or subcontractors.
4.3. MISUNDERSTANDINGS AND OVERSIGHTS. If any
delay, omission, error or failure to pay amounts due or to
perform any other act required by this Assumption Agreement
is unintentional and caused by misunderstanding or
oversight, the Company and the Reinsurer will adjust the
situation to what it would have been had the
misunderstanding or oversight not occurred. The party first
discovering such misunderstanding or oversight, or act
resulting from the misunderstanding or oversight, will
notify the other party in writing promptly upon discovery
<PAGE>
thereof, and the parties shall act to correct such
misunderstanding or oversight within thirty (30) Business
Days of receipt of such notice. However, this Section shall
not be construed as a waiver by either party of its right to
enforce strictly the terms of this Assumption Agreement.
4.4. LITIGATION; CLAIMS. The Reinsurer shall be
responsible for the handling of, and all costs and expenses,
including legal fees, relating to, litigation or other
claims under the Novated Policies. Notwithstanding the
foregoing, the Reinsurer shall have no liability for such
costs and expenses to the extent they arise out of or are
based on any Extra Contractual Liabilities, and to the
extent that the Reinsurer incurs any such costs or expenses,
the Reinsurer shall be indemnified by the Company.
4.5. NON-COMPETE. The Company shall take no
action directly or indirectly to induce any Policyholder of
a Novated Policy to terminate, reinstate, lapse or exchange
such policy.
4.6. COMPLIANCE WITH APPLICABLE LAWS AND
REGULATIONS.
(a) INTENT OF PARTIES. It is the intention
of the parties that this Assumption Agreement shall be
interpreted in accordance with the laws as of the date of
execution hereof by both parties and comply with all
existing applicable state and federal laws and regulations,
and as from time to time are or may be in effect, in such a
way that the Reinsured Policies remain reinsured on the
coinsurance plan and contingent assumption plan.
(b) PROCEDURES TO REFLECT CHANGES IN LAWS OR
REGULATIONS. In the event that it is determined by an
insurance regulatory authority or the Internal Revenue
Service or by either party upon the advice of an insurance
regulatory authority or the Internal Revenue Service that
this Assumption Agreement fails to conform to the
requirements of existing applicable laws and regulations and
that the Assumption Agreement may be brought into conformity
with said requirements only by means of a material change to
the Assumption Agreement, or in the event that such laws or
regulations are changed subsequent to the Effective Date and
such change has a material adverse affect on either party or
requires a material change to the Assumption Agreement in
order for the Assumption Agreement to conform with
applicable laws and regulations, the parties shall exercise
<PAGE>
reasonable efforts to reach an agreement to amend the
Assumption Agreement so as to return the parties to the
economic position that they would have been in had no such
change occurred or so that both parties share the economic
position that they would have been in had no such change
occurred or so that both parties share the economic
detriment of such change equally. If the parties are unable
to reach an agreement to amend the Assumption Agreement,
then the differences between the parties shall be resolved
through arbitration in accordance with the provisions of
Article VII. In the event that any change required to
conform the Assumption Agreement to the requirements of
applicable law or regulation is not material, the Assumption
Agreement shall be amended accordingly. In no event,
however, shall this provision prevent either party from
exercising any right it otherwise has under this Assumption
Agreement. For purposes of this Section 4.6(b), the word
"material" shall mean, when used with respect to (i) any
change in law or regulation, or any change into the
Assumption Agreement necessary to bring the Assumption
Agreement into conformity with the requirements of any law
or regulation; or (ii) any delay, omission, error or failure
to pay amounts due or to perform any other act required
under this Assumption Agreement; or (iii) any default, that
the effect or effects of any of (i), (ii) or (iii) above
(either individually or cumulatively) results in a deviation
from a projected return under this Assumption Agreement
(absent the occurrence of (i), (ii) or (III) above, either
individually or cumulatively) by at least five percent (5%),
measured from the first day that the occurrence of (i), (ii)
or (iii) above, or series thereof, taken into account on a
cumulative basis, occurred or becomes effective.
(c) NOTIFICATION OF DISAPPROVAL OR CHANGE IN
LAW. The Company shall promptly notify the Reinsurer of any
disapprovals, recommended changes or statements regarding
the Assumption Agreement that are made by any insurance or
tax regulatory authorities and of any change in law,
regulation or rulings affecting this Assumption Agreement.
The Reinsurer shall be allowed to make its own defense of
the Assumption Agreement with said authorities.
4.7. RECOUPMENT AND FAILURE OF CONSIDERATION. If
either party to this Assumption Agreement fails to perform
this Assumption Agreement in full, then the other party has
the right to suspend performance, and if the defaults cannot
be cured, within one hundred and twenty (120) days following
delivery of written notice from the non-defaulting party to
<PAGE>
the defaulting party, to terminate this Assumption
Agreement. Alternatively, the non-defaulting party can
recoup damages (including, without limitation, the amount
owed plus interest from the date owed and calculated at the
Chase Bank prime rate plus two points) from future
settlements between the parties.
ARTICLE V
CONSIDERATION FOR ASSUMPTION REINSURANCE
5.1 CONSIDERATION. The consideration provided
for in Article IV of the Coinsurance Agreement shall be the
consideration for the assumption of the Novated Policies (as
direct obligations) by the Reinsurer, and there shall be no
additional consideration or premium due or payable under
this Assumption Agreement.
ARTICLE VI
DUTY OF COOPERATION
6.1. DUTY OF COOPERATION. Each party hereto
shall cooperate fully with the other in all reasonable
respects in order to accomplish the objectives of this
Assumption Agreement. This duty to cooperate shall include
obtaining the governmental and regulatory consents and
approvals and taking the other steps necessary for the
assumption of the Reinsured Policies, as described in
Article III hereof. In addition, this duty to cooperate
shall include making available any Reinsured Policy records
which either party subsequently may require to resolve
issues related to claims or liabilities. The Company and
the Reinsurer agree to perform such additional acts and
execute such additional documents and agreements as may be
necessary or desirable to carry out the purposes and
objectives of this Assumption Agreement; provided however,
that Reinsurer shall reimburse the Company for reasonable
out-of-pocket expenses incurred by the Company.
<PAGE>
ARTICLE VII
ARBITRATION
7.1. GENERAL. Any dispute or difference between
the parties with respect to the operation or interpretation
of, or arising from or relating to, this Assumption
Agreement on which an amicable understanding cannot be
reached shall be decided pursuant to and in accordance with
the terms, conditions and procedures set forth in Article XI
of the Coinsurance Agreement.
7.2. SURVIVAL. This Article shall survive
termination of this Assumption Agreement.
ARTICLE VIII
INDEMNIFICATION
8.1. THE COMPANY. The Company hereby agrees on
demand to indemnify and hold harmless the Reinsurer, and its
respective officers, directors and employees from and
against any and all demands, actions, proceedings, suits (by
any Person) and liabilities, paid or incurred (including
reasonable attorneys' fees), resulting from or arising out
of the breach of or failure to perform any of the duties,
obligations, covenants or agreements of the Company
contained in this Assumption Agreement.
8.2. THE REINSURER. The Reinsurer hereby agrees
to indemnify and hold harmless the Company, and its
respective officers, directors and employees from and
against any and all demands, actions, proceedings, suits (by
any Person) and liabilities, paid or incurred (including
reasonable attorneys' fees), resulting from or arising out
of the breach of or failure to perform any of the duties,
obligations, covenants or agreements of the Reinsurer
contained in this Assumption Agreement.
8.3. SURVIVAL OF ARTICLE. This Article shall
survive termination of this Assumption Agreement.
<PAGE>
ARTICLE IX
EXECUTORY CONTRACT AND INSOLVENCY-SETOFF
9.1. INSOLVENCY-SETOFF (OR OFFSET). In the event
either party to the Assumption Agreement shall be the
subject of insolvency proceedings ("Insolvency Proceedings")
all independent debts on unrelated contracts between the
parties shall be setoff to the extent:
(a) the debt from the creditor to the insolvent arose
pre-petition.
(b) the debt from the insolvent to the creditor arose
pre-petition.
(c) the debts are mutual, meaning they are between the
two parties to this Assumption Agreement, and in the same
right and the same capacity.
The cash payment due on each reinsurance agreement between
the parties shall constitute the "debt" on such agreement.
9.2. ADEQUATE ASSURANCE. In the event of
Insolvency Proceedings involving the Company, the
Reinsurer's future performance is conditioned on receiving
adequate assurance of future performance, as defined in the
Uniform Commercial Code, Section 2-206, and the Official Comments
thereunder.
9.3. IPSO FACTO CLAUSE. If the receiver,
including any liquidator or rehabilitator, of one of the
parties assigns the rights or delegates the duties of this
Assumption Agreement, and the assignee is the subject of
Insolvency Proceedings then the other party may immediately
terminate the Assumption Agreement without further
performance.
9.4. EXECUTORY CONTRACT. In the event either
party to the Assumption Agreement is the subject of
Insolvency Proceedings the receiver of the insolvent, with
respect to future account settlements, may affirm or reject
the Assumption Agreement, but not affirm the rewards and
reject the burdens. If this Assumption Agreement is neither
affirmed nor rejected within one hundred and twenty (120)
days after a party becomes the subject of Insolvency
Proceedings, then the Assumption Agreement shall be deemed
to be rejected.
<PAGE>
If either party is the subject of Insolvency
Proceedings other than liquidation proceedings, then the
other party may request adequate assurance of continued
performance and the first priority administrative expense
with respect to future performance prior to the time the
Assumption Agreement is either affirmed or rejected, and if
such is not provided, then, after one hundred and twenty
(120) days, the other party may treat its future performance
as canceled.
9.5. INSOLVENCY PROCEEDINGS. For purposes of
this Assumption Agreement the term "Insolvency Proceedings"
shall include, but not be limited to, any action by a state
insurance regulatory authority to place a party in, or the
actual commencement of, delinquency proceedings, including
conservatorship, receivership, rehabilitation,
reorganization, "adjustment of debts," "voluntary
supervision," or liquidation.
ARTICLE X
MISCELLANEOUS PROVISION
10.1. NO THIRD PARTY BENEFICIARIES. This Assumption Agreement is
between the Company and the Reinsurer, and the performace of the
obligations of each party under this Assumption Agreement shall be
rendered solely to the other party. In no instance shall anyone other
than the Company or the Reinsurrer, or their successors or permitted
assigns, have any rights, benefits or remedies under this Assumption
Agreement. Until the Reinsurer has reinsured a Reinsured Policy on an
assumption reinsurance basis pursuant to this Assumption Reinsurance
Agreement, the Reinsurer shall not be liable to any insured, contract
owner, or beneficiary under any Reinsured Policy.
10.2. HEADINGS AND EXHIBIT. Headings used herein are inserted
solely for the convenience of reference and are not a part of this
Assumption Agreement and shall not affect the terms hereof. The
attached Exhibits are part of this Assumption Agreement.
10.3. NOTICES. All noteice and communications hereunder shall
be in writing and sahll be deemed to have been received three (3)
Business Days after mailing, or if by telefax or by hand, when received,
and if by overnight mail, on the next Business Day. Any written notice
shall be
<PAGE>
by either certified or registered mail, return receipt requested, or
overnight delivery service (providing for delivery receipt) or
delivered by hand. All notices or communications with the Reinsurer
under this Assumption Agreement shall be addressed as follows:
First International Life Insurance Company
c/o The Guardian Life Insurance Company of America
201 Park Avenue South
New York, New York 10003
Attention: Jeremy Starr
Telefax No.: (212) 598-8659
All notices and communications with the Company under this
Assumption Agreement shall be directed to:
Universal Guaranty Life Insurance Company
5250 South Sixth Street
Springfield, Illinois 62750-5147
Attention: James Melville
Telefax No.: (217) 786-4372
10.4. SEVERABILITY. If any term or provision of this Assumption
Agreement shall be held void, illegal, or unenforceable, the validity of
the remaining portions or provisions of this Assumption Agreement shall
not be affected therby; provided, however, that to the extent that such
remeining portions or provisions affect the ecomomic positions of the
parties hereunder, this Assumption Agreement shall be amended by the
parties so as to return the parties to the economic positions that they
would have been in had no such severance occurred or so that both
parties share the economic detriment of such severance equally.
10.5. ASSIGNMENT. This Assumption Agreement may not be assigned
by either party without the prior written consent of the other and any
attempted assignment without such consent shall be void.
10.6. SUCCESSORS AND ASSIGNS. The provisions of this Assumption
Agreement shall be binding upon and inure to the benefit of and be
enforceable by the parties hereto and their respective successors
and permitted assigns.
10.7. EXECUTION IN CONTERPARTS. This Assumptin Agreement may be
executed by the parties hereto in any number of conterparts, and by
each of the parties hereto in
<PAGE>
separate conterparts, each of which counterparts, when so executed and
delivered, shall be deemed to be an original, but all such conterparts
shall together constitute but one and the same instrument.
10.8. AMENDMENTS. This Assumption Agreement may be amended only
by written amendment hereto executed by the parties.
10.9. WAIVER. The failure of the Company or Reinsurer to insist
on strict compliance with this Assumption Agreement, or to exercise any
right or remedy under this Assumptin Agreement, shall not constitute a
wavier of any rights provided under this Reinsurance Agreement, nor
stop the parties from thereafter demanding full and complete compliance
nor prevent the parties from exercising such a right or remedy in the
future.
10.10. INTERPRETATION. No provision of this Assumption Agreement
shall be construed against any party on the ground that such party
drafted the provision or caused it to be drafted.
10.11. ENTIRE AGREEMENT. This Assumption Agreement and the
Coinsurance Agreement constitute the sole and entire agreement and
understanding between the parties hereto, and supersedes all prior
agreements, whether oral or written, between the parties, with respect
to the subject matter hereof.
10.12. GOVERNING LAW AND FORUM. This Assumption Agreement shall
be governed by the laws of the State of New York, without giving effect
to principles of conflicts of law thereof. Both parties hereby
irrevocably and undonditionally submit themselves to the exclusive
jurisdiction of the Courts of the State of New York for any actions,
suits or proceedings of or relating to this Assumption Agreement and
the transactions contemplated thereby that cannot be resolved pursuant
to the provisions of Article VII hereof.
10.13. CONFIDENTIALITY. Except as required by law or regulatory
authority, neither the Company nor the Reinsurer shall publicly
disclose the purchase price or other terms of the transfer proposed
herein, but this restriction shall terminate if such price and terms
shall otherwise become public knowledge. In the event that the
Reinsurer or its representative are requested or required by
<PAGE>
oral questions, interrogatories, requests for information or documents,
subpoena, civil investigation, demand or similar process to disclose
any terms or information regarding such transfer it may disclose any
terms or information regarding such transfer provided, however, that
to the extent practicable under the circumstances the Reinsurer shall
give the Company reasonable notice of the order or request before
making the disclosure provided that such notice can be provided without
cost to the Reinsurer. This Section 10.13 shall survive termination of
this Assumption Agreement and the Coinsurance Agreement.
AMENDMENT
to
COINSURANCE AGREEMENT
Between
UNIVERSAL GUARANTY LIFE INSURANCE COMPANY
hereinafter referred to as "the Company"
and
FIRST INTERNATIONAL LIFE INSURANCE COMPANY
hereinafter referred to as "the Reinsurer"
WHEREAS, the Company and the Reinsurer have made
and entered into a Coinsurance Agreement dated as of
September 30, 1996 (the "Agreement"); and
WHEREAS, the Company and the Reinsurer wish to
amend certain provisions of the Agreement;
NOW, THEREFORE, in consideration of the mutual
agreements, promises and covenants provided herein, the
Company and the Reinsurer hereby agree to amend the
Agreement as follows:
SECTION 1.-DEFINITIONS
All terms used in this Amendment shall be subject
to the definitions provided in the Agreement.
The definition of Reinsured Policies in Article I
shall be replaced with the following:
""REINSURED POLICIES" means all paid-up
life insurance and, if attached thereto, annuity
policies, contracts, binders or certificates of
insurance, and all riders, endorsements and amendments
thereto, whether written or oral, issued or assumed by
the Company, that are in force on the Effective Date,
except those offered in settlement to so called "HIV"
policyholders and paid-up business associated with the
Company's Jr./Sr. Plan Single Premium Interest
Sensitive Whole Life policies, including, without
limitation, Policy Loans, all such Reinsured Policies
being set forth in Schedule G, attached hereto."
The definition of Closing Date in
Article I shall be replaced with the following:
<PAGE>
""CLOSING DATE" shall be December 6,
1996, unless all of the conditions in Article XV
hereunder have not been satisfied prior to such date,
in which event it shall be that date ten (10) Business
Days following receipt of notice from the Company to
the Reinsurer that all of the conditions in Article XV
hereunder have been satisfied."
SECTION 2.-TABLE OF CONTENTS
Add to the Table of Contents "SCHEDULE G -
LIST OF REINSURED POLICIES" at page G-1.
SECTION 3.-SCHEDULE G
Add to the Agreement a new "SCHEDULE G" as
attached hereto.
SECTION 4.-INITIAL REINSURANCE CONSIDERATION
Section 4.01 of the Agreement is to be replaced with the
following:
"4.01. INITIAL REINSURANCE CONSIDERATION. On
the Closing Date, as consideration for the assumption
by the Reinsurer of the Reserves and Liabilities under
the Reinsured Policies, the Company shall transfer to
the Reinsurer cash in an amount equal to one hundred
percent (100%) of the Reserves and Liabilities, which
excludes all claim liabilities, as of the Effective
Date (the "Initial Reinsurance Premium"), less the
Expense Allowance described in Article V below (such
net amount being the "Initial Reinsurance
Consideration" as described in Schedule C attached
hereto). Such Initial Reinsurance Premium (shown on
Schedule C) shall be subject to further and final
adjustment as follows: (1) within ninety (90) days
after the Closing Date, the Reinsurer shall send a
notice to the Company advising the Company of the final
valuation of the Initial Reinsurance Premium, and (2)
the Company shall then have five (5) Business Days from
receipt of the aforementioned notice to make an
adjustment to the cash amount it transferred to the
Reinsurer on the Closing Date, in order to reflect the
final valuation of the Initial Reinsurance
Consideration pursuant to this Section 4.01."
<PAGE>
SECTION 5.-DEATH BENEFITS AND OTHER PAYMENTS
Section 6.01 of the Agreement is to be
replaced with the following:
"6.01. DEATH, ANNUITY BENEFITS AND PAYMENTS
UNDER SETTLEMENT OPTIONS. The Reinsurer shall assume
liability for, subject to Section 2.03, all death
benefits, all annuity benefits, all periodic or lump
sum payments on settlement options or withdrawals from
Dividends on deposit, and all surrender and endorsement
payments to Policyholders with respect to Reinsured
Policies (such death benefits, annuity benefits and
other payments are referred to collectively as
"Benefits"), and shall indemnify the Company with
respect to any such Benefits paid by the Company
incurred after the Effective Date."
SECTION 6.-ARTICLE VII
Article VII of the Agreement is to be
replaced with the following:
"NON-GUARANTEED ELEMENTS
7.01. PARTICIPATION. The Reinsurer shall
participate in the excess interest credited, dividends
and coupon ("Dividends") scales in effect on the
Effective Date of this Agreement. Should the Company
desire to change said scales, it shall do so only upon
the consent of the Reinsurer, which shall not be
unreasonably withheld. The Reinsurer shall only
reimburse those Dividends that are incurred after the
Effective Date. The Reinsurer may also make
recommendations about a change in the Dividend scales.
Article 7.02. OPTIONS. The Reinsurer shall
participate in all Dividend options provided under the
Reinsured Policies."
SECTION 7.-SCHEDULE A
Substitute the term "Reinsured Policies" for the
term "Policies" in paragraphs E.1., E.2. and F.1. of
Schedule A.
<PAGE>
SECTION 8.-SCHEDULE B
Substitute the Schedule B attached hereto as
Schedule B to the Agreement.
SECTION 9.-COUNTERPARTS
This Amendment to the Agreement may be executed in
several counterparts and each shall have the same force and
effect as an original.
SECTION 10.-REPLACEMENTS
Add a new Section 9.07 as follows:
"9.07. REPLACEMENTS. The replacement of any
Reinsured Contract, pursuant to any program of replacement
initiated by the Company or any Person acting on behalf or
in the place of the Company, including any receiver,
liquidator or rehabilitator, shall be considered as a
recaptured contract and not a surrender unless the
reinsurance provided by the Reinsurer hereunder is continued
for the new contract. Any contracts so surrendered and
deemed recaptured shall be treated in accordance with the
recapture terms in Schedule E."
SECTION 11.-EFFECT
Except as amended herein, the Agreement,
together with all Schedules and Exhibits, remains in full
force and effect.
IN WITNESS WHEREOF, UNIVERSAL GUARANTY LIFE
INSURANCE COMPANY and FIRST INTERNATIONAL LIFE INSURANCE
COMPANY have by their respective officers made and entered
into this Amendment as of the 30th day of September, 1996.
UNIVERSAL GUARANTY LIFE FIRST INTERNATIONAL LIFE
INSURANCE COMPANY INSURANCE COMPANY
James E. Melville Jeremy Starr
By By
President Vice President, Reinsurance
Title Title
<PAGE>
SCHEDULE B
EXPENSE ALLOWANCE
Expense Allowance = Base Allowance - Closing Interest
Base Allowance = P x Reserves and Liabilities +
Interest Adjustment Factor
Interest Adjustment Factor = $1,600,000 x (A - B)
Closing Interest = (Reserves and Liabilities - Policy Loans
on the Effective Date - Base Allowance)
x D x B/365
Where:
P = 23.7% for Paid-up permanent policies
43.4% for Paid-up term policies
23.0% for Dividends on deposit, endowments
on deposit and reserves on Paid-up
additions bought by Dividends
0.0% for provisions for policyholder
Dividends payable in the following year
100.0% for immediate payment of claim
reserves
3.0% for Annuities
A = 30 Year Treasury Rate in effect three (3)
Business Days prior to the Closing Date
B = 30 Year Treasury Rate on September 6, 1996
(which is 7.12%)
D = Calendar Days between Closing Date and
Effective Date
Records with:
First Character In-Force
"class base" Code
Paid-up Term
ETI A,N,T D
Other Term 4,5,8 B or C
Paid-up Permanent 1,2,3 B or C
Dividend Options amounts in any record
Annuities D,F,S amounts in any record
<PAGE>
SCHEDULE G
LIST OF REINSURED POLICIES
[A completed Schedule G will be prepared by the Reinsurer
and provided under separate cover]
AMENDMENT
to
ASSUMPTION REINSURANCE AGREEMENT
Between
UNIVERSAL GUARANTY LIFE INSURANCE COMPANY
hereinafter referred to as "the Company"
and
FIRST INTERNATIONAL LIFE INSURANCE COMPANY
hereinafter referred to as "the Reinsurer"
WHEREAS, the Company and the Reinsurer have made and
entered into an Assumption Reinsurance Agreement dated as of
September 30, 1996 (the "Assumption Agreement"); and
WHEREAS, the Company and the Reinsurer wish to amend
certain provisions of the Assumption Agreement;
NOW, THEREFORE, in consideration of the mutual
agreements, promises and covenants provided herein, the
Company and the Reinsurer hereby agree to amend the
Assumption Agreement as follows:
SECTION 1.-DEFINITIONS
All terms used in this Amendment shall be subject to
the definitions provided in the Assumption Agreement.
The definition of Reinsured Policies in Article I shall
be replaced with the following:
""REINSURED POLICIES" means all paid-up life
insurance and, if attached thereto, annuity policies,
contracts, binders or certificates of insurance, and
all riders, endorsements and amendments thereto,
whether written or oral, issued or assumed by the
Company, that are in force on the Effective Date,
except those offered in settlement to so called "HIV"
policyholders and paid-up business associated with the
Company's Jr./Sr. Plan Single Premium Interest
Sensitive Whole Life policies, including, without
limitation, Policy Loans, all such Reinsured Policies
being set forth in Schedule G of the Coinsurance
Agreement."
<PAGE>
SECTION 2.-COUNTERPARTS
This Amendment to the Assumption Agreement may be
executed in several counterparts and each shall have the
same force and effect as an original.
SECTION 3.-EFFECT
Except as amended herein, the Assumption
Agreement, together with all Exhibits, remains in full force
and effect.
IN WITNESS WHEREOF, UNIVERSAL GUARANTY LIFE INSURANCE
COMPANY and FIRST INTERNATIONAL LIFE INSURANCE COMPANY have
by their respective officers made and entered into this
Amendment as of the 30th day of September, 1996.
UNIVERSAL GUARANTY LIFE FIRST INTERNATIONAL LIFE
INSURANCE COMPANY INSURANCE COMPANY
James E. Melville Jeremy Starr
By By
President Vice President, Reinsurance
Title Title
SECOND AMENDMENT
to
ASSUMPTION REINSURANCE AGREEMENT
Between
UNIVERSAL GUARANTY LIFE INSURANCE COMPANY
hereinafter referred to as "the Company"
and
FIRST INTERNATIONAL LIFE INSURANCE COMPANY
hereinafter referred to as "the Reinsurer"
WHEREAS, the Company and the Reinsurer have made and
entered into an Assumption Reinsurance Agreement dated as of
September 30, 1996 (the "Assumption Agreement"); and
WHEREAS, the Company and the Reinsurer have made and
entered into an Amendment to the Assumption Agreement dated
as of September 30, 1996; and
WHEREAS, the Company and the Reinsurer wish hereby to
further amend the Assumption Agreement;
NOW, THEREFORE, in consideration of the mutual
agreements, promises and covenants provided herein, the
Company and the Reinsurer hereby agree to amend the
Assumption Agreement as follows:
SECTION 1.-REGULATORY CONSENTS AND APPROVALS
Section 2.1 of the Assumption Agreement is to be
replaced with the following:
"Section 2.1. COVERAGE. After the Effective Date
and upon the terms and conditions, including Article
XVI of the Coinsurance Agreement, and other provisions
of this Assumption Agreement and any required
governmental and regulatory consents and approvals,
including consent and approval by the State of Ohio,
the Company, if requested to do so by the Reinsurer,
hereby agrees to cede to the Reinsurer and the
Reinsurer hereby agrees to accept and reinsure, on an
assumption basis, any Reinsured Policy. Reinsurance
pursuant to this Section 2.1 shall occur no less
frequently than on a monthly basis until all Reinsured
Policies have been assumed pursuant to the provisions
of Article III hereunder; provided, however, that
<PAGE>
reinsurance may occur more frequently if the parties
hereto agree."
SECTION 2.-COUNTERPARTS
This Second Amendment to the Assumption Agreement
may be executed in several counterparts and each shall have
the same force and effect as an original.
SECTION 3.-EFFECT
Except as amended herein, the Assumption
Agreement, together with all Exhibits, remains in full force
and effect.
IN WITNESS WHEREOF, UNIVERSAL GUARANTY LIFE INSURANCE
COMPANY and FIRST INTERNATIONAL LIFE INSURANCE COMPANY have
by their respective officers made and entered into this
Second Amendment as of the 5th day of December, 1996.
UNIVERSAL GUARANTY LIFE FIRST INTERNATIONAL LIFE
INSURANCE COMPANY INSURANCE COMPANY
James E. Melville Jeremy Starr
By By
President Vice President, Reinsurance
Title Title
