<PAGE> 1
(LOGO)
HOME OFFICE:
III UNITED PLAZA
8545 UNITED PLAZA BLVD.
BATON ROUGE, LOUISIANA 70809-2251
(800) 825-7568
INDIVIDUAL AND GROUP FIXED AND VARIABLE
DEFERRED ANNUITY CONTRACTS AND CERTIFICATES
ISSUED BY
UNITED COMPANIES SEPARATE ACCOUNT ONE
AND
UNITED COMPANIES LIFE INSURANCE COMPANY
The Individual and Group Fixed and Variable Deferred Annuity Contracts and
Certificates (the "Contracts and "Certificates") described in this Prospectus
provide for accumulation of values on a fixed and variable basis and payment of
annuity payments on a fixed basis. The Contracts are designed for use by
individuals in retirement plans on a Qualified or Non-Qualified basis. (See
"Definitions.")
Purchase Payments for the Contracts will be allocated to a segregated
investment account of United Companies Life Insurance Company (the "Company")
which account has been designated United Companies Separate Account One (the
"Separate Account") or to the Company's Fixed Account or Market Value Adjustment
Account ("MVA Account"). Under certain circumstances, however, Purchase Payments
may initially be allocated to the Scudder Money Market Sub-Account of the
Separate Account. Currently, an Owner or Certificate Holder may not be invested
in more than ten investment options at any time (an investment option is each
Sub-Account of the Separate Account, the Fixed Account, and each MVA Account
Guarantee Period). The Separate Account invests in shares of the following:
MFS(R) Variable Insurance Trust(SM) (MFS Emerging Growth Series and MFS Total
Return Series); Federated Insurance Series (Federated High Income Bond Fund II,
Federated Utility Fund II and Federated Fund for U.S. Government Securities II);
Dreyfus Stock Index Fund; Dreyfus Variable Investment Fund (Growth and Income
Portfolio); Scudder Variable Life Investment Fund (Money Market Portfolio and
International Portfolio); Van Eck Worldwide Insurance Trust (Gold and Natural
Resources Fund); and The Alger American Fund (Alger American Growth Portfolio).
The Contracts and Certificates are not deposits or obligations of, or
guaranteed or endorsed by, any financial institution, and are not federally
insured by the Federal Deposit Insurance Corporation, the Federal Reserve Board,
or any other agency. Investment in the Contracts and Certificates is subject to
risk that may cause the value of the Owner's or Certificate Holder's investment
to fluctuate, and when the Contracts and Certificates are surrendered, the value
may be higher or lower than the Purchase Payments.
This Prospectus concisely sets forth the information a prospective investor
should know before investing. Additional information about the Contracts and
Certificates is contained in the Statement of Additional Information which is
available at no charge. The Statement of Additional Information has been filed
with the Securities and Exchange Commission and is incorporated herein by
reference. The Table of Contents of the Statement of Additional Information can
be found on page S-6 of this Prospectus. For the Statement of Additional
Information, call or write to the Company at: (800) 825-7568, P.O. Box 3257,
8545 United Plaza Boulevard, Baton Rouge, LA 70821-3257.
INQUIRIES: Any inquiries can be made by telephone or in writing to the Company
at the address listed above.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION NOR HAS THE COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY
OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
This Prospectus and the Statement of Additional Information are dated May 1,
1996.
This Prospectus should be kept for future reference.
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Definitions.............................. 1
Highlights............................... 4
Fee Table................................ 7
Condensed Financial Information.......... 11
The Company.............................. 12
The Separate Account..................... 12
Eligible Funds and Portfolios............ 13
MFS(R) Variable Insurance Trust(SM).... 13
MFS Emerging Growth Series.......... 13
MFS Total Return Series............. 13
Federated Insurance Series............. 13
Federated High Income Bond Fund
II............................... 13
Federated Utility Fund II........... 14
Federated Fund for U.S. Government
Securities II.................... 14
Dreyfus Stock Index Fund............... 14
Dreyfus Variable Investment Fund....... 14
Growth and Income Portfolio......... 14
Scudder Variable Life Investment
Fund................................ 14
Money Market Portfolio.............. 14
International Portfolio............. 14
Van Eck Worldwide Insurance Trust...... 14
Gold and Natural Resources Fund..... 15
The Alger American Fund................ 15
Alger American Growth Portfolio..... 15
Voting Rights.......................... 15
Substitution of Securities............. 15
Fixed Account Options.................... 16
General................................ 16
Fixed Account Option................... 16
Market Value Adjustment Account........ 16
Charges and Deductions................... 18
Deduction for Contingent Deferred Sales
Charge (Sales Load)................. 18
Reduction or Elimination of the
Contingent Deferred Sales Charge.... 19
Deduction for Mortality and Expense
Risk Charge......................... 19
Deduction for Administrative Charge.... 20
Deduction for Contract and Certificate
Maintenance Charges................. 20
Deduction for Transfer Fee............. 20
Deduction for Premium and Other
Taxes............................... 21
Deduction for Expenses of the Eligible
Funds............................... 21
</TABLE>
i
<PAGE> 3
TABLE OF CONTENTS -- (CONTINUED)
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
The Contracts and Certificates........... 21
Owner/Certificate Holder............... 21
Joint Owners/Joint Certificate
Holders............................. 22
Contract Owner......................... 22
Annuitant.............................. 22
Assignment............................. 22
Purchase Payments, Contract Value and
Certificate Holder's Account Value..... 23
Purchase Payments...................... 23
Allocation of Purchase Payments........ 23
Dollar Cost Averaging.................. 23
Rebalancing............................ 24
Asset Allocation Programs.............. 24
Contract Value......................... 24
Certificate Holder's Account Value..... 25
Accumulation Units..................... 25
Accumulation Unit Value................ 25
Transfers................................ 26
Transfers During the Accumulation
Period.............................. 26
Withdrawals.............................. 27
Systematic Withdrawal Program.......... 27
Suspension or Deferral of Payments..... 28
Proceeds Payable on Death................ 28
Death of Owner or Certificate Holder
During the Accumulation Period...... 28
Death Benefit Amount During the
Accumulation Period................. 28
Death Benefit Options During the
Accumulation Period................. 29
Death of Owner/Certificate Holder
During the Annuity Period........... 30
Death of Annuitant..................... 30
Payment of Death Benefit............... 30
Beneficiary............................ 30
Change of Beneficiary.................. 30
Annuity Provisions....................... 31
General................................ 31
Annuity Date........................... 31
Selection or Change of an Annuity
Option.............................. 31
Frequency and Amount of Annuity
Payments............................ 31
Fixed Annuity.......................... 31
Annuity Options........................ 32
Distributor.............................. 32
Performance Information.................. 32
Money Market Sub-Account............... 32
Other Sub-Accounts..................... 32
Hypothetical Performance............... 33
</TABLE>
ii
<PAGE> 4
TABLE OF CONTENTS -- (CONTINUED)
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Tax Status............................... 34
General................................ 34
Diversification........................ 34
Contracts and Certificates Owned by
Other than Natural Persons.......... 35
Multiple Contracts/Certificates........ 36
Tax Treatment of Assignments........... 36
Income Tax Withholding................. 36
Tax Treatment of Withdrawals -- Non-
Qualified Contracts and
Certificates........................ 36
Qualified Contracts and Certificates... 37
Tax Treatment of
Withdrawals -- Qualified Contracts
and Certificates.................... 38
Tax-Sheltered Annuities -- Withdrawal
Limitations......................... 39
Section 457 -- Deferred Compensation
Plans............................... 39
Additional Information About The
Company................................ 40
Selected Financial Data................ 40
Business............................... 40
Government Regulation and
Legislation......................... 47
Management's Discussion and Analysis of
Financial Condition and Results of
Operations.......................... 50
Results of Operations.................. 52
The Company's Directors and Executive
Officers............................ 61
Executive Compensation................. 63
Legal Proceedings........................ 65
Experts.................................. 65
Additional Information About the Separate
Account................................ 65
Registration Statement................... 65
Legal Opinions........................... 65
Financial Statements..................... 65
Financial Statement Schedules............ S-1
Table of Contents of the Statement of
Additional Information................. S-6
Appendix................................. A-1
</TABLE>
iii
<PAGE> 5
DEFINITIONS
ACCUMULATION PERIOD -- The period prior to the Annuity Date during which
Purchase Payments may be made.
ACCUMULATION UNIT -- A unit of measure used to determine the value of the
Owner's or Certificate Holder's interest in a Sub-Account of the Separate
Account during the Accumulation Period.
ADJUSTED CONTRACT VALUE -- The Contract Value less any applicable Premium Tax
and Contract Maintenance Charge. This amount is applied to the applicable
Annuity Tables to determine Annuity Payments under an individual Contract.
AGE -- The age of any Owner, Certificate Holder or Annuitant on his/her last
birthday.
ANNUITANT -- The natural person on whose life Annuity Payments to an Owner or
Certificate Holder are based. On or after the Annuity Date, the Annuitant shall
also include any Joint Annuitant.
ANNUITY DATE -- The date on which Annuity Payments begin.
ANNUITY OPTIONS -- Options available for Annuity Payments.
ANNUITY PAYMENTS -- The series of payments made to the Owner or Certificate
Holder or any named payee after the Annuity Date under the Annuity Option
selected.
ANNUITY PERIOD -- The period of time beginning with the Annuity Date during
which Annuity Payments are made.
BENEFICIARY -- The person(s) or entity(ies) who will receive the death benefit
payable under a Contract or Certificate.
CERTIFICATE -- The document issued to a Certificate Holder to evidence a
Certificate Holder's Account established under a group Contract.
CERTIFICATE ANNIVERSARY -- An anniversary of the Certificate Issue Date.
CERTIFICATE ISSUE DATE -- The date a Certificate is issued to a Certificate
Holder.
CERTIFICATE HOLDER -- A person who has established a Certificate Holder's
Account under a group Contract.
CERTIFICATE HOLDER'S ACCOUNT -- A record established for each Certificate Holder
to maintain values under a group Contract.
CERTIFICATE HOLDER'S ACCOUNT VALUE -- The dollar value as of any Valuation
Period of all amounts accumulated in a Certificate Holder's Account.
CERTIFICATE HOLDER'S ADJUSTED ACCOUNT VALUE -- A Certificate Holder's Account
Value less any applicable Premium Tax and Certificate Maintenance Charge. This
amount is applied to the applicable Annuity Tables to determine Annuity Payments
under a Certificate.
CERTIFICATE WITHDRAWAL VALUE -- The Certificate Holder's Account Value less any
applicable Premium Tax, less any Contingent Deferred Sales Charge, less any
applicable Certificate Maintenance Charge and plus or minus any Market Value
Adjustment.
CERTIFICATE YEAR -- The first Certificate Year is the annual period which begins
on the Certificate Issue Date. Subsequent Certificate Years begin on each
anniversary of the Certificate Issue Date.
COMPANY -- United Companies Life Insurance Company.
CONTRACT ANNIVERSARY -- An anniversary of the Issue Date.
CONTRACT ISSUE DATE -- The date on which an individual Contract became
effective.
CONTRACT OWNER -- The person or entity to which a group Contract is issued.
1
<PAGE> 6
CONTRACT VALUE -- The dollar value as of any Valuation Period of all amounts
accumulated in an individual Contract.
CONTRACT WITHDRAWAL VALUE -- The Contract Value of an individual Contract less
any applicable Premium Tax, less any Contingent Deferred Sales Charge, less any
applicable Contract Maintenance Charge and plus or minus any Market Value
Adjustment.
CONTRACT YEAR -- The first Contract Year is the annual period which begins on
the Issue Date. Subsequent Contract Years begin on each anniversary of the Issue
Date.
CURRENT INTEREST RATE -- The interest rate credited to a Certificate Holder's
Account Value by the Company for any given Guarantee Period in the MVA Account
or the Fixed Account.
EFFECTIVE DATE -- The Effective Date of a Guarantee Period with a Current
Interest Rate.
ELIGIBLE FUND -- An investment entity into which assets of the Separate Account
will be invested.
FIXED ACCOUNT -- An investment option within the General Account.
FIXED ANNUITY -- A series of payments made during the Annuity Period which are
guaranteed as to dollar amount by the Company.
GENERAL ACCOUNT -- The Company's general investment account which contains all
the assets of the Company with the exception of the Separate Account and other
segregated asset accounts.
GUARANTEE PERIOD -- The period for which the Current Interest Rate is credited
in either the MVA Account or the Fixed Account.
INTEREST RATES -- All stated interest rates are effective annual yields.
MARKET VALUE ADJUSTMENT -- An adjustment to the amount withdrawn or transferred
from the MVA Account prior to the end of the applicable Guarantee Period. The
adjustment reflects the change in the value of the funds withdrawn or
transferred due to the change in the interest rates since the beginning of the
Guarantee Period.
MVA ACCOUNT -- An investment option where the Company guarantees the rate of
interest for a specified period and where withdrawals or transfers may be
subject to a Market Value Adjustment.
NET PURCHASE PAYMENT -- A Purchase Payment less any applicable Premium Tax.
NON-QUALIFIED CONTRACTS AND CERTIFICATES -- Contracts and Certificates issued
under non-qualified plans which do not receive favorable tax treatment under
Sections 401, 403(b), 408 or 457 of the Internal Revenue Code of 1986, as
amended (the "Code").
OWNER -- The person or entity entitled to the ownership rights stated in an
individual Contract.
PORTFOLIO -- A segment of an Eligible Fund which constitutes a separate and
distinct class of shares which may also sometimes be referred to herein as a
Series or a Fund.
PREMIUM TAX -- Any premium taxes paid to any governmental entity assessed
against Purchase Payments, Contract Values under individual Contracts or
Certificate Holders' Account Values.
QUALIFIED CONTRACTS AND CERTIFICATES -- Contracts and Certificates issued under
qualified plans which receive favorable tax treatment under Sections 401,
403(b), 408 or 457 of the Code.
SEPARATE ACCOUNT -- The Company's Separate Account designated as United
Companies Separate Account One.
SUB-ACCOUNT -- Separate Account assets are divided into Sub-Accounts. Assets of
each Sub-Account will be invested in shares of an Eligible Fund or a Portfolio
of an Eligible Fund.
VALUATION DATE -- Each day on which the Company and the New York Stock Exchange
("NYSE") are open for business.
2
<PAGE> 7
VALUATION PERIOD -- The period of time beginning at the close of business of the
NYSE on each Valuation Date and ending at the close of business for the next
succeeding Valuation Date.
WRITTEN REQUEST -- A request in writing, in a form satisfactory to the Company,
which is received by the Company.
3
<PAGE> 8
HIGHLIGHTS
GENERAL
The Contracts and Certificates offered by this Prospectus are combined
fixed and variable deferred annuity contracts and certificates issued by United
Companies Life Insurance Company (the "Company"). Pursuant to selections made by
the Owner or Certificate Holder, Net Purchase Payments are allocated to (i) a
segregated investment account of the Company which has been designated United
Companies Separate Account One (the "Separate Account"), (ii) the Fixed Account,
which is an investment option within the General Account of the Company; and
(iii) the MVA Account, which is an investment option within the General Account
where the Company guarantees the rate of interest for a specified period and
where withdrawals or transfers may be subject to a Market Value Adjustment.
Under certain circumstances, however, Net Purchase Payments may initially be
allocated to the Scudder Money Market Sub-Account of the Separate Account (see
"Right to Examine Period" below).
SEPARATE ACCOUNT
The Separate Account is divided into Sub-Accounts. The Sub-Accounts invest
in the following:
MFS(R) Variable Insurance Trust(SM)
MFS Emerging Growth Series
MFS Total Return Series
Federated Insurance Series
Federated High Income Bond Fund II
Federated Utility Fund II
Federated Fund for U.S. Government Securities II
Dreyfus Stock Index Fund
Dreyfus Variable Investment Fund
Growth and Income Portfolio
Scudder Variable Life Investment Fund
Money Market Portfolio
International Portfolio
Van Eck Worldwide Insurance Trust
Gold and Natural Resources Fund
The Alger American Fund
Alger American Growth Portfolio
Owners and Certificate Holders bear the investment risk for all amounts
allocated to the Separate Account.
MVA ACCOUNT
The MVA Account offers investment options which pay fixed rates of interest
declared by the Company for specified periods (currently, 3 years, 5 years and 7
years) from the date amounts are allocated to the MVA Account. Please contact
the Company or the agent from whom this Prospectus was obtained for information
as to currently available options.
Such declared rates will vary from time to time but will not be less than
3% per annum, and, once established for a particular allocation, will not change
during the Guarantee Period. However, withdrawals, transfers or annuitization
prior to the end of the Guarantee Period may be subject to a Market Value
Adjustment. Owners and Certificate Holders bear the risk that amounts
reallocated within, or prematurely withdrawn, transferred or annuitized from the
MVA Account prior to the end of their respective Guarantee Period could result
in the Owner or Certificate Holder receiving less than the Purchase Payments or
amounts so allocated.
4
<PAGE> 9
RIGHT TO EXAMINE PERIOD
The individual Contract or the Certificate may be returned to the Company
for any reason within ten (10) calendar days, or longer in states where
required, (30 days if purchased by individuals who are 60 years of age or older
on the Issue Date/Certificate Issue Date in California, or twenty (20) calendar
days from the date of receipt with respect to the circumstances described in (c)
below) after its receipt by the Owner or Certificate Holder ("Right to Examine
Period"). It may be returned to the Company at the address listed on the cover
page. When the Contract or Certificate is received by the Company, it will be
voided as if it had never been in force. Upon its return, the Company will
refund the Contract Value or Certificate Holder's Account Value next computed
after receipt of the Contract or Certificate by the Company except in the
following circumstances: (a) where the Contract or Certificate is purchased
pursuant to an Individual Retirement Annuity; (b) in those states which require
the Company to refund Purchase Payments, less withdrawals; or (c) in the case of
Contracts or Certificates which are deemed by certain states to be replacing an
existing annuity or insurance contract and which require the Company to
refund Purchase Payments, less withdrawals. With respect to the circumstances
described in (a), (b) and (c) above, the Company will refund the greater of
Purchase Payments, less any withdrawals, or the Contract Value or Certificate
Holder's Account Value, and will allocate all Purchase Payments made during the
Right to Examine Period to the Scudder Money Market Sub-Account until the
expiration of fifteen days from the Issue Date or Certificate Issue Date (or
twenty-five days in the case of Contracts or Certificates described under (c)
above). Upon the expiration of the fifteen day period (or twenty-five day period
with respect to Contracts or Certificates described under (c)), the Sub-Account
value of the Scudder Money Market Sub-Account will be allocated to the Separate
Account, the Fixed Account and the MVA Account in accordance with the election
made by the Owner or Certificate Holder at the time the Contract or Certificate
is issued.
CHARGES
CONTINGENT DEFERRED SALES CHARGES -- A Contingent Deferred Sales Charge is
assessed against Purchase Payments withdrawn. The Charge is calculated at the
time of each withdrawal and will be deducted from the account value remaining in
an individual Contract or Certificate. The Contingent Deferred Sales Charge is
based upon the length of time from receipt of Purchase Payments to the date of
withdrawal. Each Purchase Payment is tracked as to its date of receipt and
withdrawals thereof are determined in accordance with the following:
CONTINGENT DEFERRED SALES CHARGE:
<TABLE>
<CAPTION>
NUMBER OF COMPLETE
YEARS SINCE RECEIPT OF
PURCHASE PAYMENTS CHARGE
- ----------------------- ------
<S> <C>
0 years............................................................ 8.5%
1 years............................................................ 8.0%
2 years............................................................ 7.5%
3 years............................................................ 7.0%
4 years............................................................ 6.5%
5 years............................................................ 6.0%
6 years............................................................ 5.0%
7 years............................................................ 4.0%
8 years............................................................ 3.0%
9 years............................................................ 2.0%
10 years or more................................................... 0.0%
</TABLE>
FREE WITHDRAWAL -- Owners/Certificate Holders may make a partial withdrawal
without incurring a Contingent Deferred Sales Charge of the Free Withdrawal
amount. On each Contract or Certificate Anniversary, the Free Withdrawal amount
is equal to the greater of: (a) the cumulative earnings in the Owner's Contract
Value or the Certificate Holder's Account Value or (b) 10% of Purchase Payments
as of
5
<PAGE> 10
the beginning of the current Contract or Certificate Year. On other than
Contract and Certificate Anniversaries, the Free Withdrawal amount is equal to
the Free Withdrawal amount at the beginning of the Contract or Certificate Year
less amounts withdrawn without deduction of Contingent Deferred Sales Charges
during the current Contract or Certificate Year. (See "Charges and
Deductions -- Deduction for Contingent Deferred Sales Charge.")
MORTALITY AND EXPENSE RISK CHARGE -- Each Valuation Period, the Company
deducts a Mortality and Expense Risk Charge from the Separate Account which is
equal, on an annual basis, to 1.52% of the average daily net asset value of each
Sub-Account of the Separate Account. This Charge compensates the Company for
assuming the mortality and expense risks under the Contracts and Certificates.
(See "Charges and Deductions -- Deduction for Mortality and Expense Risk
Charge.")
ADMINISTRATIVE CHARGE -- Each Valuation Period, the Company deducts an
Administrative Charge from the Separate Account which is equal, on an annual
basis, to .15% of the average daily net asset value of each Sub-Account of the
Separate Account. This Charge compensates the Company for costs associated with
the administration of the Contracts, Certificates and the Separate Account. (See
"Charges and Deductions -- Deduction for Administrative Charge.")
CONTRACT AND CERTIFICATE MAINTENANCE CHARGES -- The Company makes a
deduction of $30.00 each Contract or Certificate Year. However, during the
Accumulation Period, if the Owner's Contract Value or the Certificate Holder's
Account Value on the Contract or Certificate Anniversary is at least $75,000,
then no Contract or Certificate Maintenance Charge is deducted. If a total
withdrawal is made on other than a Contract or Certificate Anniversary and the
Owner's Contract Value or the Certificate Holder's Account Value for the
Valuation Period during which the total withdrawal is made is less than $75,000,
the full Contract or Certificate Maintenance Charge will be deducted at the time
of the total withdrawal. During the Annuity Period, no Contract or Certificate
Maintenance Charge is deducted. (See "Charges and Deductions -- Deduction for
Contract and Certificate Maintenance Charges.")
TRANSFER FEE -- Under certain circumstances, a Transfer Fee may be assessed
when an Owner or Certificate Holder transfers Contract Values or Certificate
Holder's Account Values between Sub-Accounts or to or from the Fixed Account.
(See "Charges and Deductions -- Deduction for Transfer Fee.")
PREMIUM TAXES -- Some state and other jurisdictions assess Premium Taxes at
the time Purchase Payments are made; others assess premium taxes at the time
annuity payments begin. The Company currently deducts Premium Taxes when they
are due. (See "Charges and Deductions -- Deduction for Premium and Other
Taxes.")
TAXES
There is a ten percent (10%) federal income tax penalty that may be applied
to the taxable income portion of any distribution from the individual Contracts
and the Certificates. However, the penalty is not imposed under certain
circumstances. See "Tax Status -- Tax Treatment of Withdrawals -- Non-Qualified
Contracts and Certificates" and "Tax Treatment of Withdrawals -- Qualified
Contracts and Certificates." For a further discussion of the taxation of the
Contracts and Certificates, see "Tax Status."
Withdrawals of amounts attributable to contributions made pursuant to a
salary reduction agreement (as defined in Section 403(b)(11) of the Code) are
limited to circumstances only when the Owner/Certificate Holder: (a) attains age
59 1/2; (b) separates from service; (c) dies; (d) becomes disabled (within the
meaning of Section 72(m)(7) of the Code); or (e) in the case of hardship.
Withdrawals for hardship are restricted to the portion of the Owner's Contract
Value/Certificate Holder's Account Value which represents contributions made by
the Owner/Certificate Holder and does not include any investment results. The
limitations on withdrawals became effective on January 1, 1989 and apply only
to: (1) salary reduction contributions made after December 31, 1988; (2) income
attributable to such contributions; and (3) income attributable to amounts held
as of December 31, 1988. The limitations on withdrawals do not affect rollovers
or transfers between certain Qualified Plans. Tax penalties may also apply. (See
"Tax Status -- Tax Treatment of Withdrawals -- Qualified Contracts.")
Owners/Certificate
6
<PAGE> 11
Holders should consult their own tax counsel or other tax adviser regarding any
distributions. ( See "Tax Status -- Tax-Sheltered Annuities -- Withdrawal
Limitations.")
See "Tax Status -- Diversification" for a discussion of owner control of
the underlying investments in a variable annuity contract.
FIXED ACCOUNT AND MVA ACCOUNT
Because of certain exemptive and exclusionary provisions, interests in the
Fixed Account are not registered under the Securities Act of 1933 and the Fixed
Account and the MVA Account are not registered as investment companies under the
Investment Company Act of 1940, as amended ("1940 Act"). Accordingly, neither
the Fixed Account nor any interests therein are subject to the provisions of
these Acts, and the MVA Account is not registered under the 1940 Act. The
Company has been advised that the staff of the Securities and Exchange
Commission has not reviewed the disclosures in the Prospectus relating to the
Fixed Account. Disclosures regarding the Fixed Account may, however, be subject
to certain generally applicable provisions of the federal securities laws
relating to the accuracy and completeness of statements made in prospectuses.
UNITED COMPANIES SEPARATE ACCOUNT ONE
FEE TABLE
OWNER AND CERTIFICATE HOLDER TRANSACTION EXPENSES
Contingent Deferred Sales Charge
<TABLE>
<CAPTION>
NUMBER OF COMPLETE
YEARS SINCE RECEIPT OF
(see Note 1 below) PURCHASE PAYMENT CHARGE
----------------------- ------
<S> <C> <C>
0 years 8.5%
1 years 8.0%
2 years 7.5%
3 years 7.0%
4 years 6.5%
5 years 6.0%
6 years 5.0%
7 years 4.0%
8 years 3.0%
9 years 2.0%
10 yearsor more 0.0%
</TABLE>
Transfer Fee (see Note 2 below) No charge for first 12 transfers in a
Contract or Certificate Year;
thereafter the fee is the lesser of
$25 or 2% of the amount transferred.
CONTRACT AND CERTIFICATE $30 per individual Contract or
MAINTENANCE CHARGES Certificate per Contract or
(see Note 3 below) Certificate Year.
SEPARATE ACCOUNT ANNUAL EXPENSES
(as a percentage of average account value)
Mortality and Expense Risk Charge 1.52%
Administrative Charge .15%
-------
Total Separate Account Annual Expenses 1.67%
7
<PAGE> 12
ELIGIBLE FUND ANNUAL EXPENSES
(as a percentage of the average daily net assets of a Portfolio)
<TABLE>
<CAPTION>
MANAGEMENT OTHER TOTAL
FEES EXPENSES ANNUAL EXPENSES
---------- -------- ---------------
<S> <C> <C> <C>
MFS(R) VARIABLE INSURANCE TRUSTSM
MFS EMERGING GROWTH SERIES(A)................... .75% .25% 1.00%
MFS TOTAL RETURN SERIES(A)...................... .75% .25% 1.00%
FEDERATED INSURANCE SERIES
Federated High Income Bond Fund II(b)........... .00% .80% .80%
Federated Utility Fund II(c).................... .00% .85% .85%
Federated Fund for U.S. Government Securities
II(d)........................................ .00% .80% .80%
DREYFUS STOCK INDEX FUND(E)....................... .27% .12% .39%
DREYFUS VARIABLE INVESTMENT FUND
Growth and Income Portfolio(f).................. .72% .20% .92%
SCUDDER VARIABLE LIFE INVESTMENT FUND
Money Market Portfolio.......................... .37% .13% .50%
International Portfolio......................... .875% .205% 1.08%
VAN ECK WORLDWIDE INSURANCE TRUST
Gold and Natural Resources Fund(g).............. 1.00% .21% 1.21%
THE ALGER AMERICAN FUND
Alger American Growth Portfolio................. .75% .10% .85%
</TABLE>
- ---------------
(a) The adviser has agreed to bear expenses for the MFS Emerging Growth Series
and the MFS Total Return Series such that a Series' aggregate operating
expenses shall not exceed, on an annualized basis, 1.00% of the average
daily net assets of the Series from November 2, 1994 through December 31,
1996, 1.25% of the average daily net assets of the Series from January 1,
1997 through December 31, 1998, and 1.50% of the average daily net assets
of the Series from January 1, 1999 through December 31, 2004; provided,
however, that this obligation may be terminated or revised at any time. To
the extent that actual Series' expenses do not reach the limit, the Series
will reimburse MFS for prior expenses paid by MFS on behalf of the Series
such that such Series' expense ratio does not exceed 1.00% of its average
daily net assets. Absent this expense arrangement, "Other Expenses" and
"Total Annual Expenses" would be 2.16% and 2.91%, respectively for the MFS
Emerging Growth Series and 2.02% and 2.77%, respectively for the MFS Total
Return Series.
(b) The management fee has been reduced to reflect the voluntary waiver of the
management fee. The adviser can terminate this voluntary waiver at any time
at in its sole discretion. The maximum management fee is .60%. The total
operating expenses were 4.20% absent the voluntary waiver of the management
fee and the voluntary reimbursement of certain other operating expenses.
(c) The management fee has been reduced to reflect the voluntary waiver of the
management fee. The adviser can terminate this voluntary waiver at any time
at in its sole discretion. The maximum management fee is .75%. The total
operating expenses were 3.09% absent the voluntary waiver of the management
fee and the voluntary reimbursement of certain other operating expenses.
(d) The management fee has been reduced to reflect the voluntary waiver of the
management fee. The adviser can terminate this voluntary waiver at any time
at in its sole discretion. The maximum management fee is .60%. The total
operating expenses were 5.61% absent the voluntary waiver of the management
fee and the voluntary reimbursement of certain other operating expenses.
(e) The fees and expenses shown above take into account an arrangement pursuant
to which the manager and/or administrator for Dreyfus Stock Index Fund
waive fees and/or assume expenses so that aggregate expenses for a fiscal
year (excluding brokerage commissions, transaction fees and extraordinary
expenses) do not exceed .40%. This arrangement is in effect until the
manager and/or the administrator give Dreyfus Stock Index Fund at least 180
days prior notice to the contrary. Absent such arrangements, the
"Management Fees," "Other Expenses" and "Total Annual Expenses" would be
.30%, .12% and .42%, respectively.
8
<PAGE> 13
(f) The fees and expenses shown above take into account an arrangement pursuant
to which the investment adviser waived a portion of its management fees
during 1995. Absent such fee waiver, the management fee for the Portfolio
is .75%. There is currently no management fee waiver arrangement in effect
during 1996.
(g) Prior to October 3, 1995, the effective rate of the management fee was
.75%. The management fee has been restated for 1996 to reflect the new
management fee.
EXAMPLES (SEE NOTE 4 BELOW)
An Owner/Certificate Holder would pay the following expenses on a $1,000
investment, assuming a 5% annual return on assets: (a) if the
Contract/Certificate is surrendered at the end of each time period; (b) if the
Contract/Certificate is not surrendered or if the Contract/Certificate is
annuitized.
<TABLE>
<CAPTION>
TIME PERIODS
--------------------------
1 YEAR 3 YEARS
------ -------
<S> <C> <C> <C> <C>
MFS(R) VARIABLE INSURANCE TRUST(SM)
MFS Emerging Growth Series............................... a) $ 113 a) $ 162
b) $ 28 b) $ 87
MFS Total Return Series.................................. a) $ 113 a) $ 162
b) $ 28 b) $ 87
FEDERATED INSURANCE SERIES
Federated High Income Bond Fund II....................... a) $ 111 a) $ 156
b) $ 26 b) $ 81
Federated Utility Fund II................................ a) $ 112 a) $ 157
b) $ 27 b) $ 82
Federated Fund for U.S. Government Securities II......... a) $ 111 a) $ 156
b) $ 26 b) $ 81
DREYFUS STOCK INDEX FUND
a) $ 107 a) $ 143
b) $ 22 b) $ 68
DREYFUS VARIABLE INVESTMENT FUND
Growth and Income Portfolio.............................. a) $ 112 a) $ 159
b) $ 27 b) $ 84
SCUDDER VARIABLE LIFE INVESTMENT FUND
Money Market Portfolio................................... a) $ 108 a) $ 147
b) $ 23 b) $ 72
International Portfolio.................................. a) $ 114 a) $ 164
b) $ 29 b) $ 89
VAN ECK WORLDWIDE INSURANCE TRUST
Gold and Natural Resources Fund.......................... a) $ 115 a) $ 168
b) $ 30 b) $ 93
THE ALGER AMERICAN FUND
Alger American Growth Portfolio.......................... a) $ 112 a) $ 157
b) $ 27 b) $ 82
</TABLE>
THE ANNUAL EXPENSES OF THE ELIGIBLE FUNDS AND THE EXAMPLES ARE BASED ON
DATA PROVIDED BY THE RESPECTIVE ELIGIBLE FUNDS. THE COMPANY HAS NOT
INDEPENDENTLY VERIFIED SUCH DATA.
NOTES TO FEE TABLE AND EXAMPLES
The Fee Table is provided to assist Owners and Certificate Holders in
understanding the various costs and expenses that they will bear directly or
indirectly. The Fee Table reflects expenses of both the Separate
9
<PAGE> 14
Account and the Eligible Funds. For more complete descriptions of the various
costs and expenses involved, see "Charges and Deductions" in this Prospectus and
the Prospectuses for each of the Eligible Funds. Premium Taxes may also be
applicable, although they do not appear in this table.
1. Under certain circumstances a Free Withdrawal can be made which is not
subject to a Contingent Deferred Sales Charge.
2. Transfers made at the end of the Right to Examine Period and any
transfers made pursuant to an approved Dollar Cost Averaging Program and/or
Rebalancing Program will not be counted in determining the application of the
Transfer Fee.
3. During the Accumulation Period, if the Owner's Contract Value or the
Certificate Holder's Account Value on the Contract or Certificate Anniversary is
at least $75,000, then no Contract or Certificate Maintenance Charge is
deducted. If a total withdrawal is made on other than a Contract or Certificate
Anniversary and the Owner's Contract Value or Certificate Holder's Account Value
for the Valuation Period during which the total withdrawal is made is less than
$75,000, the full Contract or Certificate Maintenance Charge will be deducted at
the time of the total withdrawal. During the Annuity Period, no Contract or
Certificate Maintenance Charges are deducted.
4. The Examples assume an estimated $25,000 Contract Value or Certificate
Holder's Account Value so that the Contract and Certificate Maintenance Charges
per $1,000 of net asset value in the Separate Account are $1.20. Such charge
would be higher for smaller values and lower for higher values.
5. THE EXAMPLES SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE
EXPENSES. ACTUAL EXPENSES MAY BE GREATER OR LESS THAN THOSE SHOWN.
10
<PAGE> 15
CONDENSED FINANCIAL INFORMATION
ACCUMULATION UNIT VALUES
The following schedule includes Accumulation Unit Values for the periods
indicated. This data has been extracted from the Separate Account's Financial
Statements. This information should be read in conjunction with the Separate
Account's Financial Statements and related notes thereto which appear in the
Statement of Additional Information.
<TABLE>
<CAPTION>
PERIOD FROM COMMENCEMENT
OF OPERATIONS
(NOVEMBER 28, 1995)
THROUGH 12-31-95
------------------------
<S> <C>
ALGER AMERICAN GROWTH SUB-ACCOUNT
Unit value at beginning of period.............................. $10.00
Unit value at end of period.................................... $10.05
Number of units outstanding at end of period................... 6,521
DREYFUS STOCK INDEX FUND SUB-ACCOUNT
Unit value at beginning of period.............................. $10.00
Unit value at end of period.................................... $10.15
Number of units outstanding at end of period................... 4,041
FEDERATED HIGH INCOME BOND FUND II SUB-ACCOUNT*
Unit value at beginning of period.............................. $10.00
Unit value at end of period.................................... $10.16
Number of units outstanding at end of period................... 456
MFS EMERGING GROWTH SUB-ACCOUNT
Unit value at beginning of period.............................. $10.00
Unit value at end of period.................................... $10.19
Number of units outstanding at end of period................... 100
MFS TOTAL RETURN SUB-ACCOUNT
Unit value at beginning of period.............................. $10.00
Unit value at end of period.................................... $10.25
Number of units outstanding at end of period................... 2,346
MONEY MARKET SUB-ACCOUNT
Unit value at beginning of period.............................. $10.00
Unit value at end of period.................................... $10.04
Number of units outstanding at end of period................... 7,407
INTERNATIONAL SUB-ACCOUNT
Unit value at beginning of period.............................. $10.00
Unit value at end of period.................................... $10.11
Number of units outstanding at end of period................... 6
</TABLE>
- ---------------
* formerly, the Corporate Bond Sub-Account.
As of December 31, 1995, the Federated Utility Fund II, Federated Fund for
U.S. Government Securities II, Growth and Income and Gold and Natural Resources
Sub-Accounts had not yet commenced operations.
11
<PAGE> 16
THE COMPANY
United Companies Life Insurance Company (the "Company") is a stock life
insurance company domiciled in Louisiana and organized in 1955. It is currently
authorized to conduct business in 47 states, the District of Columbia and Puerto
Rico. The Company is a wholly-owned subsidiary of United Companies Financial
Corporation ("UCFC").
On February 2, 1996, UCFC signed a stock purchase agreement ("Agreement")
dated as of January 30, 1996, for the sale of all of the outstanding capital
stock of the Company to UC Life Holding Corp., a new Delaware corporation formed
by Knightsbridge Capital Fund I, L.P. ("Knightsbridge"), for $164 million plus
earnings of the Company from January 1, 1996, to closing of the transaction.
Knightsbridge, which is a private investment partnership with institutional
partners, was formed in 1995 to make equity investments in companies engaged
primarily in the life insurance industry. Knightsbridge is a Delaware limited
partnership, the limited partners of which are primarily affiliates of leading
domestic and international banking organizations. The general partner is
Knightsbridge Management L.L.C. Under the terms of the Agreement, the sales
price is comprised of cash, estimated, as of January 30, 1996, to be
approximately $109 million, and real estate and other assets owned by the
Company to be distributed to UCFC prior to the closing. The real estate to be
distributed includes portions of the United Plaza office park, including UCFC's
home office. In addition, UCFC will purchase a convertible promissory note from
an affiliate of the purchaser for $15 million in cash. The purchaser also agreed
that the Company would continue to be an investor in first lien home equity
loans originated by UCFC's lending operations and that the purchaser would use
commercially reasonable efforts to maintain the Company's home office operations
in its present location in Baton Rouge, Louisiana following the closing for at
least two years. The Agreement is subject to approval by UCFC's shareholders and
regulatory authorities and the satisfaction of other conditions, and provides
that the closing will occur on or before July 31, 1996.
For more detailed information about the Company, see "Additional
Information About the Company."
THE SEPARATE ACCOUNT
The Board of Directors of the Company adopted a resolution to establish a
segregated asset account pursuant to Louisiana insurance law on November 2,
1994. This segregated asset account has been designated United Companies
Separate Account One (the "Separate Account"). The Company has caused the
Separate Account to be registered with the Securities and Exchange Commission as
a unit investment trust pursuant to the provisions of the Investment Company Act
of 1940.
The assets of the Separate Account are the property of the Company.
However, the assets of the Separate Account, equal to the reserves and other
contract liabilities with respect to the Separate Account, are not chargeable
with liabilities arising out of any other business the Company may conduct.
Income, gains and losses, whether or not realized, are, in accordance with the
Contracts and Certificates, credited to or charged against the Separate Account
without regard to other income, gains or losses of the Company. The Company's
obligations arising under the Contracts and Certificates are general
obligations.
The Separate Account meets the definition of a "separate account" under
federal securities laws.
The Separate Account is divided into Sub-Accounts. Each Sub-Account invests
in one Eligible Fund or a Portfolio of an Eligible Fund.
12
<PAGE> 17
ELIGIBLE FUNDS AND PORTFOLIOS
The Separate Account invests in the shares of the Eligible Funds and
Portfolios as described below. The description below contains a short discussion
of the investment objective(s) and the investment advisers. See the Prospectuses
for the Eligible Funds for more complete discussions.
There is no assurance that the investment objective of any of the Eligible
Funds or Portfolios will be met. Owners and Certificate Holders bear the
complete investment risk for Purchase Payments allocated to an Eligible Fund or
Portfolio. Contract Values and Certificate Holder's Account Values will
fluctuate in accordance with the investment performance of the Portfolios to
which Purchase Payments are allocated, and in accordance with the imposition of
the fees and charges assessed under the Contracts and Certificates.
DETAILED INFORMATION ABOUT THE ELIGIBLE FUNDS IS CONTAINED IN THE
ACCOMPANYING CURRENT PROSPECTUSES OF THE ELIGIBLE FUNDS. THE PROSPECTUSES OF THE
ELIGIBLE FUNDS MAY CONTAIN PORTFOLIOS NOT CURRENTLY AVAILABLE IN CONNECTION WITH
THE CONTRACTS AND CERTIFICATES. AN INVESTOR SHOULD CAREFULLY READ THESE
PROSPECTUSES BEFORE ALLOCATING AMOUNTS TO BE INVESTED IN THE SEPARATE ACCOUNT.
MFS(R) VARIABLE INSURANCE TRUST(SM) -- The Trust is comprised of twelve
Series, of which only the MFS Emerging Growth Series and the MFS Total Return
Series are available under the Contracts and Certificates. Massachusetts
Financial Services Company is the investment adviser to each Series.
MFS EMERGING GROWTH SERIES -- The investment objective of the MFS
Emerging Growth Series is to provide long-term growth of capital. Dividend
and interest income from portfolio securities, if any, is incidental to the
Series' investment objective of long-term growth of capital. The Series'
policy is to invest primarily (at least 80% of its assets under normal
circumstances) in common stocks of companies that the adviser believes are
early in their life cycle but which have the potential to become major
enterprises (emerging growth companies).
MFS TOTAL RETURN SERIES -- The MFS Total Return Series' primary
investment objective is to obtain above-average income (compared to a
portfolio entirely invested in equity securities) consistent with the
prudent employment of capital, and its secondary objective is to provide a
reasonable opportunity for growth of capital and income, since many
securities offering better than average yield may also possess growth
potential. Under normal market conditions, at least 25% of the Series'
assets will be invested in fixed income securities, and at least 40% and no
more than 75% of the Series' assets will be invested in equity securities.
FEDERATED INSURANCE SERIES (FORMERLY, INSURANCE MANAGEMENT SERIES) -- The
Trust has seven separate Funds, of which the Federated High Income Bond Fund II,
Federated Utility Fund II, and Federated Fund for U.S. Government Securities II
are available under the Contracts and Certificates. Federated Advisers is the
investment adviser to each Series.
FEDERATED HIGH INCOME BOND FUND II (FORMERLY, CORPORATE BOND
FUND) -- The investment objective of the Federated High Income Bond Fund II
is to seek high current income. The Fund endeavors to achieve its objective
by investing primarily in a professionally managed, diversified portfolio
of fixed income securities. The fixed income securities in which the Fund
intends to invest are lower-rated corporate debt obligations, which are
commonly referred to as "junk bonds," and involve a significant degree of
risk. Some of these fixed income securities may involve equity features.
Capital growth will be considered, but only when consistent with the
investment objective of high current income. Prior to investing in this
Fund, purchasers are cautioned to read the sections entitled "INVESTMENTS
RISKS" and "REDUCING RISKS OF LOWER-RATED SECURITIES" in the Federated High
Income Bond Fund II Prospectus for information regarding the risks
associated with an investment in this Fund.
13
<PAGE> 18
FEDERATED UTILITY FUND II (FORMERLY, UTILITY FUND) -- The investment
objective of the Federated Utility Fund II is to achieve high current
income and moderate capital appreciation. The Fund endeavors to achieve its
objective by investing primarily in a professionally managed, diversified
portfolio of equity and debt securities of utility companies. Under normal
market conditions, the Fund will invest at least 65% of its total assets in
securities of utility companies.
FEDERATED FUND FOR U.S. GOVERNMENT SECURITIES II (FORMERLY, U.S.
GOVERNMENT BOND FUND) -- The investment objective of the Federated Fund for
U.S. Government Securities II is to provide current income. Under normal
circumstances, the Fund pursues its investment objective by investing at
least 65% of the value of its total assets in securities issued or
guaranteed as to payment of principal and interest by the U.S. Government,
its agencies or instrumentalities.
DREYFUS STOCK INDEX FUND -- The investment objective of the Dreyfus Stock
Index Fund is to provide investment results that correspond to the price and
yield performance of publicly traded common stocks in the aggregate, as
represented by the Standard & Poor's 500 Composite Stock Price Index (the
"Index"). The Dreyfus Stock Index Fund is neither sponsored by nor affiliated
with Standard & Poor's Corporation. The Fund attempts to duplicate the
investment results of the Index, which is comprised of 500 selected common
stocks, most of which are listed on the New York Stock Exchange. The Fund
attempts to be fully invested at all times in the stocks that comprise the Index
and stock index futures and, in any event, at least 80% of the Fund's net assets
will be so invested. The Dreyfus Corporation serves as the Fund's manager and
Mellon Equity Associates serves as the Fund's index fund manager.
DREYFUS VARIABLE INVESTMENT FUND -- The Fund is comprised of eight
Portfolios, of which only the Growth and Income Portfolio is available under the
Contracts and Certificates. The Dreyfus Corporation serves as the investment
adviser.
GROWTH AND INCOME PORTFOLIO -- The Growth and Income Portfolio is a
nondiversified portfolio, the goal of which is long-term capital growth,
current income and growth of income, consistent with reasonable investment
risk. The Portfolio invests in equity and debt securities and money market
instruments of domestic and foreign issuers.
SCUDDER VARIABLE LIFE INVESTMENT FUND -- The Fund is comprised of seven
Portfolios, of which the Money Market Portfolio and the International Portfolio
are available under the Contracts and Certificates. Scudder, Stevens & Clark,
Inc. is the investment adviser to the Fund.
MONEY MARKET PORTFOLIO -- The investment objective of the Money Market
Portfolio is to maintain the stability of capital and, consistent
therewith, to maintain the liquidity of capital and to provide current
income. The Money Market Portfolio seeks to maintain a constant net asset
value of $1.00 per share, although there can be no assurance that this will
be achieved. An investment in the Money Market Portfolio is neither insured
nor guaranteed by the U.S. Government.
INTERNATIONAL PORTFOLIO -- The investment objective of the
International Portfolio is long-term growth of capital primarily through
diversified holdings of marketable foreign equity investments. The
Portfolio invests in companies, wherever organized, which do business
primarily outside the United States. The Portfolio intends to diversify
investments among several countries and to have represented in its holdings
business activities in not less than three different countries. The
Portfolio does not intend to concentrate investments in any particular
industry. Investing in foreign securities generally involves risks not
ordinarily associated with investing in securities of domestic issuers.
Purchasers are cautioned to read "POLICIES AND TECHNIQUES APPLICABLE TO THE
PORTFOLIOS -- FOREIGN SECURITIES" in the Prospectus of Scudder Variable
Life Investment Fund.
VAN ECK WORLDWIDE INSURANCE TRUST -- The Trust is comprised of five
separate funds, of which only the Gold and Natural Resources Fund is available
under the Contracts and Certificates. Van Eck Associates Corporation is the
investment adviser to the Fund.
14
<PAGE> 19
GOLD AND NATURAL RESOURCES FUND -- The investment objective of the
Gold and Natural Resources Fund is to seek long-term capital appreciation
by investing in equity and debt securities of companies engaged in the
exploration, development, production and distribution of gold and other
natural resources, such as strategic and other metals, minerals, forest
products, oil, natural gas and coal. Current income is not an investment
objective.
THE ALGER AMERICAN FUND -- The Trust is comprised of six portfolios of
which only the Alger American Growth Portfolio is available under the Contracts
and Certificates. Fred Alger Management, Inc. is the investment manager.
ALGER AMERICAN GROWTH PORTFOLIO -- The investment objective of the
Alger American Growth Portfolio is long-term capital appreciation. Except
during temporary defensive periods, the Portfolio invests at least 65% of
its total assets in equity securities of companies that, at the time of
purchase of the securities, have total market capitalization of $1 billion
or greater.
VOTING RIGHTS
In accordance with its view of present applicable law, the Company will
vote the shares of the Eligible Funds held in the Separate Account at special
meetings of the shareholders in accordance with instructions received from
persons having the voting interest in the Separate Account attributable to that
option. The Company will vote shares for which it has not received instructions,
as well as shares attributable to it, in the same proportion as it votes shares
for which it has received instructions. None of the Eligible Funds hold regular
meetings of shareholders.
The number of shares which a person has a right to vote will be determined
as of a date to be chosen by the Company not more than sixty (60) days prior to
a shareholder meeting of the Eligible Fund. Voting instructions will be
solicited by written communication at least ten (10) days prior to the meeting.
SUBSTITUTION OF SECURITIES
If the shares of an Eligible Fund (or any Portfolio within an Eligible Fund
or any other Eligible Fund or Portfolio), are no longer available for investment
by the Separate Account or, if in the judgment of the Company's Board of
Directors, further investment in the shares should become inappropriate in view
of the purpose of the Contracts or Certificates, the Company may limit further
purchase of such shares or may substitute shares of another Eligible Fund or
Portfolio for shares already purchased under the Contracts and Certificates. No
substitution of securities may take place without prior approval of the
Securities and Exchange Commission and under the requirements it may impose.
Shares of the Eligible Funds are issued and redeemed in connection with
investments in an payments under certain variable annuity contracts and (with
respect to certain of the Eligible Funds) variable life insurance policies of
various life insurance companies which may or may not be affiliated. The
Eligible Funds do not foresee any disadvantage to Owners and Certificate Holders
arising out of the fact that the Eligible Funds offer their shares for products
offered by life insurance companies which are not affiliated. Nevertheless, the
Boards of Trustees or the Boards of Directors, as applicable, of the Eligible
Funds intend to monitor events in order to identify any material irreconcilable
conflicts which may possibly arise and to determine what action, if any, should
be taken in response thereto. If such a conflict were to occur, one or more
insurance company separate accounts might withdraw its investments in an
Eligible Fund. An irreconcilable conflict might result in the withdrawal of a
substantial amount of a Portfolio's assets which could adversely affect such
Portfolio's net asset value per share.
15
<PAGE> 20
FIXED ACCOUNT OPTIONS
GENERAL
In addition to the Sub-Accounts of the Separate Account, Owners and
Certificate Holders may also allocate Net Purchase Payments or transfer values
to the Fixed Account or to the MVA Account, which are investment options within
the General Account. An Owner or Certificate Holder may not be invested in more
than ten investment options at any time (an investment option is each
Sub-Account of the Separate Account, the Fixed Account, and each MVA Account
Guarantee Period).
FIXED ACCOUNT OPTION
There is a one year Guarantee Period available as a Fixed Account Option.
An Owner or Certificate Holder may elect to allocate Net Purchase Payments to
the Fixed Account. Each such allocation (to the extent it is not withdrawn,
transferred or annuitized prior to the end of the one year Guarantee Period),
will earn interest, compounded daily, at the Current Interest Rate. The Current
Interest Rate is the interest rate credited to the Contract Value or the
Certificate Holder's Account Value by the Company for the Guarantee Period. The
Current Interest Rates are set at the sole discretion of the Company. Interest
Rates after the first year will not change more frequently than once per
Contract or Certificate Year. OWNERS BEAR THE RISK THAT CURRENT INTEREST RATES
AVAILABLE AT FUTURE TIMES MAY BE MORE OR LESS THAN THOSE CURRENTLY OR INITIALLY
AVAILABLE. THEY ALSO BEAR THE RISK THAT SUCH RATES MAY NOT EXCEED THE GUARANTEED
MINIMUM INTEREST RATE OF 3%. Additional payments made during the Guarantee
Period will all be credited with the same interest rate as the initial payment
for the Guarantee Period.
During the Accumulation Period, the Owner or Certificate Holder may: a)
transfer up to 25% of the Owner's Contract Value or the Certificate Holder's
Account Value to the Separate Account in any one Contract/Certificate Year
and/or b) make a partial withdrawal of up to 25% of the Owner's Contract Value
or the Certificate Holder's Account Value in any one Contract/Certificate Year.
MARKET VALUE ADJUSTMENT ACCOUNT ("MVA ACCOUNT")
Net Purchase Payments may be allocated to one or more of the MVA Account
Guarantee Period Options. Currently, the Company offers three MVA Account
Guarantee Periods -- 3 years, 5 years and 7 years. In addition, during the
Accumulation Period, Contract Values and Certificate Holder's Account Values can
be transferred from the Separate Account and/or the Fixed Account to one or more
of the MVA Account Guarantee Period Options on the next Contract or Certificate
Anniversary. There will be an initial Current Interest Rate for the initial
Guarantee Period of the MVA Account. After the initial Guarantee Period, the
Current Interest Rate for any subsequent Guarantee Period of the MVA Account may
change. All interest payable under a Contract or Certificate is compounded
daily. In no event will the Current Interest Rate be less than the Minimum
Guaranteed Interest Rate, prior to the application of the Market Value
Adjustment.
During the thirty (30) days prior to the end of a current Guarantee Period,
the Owner or Certificate Holder may elect to renew for the same or any other
Guarantee Period at the then Current Interest Rate or may elect to transfer all
or a portion of the amount to the Fixed Account or to the Separate Account. Any
transfer elected during the 30 days prior to the end of a current Guarantee
Period will be made as of the last Valuation Date of a current Guarantee Period
and will not be subject to the Market Value Adjustment.
If the Owner or Certificate Holder does not specify a Guarantee Period at
the time of renewal, the Company will select the same Guarantee Period as has
just expired, so long as such Guarantee Period does not extend beyond the latest
Annuity Date that can be selected by an Owner or Certificate Holder. If such
Guarantee Period does extend beyond the latest Annuity Date, the Company will
choose the longest period that will not extend beyond such date. If a renewal
occurs within one year of the latest Annuity
16
<PAGE> 21
Date, the Company will choose the 1-year Fixed Account option and will credit
interest up to the Annuity Date at the Current Interest Rate for the one year
Guarantee Period as of the renewal date.
The Owner or Certificate Holder may elect one or more Guarantee Periods
subject to the Company's underwriting rules. Multiple Guarantee Periods are
treated separately for purposes of applying the Market Value Adjustment. The
Company reserves the right to credit different Current Interest Rates to the
Contract Value or the Certificate Holder's Account Value attributable:
1. to different Guarantee Periods; and
2. to Guarantee Periods of the same duration with different Effective
Dates.
The Owner or Certificate Holder may upon Written Request change to any
Guarantee Period then being offered by the Company with respect to Contracts and
Certificates. The Market Value Adjustment will apply to a change made at any
time other than at the end of a Guarantee Period. The Market Value Adjustment
will not apply to a change made at the end of a Guarantee Period if a Written
Request is received by the Company within thirty (30) days prior to the end of
the Guarantee Period. The Market Value Adjustment will be an addition to or
deduction from the remaining amount of Contract Value or the Certificate
Holder's Account Value except in the case of a full surrender.
Except on the latest Annuity Date, any amount withdrawn, transferred or
annuitized prior to the end of that Guarantee Period may be subject to a Market
Value Adjustment. Owners and Certificate Holders bear the risk that amounts
reallocated within, or prematurely withdrawn, transferred or annuitized from the
MVA Account prior to the end of their respective Guarantee Period could result
in the Owner or Certificate Holder receiving less than the Purchase Payments or
amounts so allocated. The Market Value Adjustment will be calculated by
multiplying the amount withdrawn, transferred or annuitized by the formula set
forth below. (See the "Appendix" for examples of how the Market Value Adjustment
is computed.)
There will be no Market Value Adjustment on withdrawals from the MVA
Account in the following situations: (1) payment of a death benefit under the
Contract or Certificate; (2) amounts withdrawn to pay fees or charges; and (3)
amounts withdrawn or transferred from the MVA Account at the end of the
Guarantee Period.
The Market Value Adjustment factor is equal to:
( ) n/12
( (1 + i) )
( ------------------- ) - 1
( (1 + j + .005) )
( )
where i = Current Interest Rate credited to the Owner's Contract Value
or the Certificate Holder's Account Value allocated to a
Guarantee Period as of the beginning of the Guarantee
Period.
j = Current Interpolated U.S. Constant Maturity Treasury Rate
("CITR") for the time remaining in the current Guarantee
Period plus the difference between i and the corresponding
CITR at the time of purchase.
n = Number of full months remaining in the Guarantee Period.
WITHDRAWALS, TRANSFERS OR ANNUITIZATION OF AMOUNTS FROM A GUARANTEE PERIOD PRIOR
TO THE END OF THAT GUARANTEE PERIOD MAY BE SUBJECT TO A MARKET VALUE ADJUSTMENT.
THE MARKET VALUE ADJUSTMENT MAY BE POSITIVE OR NEGATIVE AND MAY RESULT IN THE
OWNER OR CERTIFICATE HOLDER RECEIVING LESS THAN HIS OR HER PURCHASE PAYMENT OR
CONTRACT VALUE/ CERTIFICATE HOLDER'S ACCOUNT VALUE ALLOCATED TO THE MVA ACCOUNT.
17
<PAGE> 22
CHARGES AND DEDUCTIONS
Various charges and deductions are made from Owner's Contract Value and
Certificate Holders' Account Value, the Separate Account and the MVA Account.
These charges and deductions are:
DEDUCTION FOR CONTINGENT DEFERRED SALES CHARGE (SALES LOAD)
The Contracts and Certificates do not provide for a front-end sales charge.
However, if all or a portion of an Owner's Contract Value or a Certificate
Holder's Account Value is withdrawn within the first ten Contract or Certificate
Years, a Contingent Deferred Sales Charge (sales load) will be assessed. This
charge reimburses the Company for expenses incurred in connection with the
promotion, sale and distribution of the Contracts and Certificates. The Charge
is calculated at the time of each withdrawal and will be deducted from the
account value remaining in the Contract or Certificate. The Contingent Deferred
Sales Charge is based upon the length of time from receipt of each Purchase
Payment to the date of withdrawal. Each Purchase Payment is tracked as to its
date of receipt and withdrawals thereof are determined in accordance with the
following:
CONTINGENT DEFERRED SALES CHARGE:
<TABLE>
<CAPTION>
Number of Complete
Years Since
Receipt
of Purchase
Payment Charge
- ------------------ ------
<S> <C>
0 years............................................................. 8.5%
1 years............................................................. 8.0%
2 years............................................................. 7.5%
3 years............................................................. 7.0%
4 years............................................................. 6.5%
5 years............................................................. 6.0%
6 years............................................................. 5.0%
7 years............................................................. 4.0%
8 years............................................................. 3.0%
9 years............................................................. 2.0%
10 years or more..................................................... 0.0%
</TABLE>
FREE WITHDRAWAL -- Owners/Certificate Holders may make a partial withdrawal
of the Free Withdrawal amount without incurring a Contingent Deferred Sales
Charge. On each Contract or Certificate Anniversary, the Free Withdrawal amount
is equal to the greater of: (a) the cumulative earnings in the Owner's Contract
Value or the Certificate Holder's Account Value or (b) 10% of Purchase Payments
as of the beginning of the current Contract or Certificate Year. On other than
Contract and Certificate Anniversaries, the Free Withdrawal amount is equal to
the Free Withdrawal amount at the beginning of the Contract or Certificate Year
less amounts withdrawn without deduction of Contingent Deferred Sales Charges
during the current Contract or Certificate Year. In the event of a full
withdrawal, the Free Withdrawal provision is not available.
In addition, in certain states, after the first Contract/Certificate Year,
the Owner/Certificate Holder is permitted to make a total or partial withdrawal
without the imposition of the Contingent Deferred Sales Charge if the Annuitant
is confined to a skilled nursing home facility for 90 consecutive days.
18
<PAGE> 23
REDUCTION OR ELIMINATION OF THE CONTINGENT DEFERRED SALES CHARGE
The amount of the Contingent Deferred Sales Charge may be reduced or
eliminated when sales of the Contracts or Certificates are made to individuals
or to a group of individuals in a manner that results in savings of sales
expenses. The entitlement to reduction of the Contingent Deferred Sales Charge
will be determined by the Company after examination of all the relevant factors
such as:
1. The size and type of group to which sales are to be made will be
considered. Generally, the sales expenses for a larger group are less than
for a smaller group because of the ability to implement large numbers of
Contracts or Certificates with fewer sales contacts.
2. The total amount of Purchase Payments to be received will be
considered. Per Contract or Certificate sales expenses are likely to be
less on larger Purchase Payments than on smaller ones.
3. Any prior or existing relationship with the Company will be
considered. Per Contract or Certificate sales expenses are likely to be
less when there is a prior existing relationship because of the likelihood
of implementing the Contract or Certificate with fewer sales contacts.
4. There may be other circumstances, of which the Company is not
presently aware, which could result in reduced sales expenses.
If, after consideration of the foregoing factors, the Company determines
that there will be a reduction in sales expenses, the Company may provide for a
reduction or elimination of the Contingent Deferred Sales Charge.
The Contingent Deferred Sales Charge may be eliminated when the Contracts
or Certificates are issued to an officer, director or employee of the Company or
any of its affiliates. In no event will reductions or elimination of the
Contingent Deferred Sales Charge be permitted where reductions or elimination
will be unfairly discriminatory to any person.
DEDUCTION FOR MORTALITY AND EXPENSE RISK CHARGE
Each Valuation Period, the Company deducts an aggregate Mortality and
Expense Risk Charge from the Separate Account which is equal, on an annual
basis, to 1.52% of the average daily net asset value of each Sub-Account of the
Separate Account. Approximately 1.25% of the Mortality and Expense Risk Charge
is for the standard death benefit and approximately .27% is for the enhanced
death benefit. See "Proceeds Payable on Death -- Death Benefit Amount During
Accumulation Period." The portion of the Mortality and Expense Risk Charge
attributable to the enhanced death benefit (.27%) will be assessed against
Separate Account allocations pursuant to all Contracts and Certificates issued,
whether or not applicable state law permits the Contract/Certificate to offer
the enhanced death benefit. Therefore, purchasers of Contracts/Certificates in
states where the enhanced death benefit is not permitted and who allocate
Contract Value or Certificate Holder's Account Value to the Separate Account
will be paying for a benefit they will not receive. The standard death benefit
is available in all states where the Contract or Certificate is approved. The
mortality risks assumed by the Company arise from its contractual obligation to
make Annuity Payments after the Annuity Date (determined in accordance with the
Annuity Option chosen by the Owner) regardless of how long all Annuitants live.
This assures that neither an Annuitant's own longevity, nor an improvement in
life expectancy greater than that anticipated in the mortality tables, will have
any adverse effect on the Annuity Payments the Annuitant will receive under the
Contract. Further, the Company bears a mortality risk in that it guarantees the
annuity purchase rates for the Annuity Options under the Contracts and
Certificates. Also, the Company bears a mortality risk with respect to the death
benefit and with respect to the waiver of the Contingent Deferred Sales Charge
if Purchase Payments have been held in the Contract or Certificate less than ten
(10) years. The expense risk assumed by the Company is that all actual expenses
involved in administering the Contracts and Certificates, including Contract and
Certificate maintenance costs, administrative costs, mailing costs, data
processing costs, legal fees, accounting fees, filing fees and the costs of
other services may exceed the amount recovered from the Contract and Certificate
Maintenance Charges and the Administrative Charge.
19
<PAGE> 24
If the Mortality and Expense Risk Charge is insufficient to cover the
actual costs, the loss will be borne by the Company. Conversely, if the amount
deducted proves more than sufficient, the excess will be a profit to the
Company. The Company expects a profit from this charge.
The Mortality and Expense Risk Charge is guaranteed by the Company and
cannot be increased.
To the extent that the Contingent Deferred Sales Charge is insufficient to
cover the actual costs of distribution, the Company may use any of its corporate
assets, including potential profit which may arise from the Mortality and
Expense Risk Charge, to provide for any difference.
DEDUCTION FOR ADMINISTRATIVE CHARGE
Each Valuation Period, the Company deducts an Administrative Charge from
the Separate Account which is equal, on an annual basis, to .15% of the average
daily net asset value of each Sub-Account of the Separate Account. This charge,
together with the Contract and Certificate Maintenance Charges (see below), is
to reimburse the Company for the expenses it incurs in the establishment and
maintenance of the Contracts, Certificates and the Separate Account. These
expenses include but are not limited to: preparation of the Contracts and
Certificates, confirmations, annual reports and statements, maintenance of Owner
and Certificate Holder records, maintenance of Separate Account records,
administrative personnel costs, mailing costs, data processing costs, legal
fees, accounting fees, filing fees, the costs of other services necessary for
Owner and Certificate Holder servicing and all accounting, valuation, regulatory
and reporting requirements. Since this charge is an asset-based charge, the
amount of the charge attributable to a particular Contract or Certificate may
have no relationship to the administrative costs actually incurred by that
Contract or Certificate. The Company does not intend to profit from this charge.
This charge will be reduced to the extent that the amount of this charge is in
excess of that necessary to reimburse the Company for its administrative
expenses. Should this charge prove to be insufficient, the Company will not
increase this charge and will incur the loss.
DEDUCTION FOR CONTRACT AND CERTIFICATE MAINTENANCE CHARGES
During the Accumulation Period, on each Contract or Certificate
Anniversary, the Company deducts a Contract and Certificate Maintenance Charge
from the Owner's Contract Value or the Certificate Holder's Account Value by
reducing the Contract Value/Certificate Holder's Account Value in the Fixed
Account and/or the MVA Account and by cancelling Accumulation Units from each
applicable Sub-Account to reimburse it for expenses relating to the maintenance
of the Contracts and Certificates. The Company makes a deduction of $30.00 each
Contract or Certificate Year. However, during the Accumulation Period if the
Owner's Contract Value or the Certificate Holder's Account Value on the Contract
or Certificate Anniversary is at least $75,000, then no Contract or Certificate
Maintenance Charges are deducted. If a total withdrawal is made on other than a
Contract or Certificate Anniversary and the Owner's Contract Value or the
Certificate Holder's Account Value for the Valuation Period during which the
total withdrawal is made is less than $75,000, the full Contract or Certificate
Maintenance Charge will be deducted at the time of the total withdrawal. During
the Annuity Period, no Contract or Certificate Maintenance Charge is deducted.
The Contract and Certificate Maintenance Charges will be deducted from the Fixed
Account and/or the MVA Account and the Sub-Accounts in the Separate Account in
the same proportion that the amount of the Owner's Contract Value or Certificate
Holder's Account Value in the Fixed Account and/or MVA Account and each
applicable Sub-Account bears to the total Owner's Contract Value or Certificate
Holder's Account Value. The Company has set this charge at a level so that, when
considered in conjunction with the Administrative Charge (see above), it will
not make a profit from the charges assessed for administration.
DEDUCTION FOR TRANSFER FEE
An Owner or Certificate Holder may transfer all or part of the Owner's or
Certificate Holder's interest in a Sub-Account, the Fixed Account or the MVA
Account (subject to Fixed Account and MVA Account provisions) after the
expiration of any Right to Examine Period, without the imposition of any fee
20
<PAGE> 25
or charge if there have been no more than 12 transfers made in a Contract or
Certificate Year. A transfer made at the end of the Right to Examine Period from
the Scudder Money Market Sub-Account will not count in determining the
application of the Transfer Fee. If more than twelve transfers have been made in
a Contract or Certificate Year, the Company will deduct a Transfer Fee which is
equal to the lesser of $25 or 2% of the amount transferred. However, if the
Owner or Certificate Holder is participating in an approved Dollar Cost
Averaging Program or Rebalancing Program, such transfers are not counted toward
the number of transfers for the year and are not taken into account in
determining any Transfer Fee.
DEDUCTION FOR PREMIUM AND OTHER TAXES
Any taxes, including any Premium Taxes, paid to any governmental entity
relating to the Contracts and Certificates may be deducted from the Purchase
Payment or Contract Value or Certificate Holder's Account Value when incurred.
The Company will, in its sole discretion, determine when taxes have resulted
from: the investment experience of the Separate Account; receipt by the Company
of the Purchase Payments; or commencement of Annuity Payments. The Company may,
at its sole discretion, pay taxes when due and deduct that amount from the
Contract Value or Certificate Holder's Account Value at a later date. Payment at
an earlier date does not waive any right the Company may have to deduct amounts
at a later date. The Company's current practice is to pay any Premium Taxes when
they become due and payable to the states. Premium taxes generally range from 0%
to 4%.
While the Company is not currently maintaining a provision for federal
income taxes with respect to the Separate Account, the Company has reserved the
right to establish a provision for income taxes if it determines, in its sole
discretion, that it will incur a tax as a result of the operation of the
Separate Account. Currently, the Company does not incur any federal income taxes
as a result of the operation of the Separate Account. However, the Company
reserves the right to provide for the deduction from the Separate Account for
any income taxes which may be incurred as a result of the operation of the
Separate Account.
The Company will deduct any withholding taxes required by applicable law.
DEDUCTION FOR EXPENSES OF THE ELIGIBLE FUNDS
There are other deductions from and expenses (including management fees
paid to the investment advisers) paid out of the assets of the Eligible Funds
which are described in the Prospectuses for the Eligible Funds.
THE CONTRACTS AND CERTIFICATES
OWNER/CERTIFICATE HOLDER
The Owner or Certificate Holder has all interest and rights to amounts held
in his or her Contract or amounts held in his or her Certificate Holder's
Account. The Owner or Certificate Holder is the person designated as such on the
Issue Date or Certificate Issue Date, unless changed.
The Owner may change owners of the Contract at any time prior to the
Annuity Date by Written Request. The Certificate Holder may change holders of
the Certificate at any time prior to the Annuity Date by Written Request. A
change of Owner or Certificate Holder will automatically revoke any prior
designation of Owner or Certificate Holder. The change will become effective as
of the date the Written Request is signed. A new designation of Owner or
Certificate Holder will not apply to any payment made or action taken by the
Company prior to the time it was received.
For Non-Qualified Contracts and Certificates, in accordance with Code
Section 72(u), a deferred annuity contract held by a corporation or other entity
that is not a natural person is not treated as an annuity contract for tax
purposes. Income on the contract is treated as ordinary income received by the
owner during the taxable year. However, for purposes of Code Section 72(u), an
annuity contract held by a
21
<PAGE> 26
trust or other entity as agent for a natural person is considered held by a
natural person and treated as an annuity contract for tax purposes. Tax advice
should be sought prior to purchasing a Contract/Certificate which is to be owned
by a trust or other non-natural person.
JOINT OWNERS/JOINT CERTIFICATE HOLDERS
The Contract can be owned by Joint Owners. A Certificate may be owned by
Joint Certificate Holders. If Joint Owners or Joint Certificate Holders are
named, any Joint Owner or Joint Certificate Holder must be the spouse of the
other Owner or Joint Certificate Holder. Upon the death of either
Owner/Certificate Holder, the surviving Joint Owner/surviving Joint Certificate
Holder will be the Primary Beneficiary. Any other Beneficiary designation will
be treated as a Contingent Beneficiary unless otherwise indicated in a Written
Request. Unless otherwise specified in the application for the Contract or
Certificate, if there are Joint Owners/Joint Certificate Holders both signatures
will be required for all Owner/Certificate Holders transactions except telephone
transfers. If the telephone transfer option is elected and there are Joint
Owners or Joint Certificate Holders, either Joint Owner or Joint Certificate
Holder can give telephone instructions.
CONTRACT OWNER (GROUP CONTRACTS ONLY)
The Contract Owner has title to the group Contract. The Contract and any
amounts accumulated thereunder are not subject to the claims of the Contract
Owner nor any of its creditors. The Contract Owner may transfer ownership of the
group Contract. Any transfer of ownership terminates the interest of any
existing Contract Owner. It does not change the rights of any Certificate
Holder.
ANNUITANT
The Annuitant is the person on whose life Annuity Payments are based. The
Annuitant is the person designated by the Owner or Certificate Holder at the
Issue Date or Certificate Issue Date, unless changed prior to the Annuity Date.
The Annuitant may not be changed on or after the Annuity Date or in a Contract
or Certificate which is owned by a non-natural person. Any change of Annuitant
is subject to the Company's underwriting rules then in effect.
ASSIGNMENT
A Written Request specifying the terms of an assignment of the Contract or
Certificate must be provided to the Company. Until the Written Request is
received, the Company will not be required to take notice of or be responsible
for any transfer of interest in the Contract or Certificate by assignment,
agreement, or otherwise.
The Company will not be responsible for the validity or tax consequences of
any assignment. Any assignment made after the death benefit has become payable
will be valid only with the Company's consent.
If the Contract or Certificate is assigned, the Owner's or Certificate
Holder's rights may only be exercised with the consent of the assignee of
record.
If the Contract or Certificate is issued pursuant to a retirement plan
which receives favorable tax treatment under the provisions of Sections 401,
403(b), 408 or 457 of the Code, it may not be assigned, pledged or otherwise
transferred except as may be allowed under applicable law.
22
<PAGE> 27
PURCHASE PAYMENTS, CONTRACT VALUE AND
CERTIFICATE HOLDER'S ACCOUNT VALUE
PURCHASE PAYMENTS
The initial Purchase Payment is due on the Issue Date/Certificate Issue
Date. The minimum initial Purchase Payment is $5,000 (except for Qualified
Contracts and Certificates, the minimum initial Purchase Payment is $2,000). The
minimum subsequent Purchase Payment is $500, or if the automatic premium check
option is elected $100. The maximum total Purchase Payments the Company will
accept without Company approval are $500,000. The Company reserves the right to
reject any application or Purchase Payment.
ALLOCATION OF PURCHASE PAYMENTS
Net Purchase Payments are allocated to the Fixed Account or the MVA Account
Guarantee Period and/or to one or more Sub-Accounts of the Separate Account in
accordance with the selections made by the Owner or Certificate Holder. However,
under certain circumstances, the Company will allocate all Net Purchase Payments
made during the Right to Examine Period to the Scudder Money Market Sub-Account
until the expiration of the Right to Examine Period. (See "Highlights -- Right
to Examine Period.") The allocation of the initial Net Purchase Payment is made
in accordance with the selection made by the Owner or Certificate Holder at the
Issue Date or Certificate Issue Date. Unless otherwise changed by the Owner or
Certificate Holder, subsequent Net Purchase Payments are allocated in the same
manner as the initial Net Purchase Payment. Allocation of the Net Purchase
Payment is subject to the terms and conditions imposed by the Company.
CURRENTLY, THE OWNER OR CERTIFICATE HOLDER CAN SELECT UP TO TEN INVESTMENT
OPTIONS, INCLUDING SUB-ACCOUNTS, THE FIXED ACCOUNT AND EACH MVA ACCOUNT
GUARANTEE PERIOD. Allocations must be in whole percentages with a minimum
allocation of 5% of each purchase payment or transfer or $500, whichever is
greater.
For initial Net Purchase Payments, if the forms required to issue a
Contract or Certificate are in good order, the Company will apply the Net
Purchase Payment to the Separate Account and credit the Contract or Certificate
with Accumulation Units and/or to the Fixed Account or MVA Account and credit
the Contract or Certificate with dollars within two business days of receipt.
In addition to the underwriting requirements of the Company, good order
means that the Company has received federal funds (monies credited to a bank's
account with its regional Federal Reserve Bank). If the forms required to issue
a Contract or Certificate are not in good order, the Company will attempt to get
them in good order or the Company will return the forms and the Purchase Payment
within five business days. The Company will not retain the Purchase Payment for
more than five business days while processing incomplete forms unless it has
been so authorized by the purchaser. For subsequent Net Purchase Payments
(except those allocated to the Scudder Money Market Portfolio (see
"Highlights")), the Company will apply Net Purchase Payments to the Separate
Account and credit the Contract or Certificate with Accumulation Units and/or to
the Fixed Account or MVA Account and credit the Contract or Certificate with
dollars as of the end of the Valuation Period during which the Purchase Payment
was received in good order.
DOLLAR COST AVERAGING
Dollar Cost Averaging is a program which, if elected, permits an Owner or
Certificate Holder to systematically transfer amounts monthly, quarterly or
semi-annually from the Scudder Money Market Sub-Account or the Fixed Account to
one or more Sub-Accounts. By allocating amounts on a regularly scheduled basis
as opposed to allocating the total amount at one particular time, an Owner or
Certificate Holder may be less susceptible to the impact of market fluctuations.
The minimum amount which may be transferred is $50 per transfer (per
Sub-Account). Transfers to the Fixed Account are not permitted. If at
23
<PAGE> 28
any time the value in the Scudder Money Market Sub-Account or the Fixed Account
is insufficient to make the transfer requested, the Owner or Certificate Holder
will be notified for specific instructions. The Company reserves the right, at
any time and without prior notice to any party, to terminate, suspend or modify
its Dollar Cost Averaging program.
There is no current charge for participating in the Dollar Cost Averaging
Program. However, the Company reserves the right to charge for Dollar Cost
Averaging in the future. Transfers are made anytime prior to the 29th of a
calendar month. Dollar Cost Averaging will begin on the first transfer date
elected by the Owner or Certificate Holder following the expiration of the Right
to Examine Period (if the program has been selected on the Issue
Date/Certificate Issue Date). The minimum duration of participation in the
Dollar Cost Averaging Program is currently at least one year. Transfers made
pursuant to the Dollar Cost Averaging program are not taken into account in
determining any Transfer Fee. An Owner or Certificate Holder participating in
the Dollar Cost Averaging Program may not also participate in the Rebalancing
Program.
REBALANCING
Rebalancing is a program, which if elected, provides for periodic
pre-authorized automatic transfers among the Sub-Accounts pursuant to written
instructions from the Owner or Certificate Holder. Such transfers are made to
maintain a particular percentage allocation among the Portfolios as selected by
the Owner or Certificate Holder. Any amounts in the Fixed Account or the MVA
Account will not be transferred pursuant to the Rebalancing Program. The
Contract Value must be at least $5,000 to have transfers made pursuant to the
Program. An Owner or Certificate Holder may select that Rebalancing occur on a
quarterly, semi-annual or annual basis. Transfers made pursuant to the
Rebalancing Program are not taken into account in determining the number of
transfers per year and therefore are not counted in determining any Transfer
Fee. An Owner or Certificate Holder participating in the Rebalancing Program may
not also participate in the Dollar Cost Averaging Program.
ASSET ALLOCATION PROGRAMS
The Company has recognized the value to Owners/Certificate Holders of
having available on a continuous basis advice for the selection of the
Sub-Accounts under the Contracts/Certificates. Certain investment advisers have
made arrangements with the Company to make their services available to certain
Owners/Certificate Holders. The Company has made no independent investigation of
these investment advisers, their services or the costs for such services. The
Company is not endorsing such programs and has not conducted an examination of
the background or skill of the investment advisers. An Owner/Certificate Holder
may enter into an advisory agreement with such investment advisers. Compensation
for the services of the investment advisers is a matter between them and the
Owners/Certificate Holders.
Under certain asset allocation programs, if the Owner/Certificate Holder is
under 59 1/2, the Owner/Certificate Holder will be billed for the services of
the investment adviser. If the Owner/Certificate Holder is 59 1/2 or older, the
Company, pursuant to an agreement with the Owner/Certificate Holder, will make a
partial withdrawal from the Owner's Contract Value or the Certificate Holder's
Account Value to pay for the services of the investment adviser pursuant to such
asset allocation programs. If the Contract/Certificate is issued pursuant to a
Non-Qualified Contract/Certificate, the withdrawal will be treated like any
other distribution and will be includible in gross income for federal tax
purposes. See "Tax Status -- Tax Treatment of Withdrawals -- Non-Qualified
Contracts and Certificates."
CONTRACT VALUE
The Contract Value for any Valuation Period is the sum of the Contract
Value in each of the Sub-Accounts of the Separate Account and the Contract Value
in the Fixed Account and the MVA Account.
The Contract Value in a Sub-Account of the Separate Account is determined
by multiplying the number of Accumulation Units allocated to the Contract Value
for the Sub-Account by the Accumulation
24
<PAGE> 29
Unit value. Withdrawals will result in the cancellation of Accumulation Units in
a Sub-Account or a reduction in the Fixed Account or the MVA Account, as
applicable.
CERTIFICATE HOLDER'S ACCOUNT VALUE
The Certificate Holder's Account Value for any Valuation Period is the sum
of the Certificate Holder's Account Value in each of the Sub-Accounts of the
Separate Account, the Certificate Holder's Account Value in the MVA Account and
the Certificate Holder's Account Value in the Fixed Account.
The Certificate Holder's Account Value in a Sub-Account of the Separate
Account is determined by multiplying the number of Accumulation Units allocated
to the Certificate Holder's Account for the Sub-Account by the Accumulation Unit
Value. Withdrawals will result in the cancellation of Accumulation Units in a
Sub-Account or a reduction in the Fixed Account or the MVA Account, as
applicable.
ACCUMULATION UNITS
Accumulation Units will be used to account for all amounts allocated to or
withdrawn from the Sub-Accounts of the Separate Account as a result of Net
Purchase Payments, withdrawals, transfers, or fees and charges. The Company will
determine the number of Accumulation Units of a Sub-Account purchased or
canceled. This will be done by dividing the amount allocated to (or the amount
withdrawn from) the Sub-Account by the dollar value of one Accumulation Unit of
the Sub-Account as of the end of the Valuation Period during which the request
for the transaction is received by the Company.
ACCUMULATION UNIT VALUE
The Accumulation Unit Value for each Sub-Account was arbitrarily set
initially at $10. Subsequent Accumulation Unit Values for each Sub-Account are
determined by multiplying the Accumulation Unit Value for the immediately
preceding Valuation Period by the Net Investment Factor for the Sub-Account for
the current period.
The Net Investment Factor for each Sub-Account is determined by dividing A
by B and subtracting C where:
A is (i) the net asset value per share of the Eligible Fund or Portfolio
of an Eligible Fund held by the Sub-Account for the current Valuation
Period; plus
(ii) any dividend or capital gains per share declared on behalf of
such Eligible Fund or Portfolio that has an ex-dividend date within
the current Valuation Period; plus or minus
(iii) the cumulative per share charge or credit for taxes reserved
which is determined by the Company to have resulted from the operation
or maintenance of the Sub-Account.
B is the net asset value per share of the Eligible Fund or Portfolio
held by the Sub-Account for the immediately preceding Valuation
Period; plus or minus the cumulative per share charge or credit for
taxes reserved for the immediately preceding Valuation Date.
C is the factor representing the cumulative unpaid charge for the
Mortality and Expense Risk Charge and for the Administrative Charge.
The Accumulation Unit Value may increase or decrease from Valuation Period
to Valuation Period.
25
<PAGE> 30
TRANSFERS
TRANSFERS DURING THE ACCUMULATION PERIOD
Subject to any limitation imposed by the Company on the number of transfers
(currently, unlimited) that can be made during the Accumulation Period, the
Owner or Certificate Holder may, after the expiration of the Right to Examine
Period, transfer all or part of the Contract Value or Certificate Holder's
Account Value in a Sub-Account, the Fixed Account or the MVA Account by Written
Request without the imposition of any Transfer Fee if there have been no more
than the number of free transfers (currently, twelve). All transfers are subject
to the following:
1. If more than the number of free transfers have been made in a
Contract or Certificate Year, the Company will deduct a Transfer Fee for
each subsequent transfer permitted. The Transfer Fee is the lesser of $25
or 2% of the amount transferred. However, if the Owner or Certificate
Holder is participating in an approved Dollar Cost Averaging Program or
Rebalancing Program, such transfers currently are not counted toward the
number of transfers for the year and are not taken into account in
determining any Transfer Fee. The Transfer Fee will be deducted from the
amount which is transferred.
2. The minimum amount which can be transferred is $250 (from any
Account) or the Owner's or Certificate Holder's entire interest in any
Account, if less. This requirement is waived if the transfer is made
pursuant to the Dollar Cost Averaging program. The minimum amount which
must remain in each Account after a transfer is $500 per Account, or $0 if
the entire amount in any Account is transferred. The maximum amount which
can be transferred from the Fixed Account to the Separate Account during
the Accumulation Period is 25% of the Contract Value or the Certificate
Holder's Account Value in the Fixed Account in any one Contract or
Certificate Year. This requirement is waived if the remaining balance in
the Fixed Account is less than 25% of the original deposit to the Fixed
Account and is made pursuant to the Dollar Cost Averaging program.
3. The Company reserves the right, at any time and without prior
notice to any party, to terminate, suspend or modify the transfer privilege
described above.
Owners and Certificate Holder's can elect to make transfers by telephone.
To do so Owners and Certificate Holders must complete a Written Request. The
Company will use reasonable procedures to confirm that instructions communicated
by telephone are genuine. If it does not, the Company may be liable for any
losses due to unauthorized or fraudulent instructions. The Company may tape
record all telephone instructions. The Company will not be liable for any loss,
liability, cost or expense incurred by the Owner or Certificate Holder for
acting in accordance with such telephone instructions believed to be genuine.
The telephone transfer privilege may be discontinued at any time by the Company.
If there are Joint Owners or Joint Certificate Holders, unless the Company
is informed to the contrary, telephone instructions will be accepted from either
of the Joint Owners or Joint Certificate Holders.
Neither the Separate Account nor the Eligible Funds are designed for
professional market timing organizations or other entities using programmed and
frequent transfers. A pattern of exchanges that coincides with a "market timing"
strategy may be disruptive to a Portfolio. The Company reserves the right to
restrict the transfer privilege or reject any specific Purchase Payment
allocation request for any person whose transactions seem to follow a timing
pattern.
26
<PAGE> 31
WITHDRAWALS
During the Accumulation Period, the Owner or Certificate Holder may, upon a
Written Request, make a total or partial withdrawal of the Contract/Certificate
Withdrawal Value.
Unless the Owner or Certificate Holder instructs the Company otherwise, a
partial withdrawal will be made from the Separate Account. A partial withdrawal
will result in the cancellation of Accumulation Units from each applicable
Sub-Account in the ratio that the Owner's Contract Value or Certificate Holder's
Account Value in the Sub-Account bears to the total Contract Value or Account
Value in all Sub-Accounts. The Owner or Certificate Holder must specify by
Written Request in advance which Sub-Account Accumulation Units are to be
cancelled if other than the above method is desired.
A partial withdrawal from the Fixed Account or the MVA Account is made for
a Contract or Certificate with Multiple Guarantee Periods by a withdrawal first
from the one year Fixed Account and next from the Guarantee Period of the
shortest remaining duration and then from the Guarantee Period with the earliest
Effective Date where the Guarantee Periods are of the same duration. A partial
withdrawal is taken first from the Contract Withdrawal Value or the Certificate
Withdrawal Value for which the Free Withdrawal Provision applies and then from
the Withdrawal Value for which there is no waiver. A withdrawal from the MVA
Account may be subject to a Market Value Adjustment.
The Company will pay the amount of any withdrawal from the Separate Account
within seven (7) days of receipt of a request in good order unless the
Suspension or Deferral of Payments provision is in effect.
Each partial withdrawal must be for at least $500 (unless the withdrawal is
made pursuant to the Systematic Withdrawal Option). The minimum Contract Value
or Certificate Holder's Account Value which must remain in the Contract or
Certificate after a partial withdrawal is $2,000. The minimum Contract Value or
Certificate Holder's Account Value which must remain in any Account after a
partial withdrawal is $500. During the Accumulation Period, the
Owner/Certificate Holder may make a partial withdrawal of up to 25% of the
Contract Value/Certificate Holder's Account Value in any one Contract/
Certificate year.
Certain tax withdrawal penalties and restrictions may apply to withdrawals
from the Contracts and Certificates. (See "Tax Status"). For Contracts and
Certificates purchased in connection with 403(b) plans, the Code limits the
withdrawal of amounts attributable to contributions made pursuant to a salary
reduction agreement (as defined in Section 403(b)(11) of the Code) to
circumstances only when the Owner/Certificate Holder: (1) attains age 59 1/2;
(2) separates from service; (3) dies; (4) becomes disabled (within the meaning
of Section 72(m)(7) of the Code); or (5) in the case of hardship.
However, withdrawals for hardship are restricted to the portion of the
Owner's Contract Value or Certificate Holder's Account Value which represents
contributions made by the Owner/Certificate Holder and does not include any
investment results. The limitations on withdrawals became effective on January
1, 1989, and apply only to salary reduction contributions made after December
31, 1988, to income attributable to such contributions and to income
attributable to amounts held as of December 31, 1988. The limitations on
withdrawals do not affect rollovers or transfers between certain Qualified
Plans. Owners and Certificate Holder's should consult their own tax counsel or
other tax adviser regarding any distributions.
SYSTEMATIC WITHDRAWAL PROGRAM
The Company offers a Systematic Withdrawal Program which enables an Owner
or Certificate Holder to pre-authorize a periodic exercise of the contractual
withdrawal rights described above. Owners and Certificate Holders entering into
such a program instruct the Company to withdraw an amount specified in dollars.
The minimum withdrawal amount is $100 per payment. The Systematic Withdrawal
Program is available if the Owner's Contract Value or Certificate Holder's
Account Value is at least $12,000 as of the Valuation Date this option is
requested. The Owner, the Certificate Holder or the
27
<PAGE> 32
Company may terminate systematic withdrawals upon 30 days' prior written notice.
There is currently no charge for systematic withdrawals. However, the Company
reserves the right to charge for systematic withdrawals in the future. The total
permitted systematic withdrawals in a Contract or Certificate Year are limited
to not more than twelve. The Systematic Withdrawal Option can be exercised at
any time, including during the first Contract/Certificate Year.
Systematic withdrawals are available for Qualified and Non-Qualified
Contracts and Certificates. Certain tax penalties and restrictions may apply to
systematic withdrawals from the Contracts. (See "Tax Status -- Tax Treatment of
Withdrawals -- Non-Qualified Contracts and Certificates" and "Tax Treatment of
Withdrawals -- Qualified Contracts and Certificates.")
SUSPENSION OR DEFERRAL OF PAYMENTS
The Company reserves the right to suspend or postpone payments from the
Separate Account for a withdrawal or transfer for any period when:
1. The New York Stock Exchange is closed (other than customary weekend and
holiday closings);
2. Trading on the New York Stock Exchange is restricted;
3. An emergency exists as a result of which disposal of securities held in
the Separate Account is not reasonably practicable or it is not
reasonably practicable to determine the value of the Separate Account's
net assets; or
4. During any other period when the Securities and Exchange Commission, by
order, so permits for the protection of Owners or Certificate Holders;
provided that applicable rules and regulations of the Securities and
Exchange Commission will govern as to whether the conditions described in
(2) and (3) exist.
The Company further reserves the right to postpone payments from the Fixed
Account and the MVA Account for a period of up to six months.
PROCEEDS PAYABLE ON DEATH
DEATH OF OWNER OR CERTIFICATE HOLDER DURING THE ACCUMULATION PERIOD
Upon the death of the Owner or Certificate Holder or Joint Owner or Joint
Certificate Holder during the Accumulation Period, the death benefit will be
paid to the Beneficiary(ies) designated by the Owner or Certificate Holder. Upon
the death of a Joint Owner or Joint Certificate Holder, the surviving Joint
Owner or Joint Certificate Holder, if any, will be treated as the primary
Beneficiary. Any other Beneficiary designation on record at the time of death
will be treated as a contingent Beneficiary.
A Beneficiary may request that the death benefit be paid under one of the
Death Benefit Options below. If the Beneficiary is the spouse of the Owner or
Certificate Holder, he or she may elect to continue the Contract or Certificate
at the then current Contract Value or Certificate Holder's Account Value in his
or her own name and exercise all the Owner's or Certificate Holder's rights
under the Contract or Certificate.
DEATH BENEFIT AMOUNT DURING THE ACCUMULATION PERIOD
The death benefit will be the Contract Value or the Certificate Holder's
Account Value in the Fixed Account and in the MVA Account plus the greater of
(a), (b) or (c) where:
(a) is the Contract Value or the Certificate Holder's Account Value in the
Separate Account as of the end of the Valuation Period during which the
Company receives both due proof of death and an election of the
payment.
28
<PAGE> 33
(b) is the Purchase Payments allocated to the Separate Account, less any
withdrawals and transfers from the Separate Account and any related
Contingent Deferred Sales Charge and Transfer Fees (referred to as "net
purchase payments"), accumulated at 6% per annum up to the first
Contract/Certificate Anniversary after the Owner/Certificate Holder
attains age 75, up to a maximum of two times the net purchase payments.
(c) is the highest Reset Value up to the date of death. The Reset Value is
equal to the Contract Value or the Certificate Holder's Account Value
in the Separate Account on each 10th Contract or Certificate
Anniversary prior to the Owner or Certificate Holder attaining age 85,
plus Purchase Payments made after such Contract or Certificate
Anniversary and allocated to the Separate Account less any withdrawals
and transfers from the Separate Account after such Anniversary and any
related Contingent Deferred Sales Charges and Transfer Fees.
In states where the death benefit endorsement (enhanced death benefit) to
the Contract/Certificate is not approved, the death benefit during the
Accumulation Period will be the greater of (i) the Purchase Payments, less any
withdrawals and related Contingent Deferred Sales Charges; or (ii) the Owner's
Contract Value or the Certificate Holder's Account Value determined as of the
end of the Valuation Period during which the Company receives both due proof of
death and an election for the payment method.
Owners/Certificate Holders should refer to their Contract/Certificate for
the applicable Death Benefit provision.
The portion of the Mortality and Expense Risk Charge attributable to the
enhanced death benefit (.27%) will be assessed against Separate Account
allocations pursuant to all Contracts and Certificates issued, whether or not
applicable state law permits the Contract to offer the enhanced death benefit.
Therefore, purchasers of Contracts in states where the enhanced death benefit is
not permitted and who allocate Contract Value or Certificate Holder's Account
Value to the Separate Account will be paying for a benefit they will not
receive. The standard death benefit is available in all states where the
Contract or Certificate is approved.
DEATH BENEFIT OPTIONS DURING THE ACCUMULATION PERIOD
A non-spousal Beneficiary must elect the death benefit to be paid under one
of the following options in the event of the death of the Owner or Certificate
Holder during the Accumulation Period:
OPTION 1 -- lump sum payment of the death benefit; or
OPTION 2 -- the payment of the entire death benefit within 5 years of the
date of the death of the Owner or Certificate Holder; or
OPTION 3 -- payment of the death benefit under an Annuity Option over the
lifetime of the Beneficiary or over a period not extending beyond the life
expectancy of the Beneficiary with distribution beginning within one year
of the date of death of the Owner/Certificate Holder or any Joint
Owner/Joint Certificate Holder.
Any portion of the death benefit not applied under Option 3 within one year
of the date of the Owner's or Certificate Holder's death, must be distributed
within five years of the date of death.
A spousal Beneficiary may elect to continue the Contract or Certificate in
his or her own name at the then current Contract Value or Certificate Holder's
Account Value, elect a lump sum payment of the death benefit or apply the death
benefit to an Annuity Option.
If a lump sum payment is requested, the amount will be paid within seven
(7) days of receipt of proof of death and the election, unless the Suspension or
Deferral of Payments provision is in effect.
Payment to the Beneficiary, other than in a lump sum, may only be elected
during the sixty-day period beginning with the date of receipt of proof of
death.
29
<PAGE> 34
DEATH OF OWNER/CERTIFICATE HOLDER DURING THE ANNUITY PERIOD
If the Owner/Certificate Holder or a Joint Owner/Joint Certificate Holder,
who is not the Annuitant, dies during the Annuity Period, any remaining payments
under the Annuity Option elected will continue at least as rapidly as under the
method of distribution in effect at such Owner's/Certificate Holder's death.
Upon the death of the Owner/Certificate Holder during the Annuity Period, the
Beneficiary becomes the Owner/Certificate Holder.
DEATH OF ANNUITANT
Upon the death of the Annuitant, who is not the Owner or Certificate
Holder, during the Accumulation Period, the Owner/Certificate Holder may
designate a new Annuitant, subject to the Company's underwriting rules then in
effect. If no designation is made within 30 days of the death of the Annuitant,
the Owner or Certificate Holder, as applicable will become the Annuitant. If the
Owner or Certificate Holder is a non-natural person, the death of the Annuitant
will be treated as the death of the Owner or Certificate Holder and a new
Annuitant may not be designated.
Upon the death of the Annuitant during the Annuity Period, the death
benefit, if any, will be as specified in the Annuity Option elected. Death
benefits will be paid at least as rapidly as under the method of distribution in
effect at the Annuitant's death.
PAYMENT OF DEATH BENEFIT
The Company will require due proof of death before any death benefit is
paid. Due proof of death will be:
1. a certified death certificate;
2. a certified decree of a court of competent jurisdiction as to the
finding of death; or
3. any other proof satisfactory to the Company.
All death benefits will be paid in accordance with applicable law or
regulations governing death benefit payments.
BENEFICIARY
The Beneficiary designation in effect on the Issue Date or Certificate
Issue Date will remain in effect until changed. The Beneficiary is entitled to
receive the benefits to be paid at the death of the Owner or Certificate Holder.
Unless the Owner or Certificate Holder provides otherwise, the death benefit
will be paid in equal shares to the survivor(s) as follows:
1. to the Primary Beneficiary(ies) who survive the Owner's or Certificate
Holder's and/or the Annuitant's death, as applicable; or if there are
none
2. to the Contingent Beneficiary(ies) who survive the Owner's or
Certificate Holder's and/or the Annuitant's death, as applicable; or if
there are none
3. to the estate of the Owner or Certificate Holder.
CHANGE OF BENEFICIARY
Subject to the rights of any irrevocable Beneficiary(ies), the Owner or
Certificate Holder may change the Primary Beneficiary(ies) or Contingent
Beneficiary(ies). Any change must be made by Written Request received by the
Company. The change will take effect as of the date the Written Request is
signed. The Company will not be liable for any payment made or action taken
before it records the change.
30
<PAGE> 35
ANNUITY PROVISIONS
GENERAL
On the Annuity Date, the Adjusted Contract Value or Certificate Holder's
Adjusted Account Value, as applicable, will be applied under the Annuity Option
selected by the Owner or Certificate Holder. Annuity Payments will be made on a
fixed basis only.
ANNUITY DATE
The Annuity Date is selected by the Owner/Certificate Holder on the Issue
Date/Certificate Issue Date. The Annuity Date must be at least three years after
the Issue Date/Certificate Issue Date. The Annuity Date may not be later than
when the Annuitant reaches attained Age 85 or 10 years after the Issue
Date/Certificate Issue Date for Annuitant issue ages after Age 75.
Prior to the Annuity Date, the Owner/Certificate Holder, subject to the
above, may change the Annuity Date by Written Request. Any change must be
requested at least thirty (30) days prior to the previously selected Annuity
Date and thirty (30) days prior to the new Annuity Date.
SELECTION OR CHANGE OF AN ANNUITY OPTION
An Annuity Option is selected by Written Request by the Owner/Certificate
Holder. If no Annuity Option is selected, Option B with 120 Monthly Payments
guaranteed will automatically be applied. Prior to the Annuity Date, the Owner
or Certificate Holder can change the Annuity Option selected by Written Request.
Any change must be requested at least thirty (30) days prior to the Annuity
Date.
FREQUENCY AND AMOUNT OF ANNUITY PAYMENTS
Annuity Payments are paid in monthly installments. The Adjusted Contract
Value or the Certificate Holder's Adjusted Account Value is applied to the
Annuity Table for the Annuity Options selected. If the Adjusted Contract Value
or the Certificate Holder's Adjusted Account Value to be applied under an
Annuity Option is less than $2,000, the Company reserves the right to make a
lump sum payment in lieu of Annuity Payments. If the Annuity Payment would be or
become less than $200, the Company reserves the right to reduce the frequency of
payments to an interval which will result in each payment being at least $200.
FIXED ANNUITY
The Adjusted Contract Value or the Certificate Holder's Adjusted Account
Value is allocated to the General Account and the Annuity is paid as a Fixed
Annuity. Unless the Owner or Certificate Holder specifies otherwise, the payee
of the Annuity Payments will be the Owner or Certificate Holder.
The Adjusted Contract Value or the Certificate Holder's Adjusted Account
Value will be applied to the applicable Annuity Table contained in the Contract
or Certificate based upon the Annuity Option selected by the Owner or
Certificate Holder. The amount of the first payment for each $1,000 of Adjusted
Contract Value or Certificate Holder's Adjusted Account Value is shown in the
Annuity Tables. The dollar amount of each Fixed Annuity Payment shall be
determined in accordance with Annuity Tables contained in the Contract or
Certificate.
31
<PAGE> 36
ANNUITY OPTIONS
The following Annuity Options or any other Annuity Option acceptable to the
Company may be selected:
OPTION A. LIFE ANNUITY -- Monthly Annuity Payments during the life of the
Annuitant.
OPTION B. LIFE ANNUITY WITH PERIOD CERTAIN OF 60, 120, 180 OR 240
MONTHS -- Monthly Annuity Payments during the lifetime of the Annuitant and
in any event for sixty (60), one hundred twenty (120), one hundred eighty
(180) or two hundred forty (240) months as selected.
OPTION C. JOINT AND SURVIVOR ANNUITY -- Monthly Annuity Payments payable
during the joint lifetime of the Annuitant and a Joint Annuitant and then
during the lifetime of the survivor.
DISTRIBUTOR
United Variable Services, Inc. ("UVS"), a wholly-owned subsidiary of the
Company, is the distributor of the Contracts. UVS is registered as a
broker-dealer with the Securities and Exchange Commission and is a member of the
National Association of Securities Dealers, Inc.
PERFORMANCE INFORMATION
MONEY MARKET SUB-ACCOUNT
From time to time, the Money Market Sub-Account of the Separate Account may
advertise its "current yield" and "effective yield." Both yield figures are
based on historical earnings and are not intended to indicate future
performance. The "current yield" of the Money Market Sub-Account refers to the
income generated by Contract Values or Certificate Holder's Account Value in the
Money Market Sub-Account over a seven-day period ending on the date of
calculation (which period will be stated in the advertisement). This income is
"annualized." That is, the amount of income generated by the investment during
that week is assumed to be generated each week over a 52-week period and is
shown as a percentage of the Contract Value or Certificate Holder's Account
Value in the Money Market Sub-Account. The "effective yield" is calculated
similarly. However, when annualized, the income earned by Contract Value or
Certificate Holders Account Value is assumed to be reinvested. This results in
the "effective yield" being slightly higher than the "current yield" because of
the compounding effect of the assumed reinvestment. The yield figure will
reflect the deduction of any asset-based charges and any applicable Contract and
Certificate Maintenance Charges.
OTHER SUB-ACCOUNTS
From time to time, the Company may advertise performance data for the
various other Sub-Accounts. Such data will show the percentage change in the
value of an Accumulation Unit based on the performance of an investment medium
over a period of time, usually a calendar year, determined by dividing the
increase (decrease) in value for that Unit by the Accumulation Unit value at the
beginning of the period. This percentage figure will reflect the deduction of
any asset-based charges and any applicable Contract and Certificate Maintenance
Charges under the Contracts.
Any advertisement will also include total return figures calculated as
described in the Statement of Additional Information. The total return figures
will reflect the deduction of all charges and deductions under the Contracts and
Certificates and the fees and expenses of the Portfolios. The Company may, in
addition, advertise performance information computed on a different basis.
The Company may make available yield information with respect to some of
the Sub-Accounts. Such yield information will be calculated as described in the
Statement of Additional Information. The yield information will reflect the
deduction of all charges and deductions under the Contracts and Certificates and
the fees and expenses of the Portfolios.
32
<PAGE> 37
The Company may also show historical Accumulation Unit values in certain
advertisements containing illustrations. These illustrations will be based on
actual Accumulation Unit values.
In addition, the Company may distribute sales literature which compares the
percentage change in Accumulation Unit values for any of the Sub-Accounts
against established market indices such as the Standard & Poor's 500 Composite
Stock Price Index, the Dow Jones Industrial Average or other management
investment companies which have investment objectives similar to the underlying
Portfolio being compared. The Standard & Poor's 500 Composite Stock Price Index
is an unmanaged, unweighted average of 500 stocks, the majority of which are
listed on the New York Stock Exchange. The Dow Jones Industrial Average is an
unmanaged, weighted average of thirty blue chip industrial corporations listed
on the New York Stock Exchange. Both the Standard & Poor's 500 Composite Stock
Price Index and the Dow Jones Industrial Average assume quarterly reinvestment
of dividends.
In addition, the Company may, as appropriate, compare each Sub-Account's or
Portfolio's performance to that of other types of investments such as
certificates of deposit, savings accounts and U.S. Treasuries, or to certain
interest rate and inflation indices, such as the Consumer Price Index, which is
published by the U.S. Department of Labor and measures the average change in
prices over time of a fixed "market basket" of certain specified goods and
services. Similar comparisons of Sub-Account and/or Portfolio performance may
also be made with appropriate indices measuring the performance of a defined
group of securities widely recognized by investors as representing a particular
segment of the securities markets. For example, Sub-Account and/or Portfolio
performance may be compared with Donoghue Money Market Institutional Averages
(money market rates), Lehman Brothers Corporate Bond Index (corporate bond
interest rates) or Lehman Brothers Government Bond Index (long-term U.S.
Government obligation interest rates).
The Company may also distribute sales literature which compares the
performance of the Accumulation Unit values of the Contracts issued through the
Separate Account with the unit values of variable annuities issued through the
separate accounts of other insurance companies. Such information will be derived
from the Lipper Variable Insurance Products Performance Analysis Service, the
VARDS Report or from Morningstar.
The Lipper Variable Insurance Products Performance Analysis Service is
published by Lipper Analytical Services, Inc., a publisher of statistical data
which currently tracks the performance of almost 4,000 investment companies. The
rankings compiled by Lipper may or may not reflect the deduction of asset-based
insurance charges. The Company's sales literature utilizing these rankings will
indicate whether or not such charges have been deducted. Where the charges have
not been deducted, the sales literature will indicate that if the charges had
been deducted, the ranking might have been lower.
The VARDS Report is a monthly variable annuity industry analysis compiled
by Variable Annuity Research & Data Service of Atlanta and published by
Financial Planning Resources, Inc. The VARDS rankings may or may not reflect the
deduction of asset-based insurance charges. Where the charges have not been
deducted, the sales literature will indicate that if the charges had been
deducted, the rankings might have been lower.
Morningstar rates a variable annuity Sub-Account against its peers with
similar investment objectives. Morningstar does not rate any Sub-Account that
has less than three years of performance data. The Morningstar rankings may or
may not reflect the deduction of charges. Where charges have not been deducted,
the sales literature will indicate that if the charges had been deducted, the
rankings might have been lower.
HYPOTHETICAL PERFORMANCE
Although the Sub-Accounts of the Separate Account are relatively new and
therefore have little or no investment performance history, the corresponding
Portfolios of the Eligible Funds have been in existence for some time and
consequently have investment performance history. In order to demonstrate how
the actual investment experience of the various Portfolios of the Eligible Funds
affects Accumulation Unit
33
<PAGE> 38
values, the Company may present hypothetical performance information. The
information will be based upon the historical experience of the Portfolios and
will be for the periods shown.
The performance of the various Sub-Accounts will vary and the hypothetical
results shown are not necessarily representative of future results. Performance
for periods ending after those shown may vary substantially. The performance of
the various Sub-Accounts is calculated for a specified period of time by
assuming an initial Purchase Payment of $1,000 allocated to each of the
Sub-Accounts and a deduction of all charges and deductions (see "Charges and
Deductions" for more information). The hypothetical performance figures will
also reflect the actual fees and expenses paid by the Portfolios of the Eligible
Funds. The percentage increases are determined by subtracting the initial
Purchase Payment from the ending value and dividing the remainder by the
beginning value.
TAX STATUS
GENERAL
NOTE: THE FOLLOWING DESCRIPTION IS BASED UPON THE COMPANY'S UNDERSTANDING
OF CURRENT FEDERAL INCOME TAX LAW APPLICABLE TO ANNUITIES IN GENERAL. THE
COMPANY CANNOT PREDICT THE PROBABILITY THAT ANY CHANGES IN SUCH LAWS WILL BE
MADE. PURCHASERS ARE CAUTIONED TO SEEK COMPETENT TAX ADVICE REGARDING THE
POSSIBILITY OF SUCH CHANGES. THE COMPANY DOES NOT GUARANTEE THE TAX STATUS OF
THE CONTRACTS OR CERTIFICATES. PURCHASERS BEAR THE COMPLETE RISK THAT THE
CONTRACTS OR CERTIFICATES MAY NOT BE TREATED AS "ANNUITY CONTRACTS" UNDER
FEDERAL INCOME TAX LAWS. IT SHOULD BE FURTHER UNDERSTOOD THAT THE FOLLOWING
DISCUSSION IS NOT EXHAUSTIVE AND THAT SPECIAL RULES NOT DESCRIBED IN THIS
PROSPECTUS MAY BE APPLICABLE IN CERTAIN SITUATIONS. MOREOVER, NO ATTEMPT HAS
BEEN MADE TO CONSIDER ANY APPLICABLE STATE OR OTHER TAX LAWS.
Section 72 of the Code governs taxation of annuities in general. An owner
is not taxed on increases in the value of a contract or certificate until
distribution occurs, either in the form of a lump sum payment or as annuity
payments under the annuity option selected. For a lump sum payment received as a
total withdrawal (total surrender), the recipient is taxed on the portion of the
payment that exceeds the cost basis of the contract. For Non-Qualified
Contracts, this cost basis is generally the purchase payments, while for
Qualified Contracts there may be no cost basis. The taxable portion of the lump
sum payment is taxed at ordinary income tax rates.
For annuity payments, a portion of each payment in excess of an exclusion
amount is includible in taxable income. The exclusion amount for payments based
on a Fixed Annuity Option is determined by multiplying the payment by the ratio
that the cost basis of the Contract or Certificate (adjusted for any period
certain or refund feature) bears to the expected return under the Contract or
Certificate. The taxable portion is taxed at ordinary income tax rates. For
certain types of Qualified Plans there may be no cost basis in the Contract or
Certificate within the meaning of Section 72 of the Code. Owners, Certificate
Holders, Annuitants and Beneficiaries under the Contracts and Certificates
should seek competent financial advice about the tax consequences of any
distributions.
The Company is taxed as a life insurance company under the Code. For
federal income tax purposes, the Separate Account is not a separate entity from
the Company and its operations form a part of the Company.
DIVERSIFICATION
Section 817(h) of the Code imposes certain diversification standards on the
underlying assets of variable annuity contracts. The Code provides that a
variable annuity contract will not be treated as an annuity contract for any
period (and any subsequent period) for which the investments are not, in
accordance with regulations prescribed by the United States Treasury Department
("Treasury Department"), adequately diversified. Disqualification of the
Contracts or Certificates as annuity contracts would result in imposition of
federal income tax to the Owner or Certificate Holder with respect to earnings
34
<PAGE> 39
allocable to the Contract or Certificate prior to the receipt of payments under
the Contract or Certificate. The Code contains a safe harbor provision which
provides that annuity contracts such as the Contracts or Certificates meet the
diversification requirements if, as of the end of each quarter, the underlying
assets meet the diversification standards for a regulated investment company and
no more than fifty-five percent (55%) of the total assets consist of cash, cash
items, U.S. Government securities and securities of other regulated investment
companies.
On March 2, 1989, the Treasury Department issued Regulations (Treas. Reg.
1.817-5), which established diversification requirements for the investment
portfolios underlying variable contracts such as the Contracts and Certificates.
The Regulations amplify the diversification requirements for variable contracts
set forth in the Code and provide an alternative to the safe harbor provision
described above. Under the Regulations, an investment portfolio will be deemed
adequately diversified if: (1) no more than 55% of the value of the total assets
of the portfolio is represented by any one investment; (2) no more than 70% of
the value of the total assets of the portfolio is represented by any two
investments; (3) no more than 80% of the value of the total assets of the
portfolio is represented by any three investments; and (4) no more than 90% of
the value of the total assets of the portfolio is represented by any four
investments.
The Code provides that, for purposes of determining whether or not the
diversification standards imposed on the underlying assets of variable contracts
by Section 817(h) of the Code have been met, "each United States government
agency or instrumentality shall be treated as a separate issuer."
The Company intends that the Eligible Funds underlying the Contracts and
Certificates will be managed by the investment adviser(s) for the Eligible Funds
in such a manner as to comply with these diversification requirements.
The Treasury Department has indicated that the diversification Regulations
do not provide guidance regarding the circumstances in which Owner or
Certificate Holder control of the investments of the Separate Account will cause
the Owner or Certificate Holder to be treated as the owner of the assets of the
Separate Account, thereby resulting in the loss of favorable tax treatment for
the Contract or Certificate. At this time it cannot be determined whether
additional guidance will be provided and what standards may be contained in such
guidance.
The amount of Owner or Certificate Holder control which may be exercised
under the Contract or Certificate is different in some respects from the
situations addressed in published rulings issued by the Internal Revenue Service
in which it was held that the policy owner was not the owner of the assets of
the separate account. It is unknown whether these differences, such as the
Owner's/Certificate Holder's ability to transfer among investment choices or the
number and type of investment choices available, would cause the
Owner/Certificate Holder to be considered as the owner of the assets of the
Separate Account resulting in the imposition of federal income tax to the
Owner/Certificate Holder with respect to earnings allocable to the Contract or
Certificate prior to receipt of payments under the Contract or Certificate.
In the event any forthcoming guidance or ruling is considered to set forth
a new position, such guidance or ruling will generally be applied only
prospectively. However, if such ruling or guidance was not considered to set
forth a new position, it may be applied retroactively resulting in the Owner or
Certificate Holder being retroactively determined to be the owner of the assets
of the Separate Account.
Due to the uncertainty in this area, the Company reserves the right to
modify the Contract or Certificate in an attempt to maintain favorable tax
treatment.
CONTRACTS AND CERTIFICATES OWNED BY OTHER THAN NATURAL PERSONS
Under Section 72(u) of the Code, the investment earnings on premiums for
the Contracts and Certificates will be taxed currently to the Owner/Certificate
Holder if the Owner/Certificate Holder is a non-natural person, e.g., a
corporation, or certain other entities. Such Contracts generally will not be
treated as annuities for federal income tax purposes. However, this treatment is
not applied to Contracts/Certificates held by a trust or other entity as an
agent for a natural person nor to Con-
35
<PAGE> 40
tracts/Certificates held by certain Qualified Plans. Purchasers should consult
their own tax counsel or other tax adviser before purchasing a
Contract/Certificate to be owned by a non-natural person.
MULTIPLE CONTRACTS/CERTIFICATES
Section 72(e)(11) of the Code provides that multiple non-qualified annuity
contracts and/or certificates which are issued within a calendar year to the
same contract owner or certificate holder by one company or its affiliates are
treated as one annuity contract and/or certificate for purposes of determining
the tax consequences of any distribution. Such treatment may result in adverse
tax consequences including more rapid taxation of the distributed amounts from
such combination of contracts and/or certificates. Owners and Certificate
Holders should consult a tax adviser prior to purchasing more than one non-
qualified annuity contract and/or certificate in any calendar year.
TAX TREATMENT OF ASSIGNMENTS
An assignment or pledge of a Contract or Certificate may be a taxable
event. Owners and Certificate Holders should therefore consult competent tax
advisers should they wish to assign or pledge their Contracts or Certificates.
INCOME TAX WITHHOLDING
All distributions or the portion thereof which is includible in the gross
income of the Owner or Certificate Holder are subject to federal income tax
withholding. Generally, amounts are withheld from periodic payments at the same
rate as wages and at the rate of 10% from non-periodic payments. However, the
Owner or Certificate Holder, in most cases, may elect not to have taxes withheld
or to have withholding done at a different rate.
Effective January 1, 1993, certain distributions from retirement plans
qualified under Section 401 or Section 403(b) of the Code, which are not
directly rolled over to another eligible retirement plan or individual
retirement account or individual retirement annuity, are subject to a mandatory
20% withholding for federal income tax. The 20% withholding requirement
generally does not apply to: a) a series of substantially equal payments made at
least annually for the life or life expectancy of the participant or joint and
last survivor expectancy of the participant and a designated beneficiary, or
distributions for a specified period of 10 years or more; or b) distributions
which are required minimum distributions; or c) the portion of the distributions
not includible in gross income (i.e. returns of after-tax contributions).
Participants under such plans should consult their own tax counsel or other tax
adviser regarding withholding requirements.
TAX TREATMENT OF WITHDRAWALS -- NON-QUALIFIED CONTRACTS AND CERTIFICATES
Section 72 of the Code governs treatment of distributions from annuity
contracts. It provides that if the Contract Value or Certificate Holder's
Account Value exceeds the aggregate purchase payments made, any amount withdrawn
will be treated as coming first from the earnings and then, only after the
income portion is exhausted, as coming from the principal. Withdrawn earnings
are includible in gross income. It further provides that a ten percent (10%)
penalty will apply to the income portion of any distribution. However, the
penalty is not imposed on amounts received: (a) after the taxpayer reaches age
59 1/2; (b) after the death of the Owner or Certificate Holder; (c) if the
taxpayer is totally disabled (for this purpose disability is as defined in
Section 72(m)(7) of the Code); (d) in a series of substantially equal periodic
payments made not less frequently than annually for the life (or life
expectancy) of the taxpayer or for the joint lives (or joint life expectancies)
of the taxpayer and his or her Beneficiary; (e) under an immediate annuity; or
(f) which are allocable to purchase payments made prior to August 14, 1982.
The above information does not apply to Qualified Contracts and
Certificates. However, separate tax withdrawal penalties and restrictions may
apply to such Qualified Contracts and Certificates. (See "Tax Treatment of
Withdrawals -- Qualified Contracts and Certificates," below.)
36
<PAGE> 41
QUALIFIED CONTRACTS AND CERTIFICATES
The Contracts and Certificates offered by this Prospectus are designed to
be suitable for use under various types of qualified plans. IN CERTAIN STATES,
THE CONTRACTS/CERTIFICATES MAY NOT BE AVAILABLE FOR USE IN CONNECTION WITH
SECTION 401 PLANS. Taxation of participants in each Qualified Plan varies with
the type of plan and terms and conditions of each specific plan. Owners,
Certificate Holders, Annuitants and Beneficiaries are cautioned that benefits
under a qualified plan may be subject to the terms and conditions of the plan
regardless of the terms and conditions of the Contracts or Certificates issued
pursuant to the plan. Some retirement plans are subject to distribution and
other requirements that are not incorporated into the Company's administrative
procedures. Owners, Certificate Holders, participants and Beneficiaries are
responsible for determining that contributions, distributions and other
transactions with respect to the Contracts and Certificates comply with
applicable law. Following are general descriptions of the types of qualified
plans with which the Contracts and Certificates may be used. Such descriptions
are not exhaustive and are for general informational purposes only. The tax
rules regarding Qualified Contracts and Certificates are very complex and will
have differing applications depending on individual facts and circumstances.
Each purchaser should obtain competent tax advice prior to purchasing a Contract
or Certificate issued under a qualified plan.
Contracts and Certificates issued pursuant to qualified plans include
special provisions restricting Contract and Certificate provisions that may
otherwise be available as described in this Prospectus. Generally, Contracts and
Certificates issued pursuant to qualified plans are not transferable except upon
surrender or annuitization. Various penalty and excise taxes may apply to
contributions or distributions made in violation of applicable limitations.
Furthermore, certain withdrawal penalties and restrictions may apply to
surrenders from Qualified Contracts and Certificates. (See "Tax Treatment of
Withdrawals -- Qualified Contracts and Certificates," below.)
On July 6, 1983, the Supreme Court decided in Arizona Governing Committee
v. Norris that optional annuity benefits provided under an employer's deferred
compensation plan could not, under Title VII of the Civil Rights Act of 1964,
vary between men and women. Qualified Contracts sold by the Company will utilize
annuity tables which do not differentiate on the basis of sex. Such annuity
tables will also be available for use in connection with certain non-qualified
deferred compensation plans.
A. H.R. 10 PLANS
Section 401 of the Code permits self-employed individuals to establish
Qualified Plans for themselves and their employees, commonly referred to as
"H.R. 10" or "Keogh" plans. Contributions made to the Plan for the benefit of
the employees will not be included in the gross income of the employees until
distributed from the Plan. The tax consequences to participants may vary
depending upon the particular plan design. However, the Code places limitations
and restrictions on all Plans, including on such items as: amount of allowable
contributions; form, manner and timing of distributions; transferability of
benefits; vesting and non-forfeitability of interests; nondiscrimination in
eligibility and participation; and the tax treatment of distributions,
withdrawals and surrenders. (See "Tax Treatment of Withdrawals -- Qualified
Contracts and Certificates" below.) Purchasers of Contracts/Certificates for use
with an H.R. 10 Plan should obtain competent tax advice as to the tax treatment
and suitability of such an investment.
B. TAX-SHELTERED ANNUITIES
Section 403(b) of the Code permits the purchase of "tax-sheltered
annuities" by public schools and certain charitable, educational and scientific
organizations described in Section 501(c)(3) of the Code. These qualifying
employers may make contributions to the Contracts/Certificates for the benefit
of their employees. Such contributions are not includible in the gross income of
the employees until the employees receive distributions from the
Contracts/Certificates. The amount of contributions to the tax-sheltered annuity
is limited to certain maximums imposed by the Code. Furthermore, the Code sets
forth additional restrictions governing such items as transferability,
distributions, nondiscrimination and withdrawals. (See "Tax Treatment of
Withdrawals -- Qualified Contracts" and "Tax-Sheltered Annuities -- Withdrawal
37
<PAGE> 42
Limitations" below.) Any employee should obtain competent tax advice as to the
tax treatment and suitability of such an investment.
C. INDIVIDUAL RETIREMENT ANNUITIES
Section 408(b) of the Code permits eligible individuals to contribute to an
individual retirement program known as an "Individual Retirement Annuity"
("IRA"). Under applicable limitations, certain amounts may be contributed to an
IRA which will be deductible from the individual's gross income. These IRAs are
subject to limitations on eligibility, contributions, transferability and
distributions. (See "Tax Treatment of Withdrawals -- Qualified Contracts and
Certificates" below.) Under certain conditions, distributions from other IRAs
and other qualified plans may be rolled over or transferred on a tax-deferred
basis into an IRA. Sales of Contracts and Certificates for use with IRAs are
subject to special requirements imposed by the Code, including the requirement
that certain informational disclosure be given to persons desiring to establish
an IRA. Purchasers of Contracts and Certificates to be qualified as Individual
Retirement Annuities should obtain competent tax advice as to the tax treatment
and suitability of such an investment.
D. CORPORATE PENSION AND PROFIT SHARING PLANS
Sections 401(a) and 401(k) of the Code permit corporate employers to
establish various types of retirement plans for employees. These retirement
plans may permit the purchase of the Contracts/Certificates to provide benefits
under the Plan. Contributions to the Plan for the benefit of employees will not
be includible in the gross income of the employees until distributed from the
Plan. The tax consequences to participants may vary depending upon the
particular plan design. However, the Code places limitations and restrictions on
all plans, including on such items as: amount of allowable contributions; form,
manner and timing of distributions; transferability of benefits; vesting and
non-forfeitability of interests; nondiscrimination in eligibility and
participation; and the tax treatment of distributions, withdrawals and
surrenders. (See "Tax Treatment of Withdrawals -- Qualified Contracts and
Certificates" below.) Purchasers of Contracts/Certificates for use with
Corporate Pension or Profit Sharing Plans should obtain competent tax advice as
to the tax treatment and suitability of such an investment.
TAX TREATMENT OF WITHDRAWALS -- QUALIFIED CONTRACTS AND CERTIFICATES
In the case of a withdrawal under a Qualified Contract or Certificate, a
ratable portion of the amount received is taxable, generally based on the ratio
of the individual's cost basis to the individual's total accrued benefit under
the retirement plan. Special tax rules may be available for certain
distributions from a Qualified Contract/Certificate. Section 72(t) of the Code
imposes a 10% penalty tax on the taxable portion of any distribution from
qualified retirement plans, including Contracts and Certificates issued and
qualified under Code Sections 401 (H.R. 10 and Corporate Pension and Profit
Sharing Plans), 403(b) (Tax-Sheltered Annuities) and 408(b) (Individual
Retirement Annuities). To the extent amounts are not includible in gross income
because they have been rolled over to an IRA or to another eligible qualified
plan, no tax penalty will be imposed. The tax penalty will not apply to the
following distributions: (a) if distribution is made on or after the date on
which the Owner/Certificate Holder or Annuitant (as applicable) reaches age
59 1/2; (b) distributions following the death or disability of the
Owner/Certificate Holder or Annuitant (as applicable) (for this purpose
disability is as defined in Section 72(m)(7) of the Code); (c) distributions
that are part of substantially equal periodic payments made not less frequently
than annually for the life (or life expectancy) of the Owner/Certificate Holder
or Annuitant (as applicable) or the joint lives (or joint life expectancies) of
such Owner/Certificate Holder or Annuitant (as applicable) and his or her
designated Beneficiary; (d) distributions to an Owner/Certificate Holder or
Annuitant (as applicable) who has separated from service after he has attained
age 55; (e) distributions made to the Owner/Certificate Holder or Annuitant (as
applicable) to the extent such distributions do not exceed the amount allowable
as a deduction under Code Section 213 to the Owner/Certificate Holder or
Annuitant (as applicable) for amounts paid during the taxable year for medical
care; and (f) distributions made to an alternate payee pursuant to a qualified
domestic relations order. The exceptions stated in (d), (e) and
38
<PAGE> 43
(f) above do not apply in the case of an Individual Retirement Annuity. The
exception stated in (c) above applies to an Individual Retirement Annuity
without the requirement that there be a separation from service.
Generally, distributions from a Qualified Contract/Certificate must
commence no later than April 1 of the calendar year, following the year in which
the Owner/Certificate Holder attains age 70 1/2. Required distributions must be
over a period not exceeding the life expectancy of the individual or the joint
lives or life expectancies of the individual and his or her designated
beneficiary. If the required minimum distributions are not made, a 50% penalty
tax is imposed as to the amount not distributed. In addition, distributions in
excess of $150,000 per year may be subject to an additional 15% excise tax
unless an exemption applies.
TAX-SHELTERED ANNUITIES -- WITHDRAWAL LIMITATIONS
The Code limits the withdrawal of amounts attributable to contributions
made pursuant to a salary reduction agreement (as defined in Section 403(b)(11)
of the Code) to circumstances only when the Owner/Certificate Holder: (1)
attains age 59 1/2; (2) separates from service; (3) dies; (4) becomes disabled
(within the meaning of Section 72(m)(7) of the Code); or (5) in the case of
hardship. However, withdrawals for hardship are restricted to the portion of the
Owner's Contract Value or Certificate Holder's Account Value which represents
contributions made by the Owner/Certificate Holder and does not include any
investment results. The limitations on withdrawals became effective on January
1, 1989, and apply only to salary reduction contributions made after December
31, 1988, to income attributable to such contributions and to income
attributable to amounts held as of December 31, 1988. The limitations on
withdrawals do not affect rollovers or transfers between certain qualified
plans. Owners/Certificate Holders should consult their own tax counsel or other
tax adviser regarding any distributions.
SECTION 457 -- DEFERRED COMPENSATION PLANS
Under Section 457 of the Code, governmental and certain other tax-exempt
employers may establish deferred compensation plans for the benefit of their
employees which may invest in annuity contracts. The Code, as in the case of
qualified plans, establishes limitations and restrictions on eligibility,
contributions and distributions. Under these Plans, contributions made for the
benefit of the employees will not be includible in the employee's gross income
until distributed from the Plan. However, under a Section 457 Plan, all the
assets remain solely the property of the employer, subject only to the claims of
the employer's general creditors until such time as made available to the
participant or beneficiary. IN CERTAIN STATES, THE CONTRACTS/CERTIFICATES MAY
NOT BE AVAILABLE FOR USE IN CONNECTION WITH SECTION 457 PLANS.
39
<PAGE> 44
ADDITIONAL INFORMATION ABOUT THE COMPANY
SELECTED FINANCIAL DATA
The selected financial data set forth below is derived from the Company's
audited consolidated financial statements.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------------------------------------
1995 1994 1993 1992 1991
---------- ---------- ---------- ---------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Income Statement Data:
Net investment income................................ $ 123,107 $ 114,380 $ 109,661 $ 104,814 $ 103,894
Net insurance premiums............................... 8,508 11,373 18,684 22,860 36,269
Realized investment gains (losses)................... (3,498) (4,811) (19,393) 1,486 (2,349)
---------- ---------- ---------- ---------- ----------
Total revenues................................. 128,117 120,942 108,952 129,160 137,814
Total expenses................................. 116,017 111,862 121,317 123,695 135,737
---------- ---------- ---------- ---------- ----------
Income (loss) before income taxes.................... 12,100 9,080 (12,365) 5,465 2,077
Provision (benefit) for income taxes................. 4,065 3,194 (4,107) 1,438 173
---------- ---------- ---------- ---------- ----------
Net income (loss).............................. $ 8,035 $ 5,886 $ (8,258) $ 4,027 $ 1,904
---------- ---------- ---------- ---------- ----------
Balance Sheet Data -- Period End:
Total investments(1)................................. $1,631,723 $1,453,094 $1,428,405 $1,253,915 $1,154,486
Due from reinsurance................................. 33,583 34,985 36,577 37,716 38,600
Deferred policy acquisition costs.................... 90,703 91,915 83,495 80,007 78,599
Total assets......................................... 1,789,608 1,658,154 1,625,718 1,464,475 1,343,076
Annuity reserves..................................... 1,417,803 1,425,973 1,294,983 1,147,555 1,014,649
Policy benefit reserves.............................. 111,209 116,501 123,328 125,177 125,908
Total liabilities.................................... 1,603,083 1,555,975 1,482,591 1,327,610 1,211,080
Stockholder's equity(1).............................. 186,525 102,179 143,127 136,385 132,358
Other Data:
Annuity sales........................................ $ 135,534 $ 249,737 $ 207,682 $ 187,050 $ 175,796
Net interest spread on annuities..................... 2.37% 2.73% 2.20% 1.84% 1.88%
Investment grade bonds as % of invested assets....... 68.0% 69.6% 59.6% 54.3% 25.1%
</TABLE>
- ---------------
(1) During the first quarter of 1994, the Company implemented the provisions of
FASB Statement of Financial Accounting Standards No. 115 ("SFAS 115"),
which revised the method of accounting for certain of the Company's
investments. Prior to adoption of SFAS 115, the Company reported its
investments in fixed income investments at amortized cost, adjusted for
declines in value considered to be other than temporary, SFAS 115 requires
the classification of securities in one of three categories:
"available-for-sale," "held-to-maturity" or "trading securities."
Securities classified as held-to-maturity are carried at amortized cost,
whereas securities classified as trading securities or available-for-sale
are recorded at fair value. Effective with the adoption of SFAS 115, the
Company determined the appropriate classification of its investments and,
if necessary, adjusted the carrying value of such securities accordingly as
if the unrealized gains or losses had been realized. The adjustment, net of
applicable income taxes, for investments classified as available-for-sale
is recorded in "Net unrealized loss on securities" and is included in
Stockholders' equity and the adjustment for investments classified as
trading is recorded in "Realized investment losses" in the Statement of
Income. In accordance with the provisions of SFAS 115, prior year
investments were not restated.
BUSINESS
GENERAL
United Companies Life Insurance Company ("the Company"), domiciled in
Louisiana and organized in 1955, is currently authorized to conduct business in
47 states, the District of Columbia and Puerto Rico. The Company is a
wholly-owned subsidiary of United Companies Financial Corporation ("UCFC" or
"Parent"), a financial services holding company with mortgage and insurance
operations. The primary products of the Company are deferred annuities marketed
on a commission basis principally through
40
<PAGE> 45
financial institutions and independent general agents and generally sold to
middle income customers seeking tax deferred insurance products, primarily to
provide savings for retirement. The Company added variable annuity products to
its annuity line of business during 1995 and began sales during the fourth
quarter of 1995.
The Company produced $136 million, $250 million and $208 million in sales
of annuity products during the years ended December 31, 1995, 1994 and 1993,
respectively. At December 31, 1995, total annuity reserves were $1.4 billion. At
December 31, 1995, the invested assets of the Company consisted of $1.1 billion
in investment grade fixed maturity securities (at amortized cost), $168.9
million of home equity mortgage loans (which were primarily originated by its
affiliate, United Companies Lending Corporation ("UC Lending"), and $167.4
million of commercial mortgage loans (also primarily originated by UC Lending).
At December 31, 1995, the weighted average rating of its publicly traded bond
portfolio was "AA," the assets allocated to investments in mortgage-backed
securities were $777.7 million and the amount of non-investment grade publicly
traded bonds in the portfolio was $22 million or 1.9% of the portfolio. During
the year ended December 31, 1995, the net interest spread on the Company's
annuity business was 2.37% compared to 2.73% for the same period in 1994.
Reserves for annuity policies constitute the Company's primary liabilities.
The duration of these liabilities is affected by a number of factors, including
interest rates, surrender penalties, ratings, public confidence in the insurance
industry generally and in the Company specifically, governmental regulations and
tax laws. Since insurance commissions incurred at the origination of annuity
policies are generally deferred and recognized over the estimated life of the
policies, any unexpected increase in surrenders of annuity contracts would
require more rapid recognition of these expenses, thereby adversely impacting
profitability.
In the second quarter of 1995, A.M. Best Company ("Best"), an independent
rating organization, reaffirmed its "A-" (Excellent) rating of the Company. The
Company's claims paying ability, which has been rated "A+" (Single-A-Plus) by
Duff & Phelps Credit Rating Company ("Duff & Phelps"), has been put on its
"Rating Watch-Uncertain" list as a result of the Parent's announcement that it
was considering strategic alternatives regarding the Company, including a
possible sale thereof. Duff & Phelps reported that the Company's claims paying
ability would remain on "Rating Watch-Uncertain" until more information becomes
known about the Company's ultimate position within the organization or another
organization. See "Recent Developments" and "Insurance Ratings". During 1995,
Standard & Poor's, a division of The McGraw-Hill Companies, Inc. ("Standard &
Poor's"), revised the rating scale used in assigning its qualified solvency
ratings of insurance companies and, as a result, revised its rating assigned to
the Company from "BBq" to "Aq."
RECENT DEVELOPMENTS
On February 2, 1996, UCFC signed a stock purchase agreement ("Agreement")
dated as of January 30, 1996, for the sale of all of the outstanding capital
stock of the Company to UC Life Holding Corp., a new Delaware corporation formed
by Knightsbridge Capital Fund I, L.P. ("Knightsbridge"), for $164 million plus
earnings of the Company from January 1, 1996, to closing of the transaction.
Knightsbridge, which is a private investment partnership with institutional
partners, was formed in 1995 to make equity investments in companies engaged
primarily in the life insurance industry. Knightsbridge is a Delaware limited
partnership, the limited partners of which are primarily affiliates of leading
domestic and international banking organizations. The general partner is
Knightsbridge Management L.L.C.
Under the terms of the Agreement, the sales price is comprised of cash,
estimated, as of January 30, 1996, to be approximately $109 million, and real
estate and other assets owned by the Company to be distributed to UCFC prior to
the closing. The real estate to be distributed includes portions of the United
Plaza office park, including UCFC's home office. In addition, UCFC will purchase
a convertible promissory note from an affiliate of the purchaser for $15 million
in cash.
41
<PAGE> 46
The purchaser also agreed that the Company would continue to be an investor
in first lien home equity loans originated by UCFC's lending operations and that
the purchaser would use commercially reasonable efforts to maintain the
Company's home office operations in its present location in Baton Rouge,
Louisiana following the closing for at least two years. The Agreement is subject
to approval by UCFC's shareholders and regulatory authorities and the
satisfaction of other conditions, and provides that the closing will occur on or
before July 31, 1996.
PRINCIPAL PRODUCTS
The principal products marketed by the Company since 1978 have been
deferred annuities. During the year of 1995, the average premium received on the
sale of these policies was approximately $21,000. The annuities typically
guarantee an interest crediting rate for the first policy year. Thereafter, the
interest crediting rate generally may be adjusted by the Company at any time
(subject to certain minimum crediting rates stated in the policy). A
policyholder is permitted at any time to withdraw all or part of the accumulated
premium plus the amount of interest credited on the policy, less a surrender
charge if applicable. The initial surrender charge typically ranges from 9%-10%
of the initial premium and decreases to zero during a penalty period of from
five to ten years. Approximately 78% of the Company's annuity policies at
December 31, 1995 were subject to a surrender penalty.
The Company produced $136 million and $250 million in sales of annuity
products during the years ended December 31, 1995 and 1994, respectively. The
Company believes that the decrease in annuity sales in 1995 is due in part to
the interest rate environment, particularly the relative relationship between
short term and intermediate term interest rates, and to the focus of the
Company's resources on development of the variable annuity product. In addition,
a financial institution which produced approximately 10% of UCLIC's annuity
sales in 1994 discontinued the sale of annuities for UCLIC in 1995 subsequent to
the merger of such financial institution.
The interest earned on the annuity policy accumulates on a tax-deferred
basis until withdrawal by the policyholder. The deferred annuity policies
written by the Company generally provide a death benefit equal to the amount of
the initial premium plus accumulated interest earned less the amount of any
prior withdrawals.
The following table presents the Company's annuity sales by state by
percent of total premiums for the periods indicated:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31
-----------------
STATE 1995 1994
--------- ------ ------
<S> <C> <C>
Florida..................................................... 21.8% 28.9%
Missouri.................................................... 20.9 10.3
Louisiana................................................... 9.8 13.7
Illinois.................................................... 9.8 8.6
Texas....................................................... 7.3 5.8
All Others.................................................. 30.4 32.7
----- -----
Total............................................ 100.0% 100.0%
===== =====
</TABLE>
No other state individually accounted for more than 7% of premium income
during 1995 or 1994.
DISTRIBUTION
The Company's strategy of marketing through financial institutions and
independent general agents allows it to avoid substantial sales management
office expense and to expand its sales efforts without significant development
expense. Because financial institutions and independent general agents usually
offer the products of several insurance companies, the Company must continue to
provide products with competitive terms, interest crediting rates, commissions
and service to both policyholders and the selling institutions and independent
general agents. During 1995 and 1994, the Company focused on expanding
42
<PAGE> 47
the independent general agent share of its distribution network. Of the annuity
policies sold during 1995 and 1994, approximately 55% and 46%, respectively, of
the total dollar amount were attributable to sales by independent general
agents.
REINSURANCE
The Company generally limits the amount of insurance risk that it assumes
with respect to any one insured to $100,000 and for larger policies follows
industry practice of reinsuring that portion of the risk in excess of
established retention limits. The Company, however, remains contingently liable
for insurance ceded to reinsurers and remains liable to the policyholder in the
event the reinsurer is unable to meet the obligations assumed under the
reinsurance agreement. Reinsurance is currently ceded primarily to the following
companies: First Capital Life Insurance Company of Louisiana ("First Capital")
(not affiliated with First Capital Holding Company of California), Aetna Life
Insurance Company ("Aetna"), Continental Assurance Company ("Continental"),
American United Life Insurance Company ("American United") and Transamerica
Occidental Life Insurance Company ("Transamerica"). American United and
Transamerica are rated "A+" (Superior) by Best at December 31, 1995. Aetna and
Continental are rated "A" (Excellent"). First Capital is rated "B" (Adequate).
In the case of First Capital, the dollar amount of reserve credit taken by the
Company is held in trust for the benefit of the Company.
LIFE INSURANCE AND ANNUITY RESERVES
In accordance with applicable insurance regulations, the Company records as
liabilities in its statutory financial statements actuarially determined
reserves that are calculated to meet future obligations under outstanding
insurance. The reserves are based on statutorily recognized methods using
prescribed morbidity and mortality tables and interest rates. Reserves include
unearned premiums, premium deposits, claims that have been reported but are not
yet paid, claims that have been incurred but have not been reported, and claims
in the process of settlement. The Company's reserves satisfy minimum statutory
requirements.
The annuity reserves reflected in the consolidated financial statements are
calculated based on generally accepted accounting principles ("GAAP"). As of
December 31, 1995, annuity reserves were $1.4 billion, policy benefit reserves
were $111.2 million, and unearned premium reserves related to credit insurance
were $1.8 million. These reserves are based upon the Company's best estimates of
mortality, persistency, expenses and investment income, with appropriate
provisions for adverse statistical deviation and the use of the net level
premium method for all non-interest sensitive products and the retrospective
deposit method for interest-sensitive products. GAAP reserves differ from
statutory reserves due to the use of different assumptions regarding mortality
and interest rates and the introduction of lapse assumptions into the GAAP
reserve calculation. See Note 1 of Notes to consolidated financial statements
for additional information regarding reserve assumptions under GAAP.
INVESTMENTS
The investment function of the Company is overseen by an investment
committee comprised of senior management, with the assistance of outside
investment advisors in the management of certain assets. The Company's
investment policy seeks to achieve attractive returns on a low to moderate risk
portfolio of investments. These investments, primarily bonds and mortgage loans,
must be within regulatory constraints to qualify as permitted assets, and within
the yield, risk and maturity limitations established by the Company as necessary
for meeting its objectives.
The investment strategy continues to focus on maintaining the percentage of
the Company's invested assets committed to commercial and residential mortgages
and to investment grade corporate bonds and mortgage-backed securities.
43
<PAGE> 48
The following table sets forth, at December 31, 1995, certain information
regarding the Company's invested assets:
<TABLE>
<CAPTION>
AMORTIZED PERCENT OF
COST TOTAL
---------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Fixed Maturity Securities(1)
U.S. Government, government agencies &
authorities...................................... $ 11,504 0.7%
Foreign governments & other......................... 20,819 1.3
Corporate bonds..................................... 335,238 21.2
Mortgage-backed..................................... 777,744 49.0
---------- -----
Total...................................... 1,145,305 72.2
---------- -----
Mortgage loans on real estate....................... 336,269 21.2
Investment real estate.............................. 32,423 2.0
Short-term investments.............................. 22,804 1.4
Investment in limited partnership................... 25,594 1.6
Policy loans........................................ 20,291 1.3
Common and preferred stocks......................... 1,012 0.1
Other invested assets............................... 2,469 0.2
---------- -----
Total...................................... $1,586,167 100.0%
========== =====
</TABLE>
- ---------------
(1) Generally stated at amortized cost adjusted for permanent impairment in
value. Total fair value of held-to-maturity and available-for-sale Fixed
Maturity Securities at December 31, 1995, was approximately $1.2 billion,
representing net unrealized gains of $44.5 million.
As reflected in the following table, the carrying value of the Company's
investments classified as investment grade at December 31, 1995, was
approximately $1.1 billion or 94.4% of the fixed maturity portfolio:
<TABLE>
<CAPTION>
PERCENT OF
AMORTIZED FAIR CARRYING CARRYING
COST VALUE VALUE VALUE
--------- --------- --------- ----------
<S> <C> <C> <C> <C>
(DOLLARS IN THOUSANDS)
Investment Quality(1)
Aaa...................... $ 734,721 $ 756,251 $ 756,251 63.5%
Aa....................... 25,255 26,768 26,768 2.2
A........................ 227,800 244,562 244,434 20.5
Baa...................... 91,322 97,728 97,306 8.2
---------- ---------- ---------- -----
Total Investment Grade..... 1,079,098 1,125,309 1,124,759 94.4
Ba and below............... 21,980 22,093 22,093 1.9
Not rated.................. 44,227 42,369 44,227 3.7
---------- ---------- ---------- -----
Total Fixed
Maturity
Securities.... $1,145,305 $1,189,771 $1,191,079 100.0%
========== ========== ========== =====
</TABLE>
- ---------------
(1) Fixed maturity investments are classified according to the ratings assigned
by Moody's Investors Service, Inc., or, in the absence of such rating, by
the National Association of Insurance Commissioners ("NAIC") whose ratings
operate as follows: NAIC Class 1 was assumed equivalent to an A rating; NAIC
Class 2, BBB/Baa; and NAIC Classes 3-6, BB/Ba and below.
As a significant percentage of the Company's investment portfolio is
invested in fixed rate, fixed maturity investments, the fair value of these
investments is sensitive to changes in market rates of interest. In a rising
interest rate environment, the fair value of these investments would be expected
to decrease in value. An unanticipated increase in policy surrenders or claims
could impact the Company's liquidity and require the sale of certain assets,
such as bonds, prior to their maturity at a loss.
44
<PAGE> 49
FIXED MATURITY INVESTMENTS
As of December 31, 1995, the amortized cost of the Company's fixed maturity
investments totaled $1.1 billion or approximately 72.2% of the Company's
invested assets. The fair value of fixed maturity investments at that date
exceeded its amortized cost by approximately $44.5 million. In accordance with
the provisions of Financial Accounting Standards Board ("FASB") Statement of
Financial Accounting Standards No. 115 ("SFAS 115"), the Company classifies its
securities in one of three categories: "available-for-sale," "held-to-maturity"
or "trading." Securities classified as held-to-maturity are carried at amortized
cost, whereas securities classified as trading securities or available-for-sale
are recorded at fair value. The adjustment, net of applicable income taxes, for
investments classified as available-for-sale is recorded in "Net unrealized
gains (losses) on securities" and is included in stockholder's equity on the
balance sheet and the adjustment for investments classified as trading is
recorded in "Net investment income" in the statement of income. The Company may
for business or regulatory reasons be required to sell certain of its
investments prior to maturity, and in some cases these sales may be made at
times when the fair value is less than carrying value, thereby resulting in a
loss in the statements of income for financial and statutory reporting purposes.
At December 31, 1995, 49.0% of the Company's total invested assets were
invested in mortgage-backed securities. These mortgage-backed securities consist
principally of collateralized mortgage obligations and mortgage-backed
pass-through securities. Mortgage-backed securities generally are collateralized
by mortgages backed by GNMA, FNMA and FHLMC. Only GNMA mortgages are backed by
the full faith and credit of the United States Government. Certain
mortgage-backed securities are subject to significant prepayment risk. In
periods of declining interest rates, mortgages may be repaid more rapidly than
scheduled as individuals refinance higher-rate mortgages to take advantage of
lower interest rates. As a result, holders of mortgage-backed securities may
receive large prepayments on their investments that cannot be reinvested at an
interest rate comparable to the rate on the prepaid mortgage. In addition to
decreased investment yields, earnings could also be affected by capital gains or
losses realized on these prepayments since the carrying value of securities
purchased at a discount or premium may be different than the amount received
upon prepayment. The Company has reduced the prepayment risk associated with
mortgage-backed securities by investing in planned amortization class ("PAC")
instruments. These instruments are designed to amortize in a predictable manner
by shifting the primary risk of prepayment of the underlying collateral to other
investors. PAC instruments represented approximately 54% of the Company's
investments in mortgage-backed securities at December 31, 1995.
MORTGAGE LOANS ON REAL ESTATE
At December 31, 1995, the Company's investment in mortgage loans on real
estate was comprised of $168.9 million in residential home equity mortgage loans
and $167.4 million in commercial real estate mortgage loans, substantially all
of which were originated by UC Lending. During 1995, the Company funded $21.3
million in new commercial real estate loans which were originated by UC Lending
and refinanced $18.2 million of existing commercial real estate mortgage loans.
The mortgage loan portfolio of the Company is serviced by UC Lending. The
Company has full credit recourse to UC Lending with respect to substantially all
of the home equity mortgage loans acquired from UC Lending. The servicing of the
commercial loan portfolio will be transferred from UC Lending to the Company
under the terms of the proposed sale of the Company. See "Recent Developments"
above.
The Company has purchased on an interim basis a substantial portion of the
first mortgage home equity loans originated by UC Lending. These loans are
typically held by the Company for short time periods (typically no longer than
90 days) and then sold back to UC Lending prior to their sale in public
securitization transactions by an affiliate of UC Lending. UC Lending, not the
Company, retains the contingent credit risk in connection with these
transactions. A portion of the home equity loans are held by the Company in its
portfolio and are not sold by the Company to UC Lending.
Mortgage loans are carried at amortized cost less valuation adjustments for
permanently impaired value where appropriate. Commercial mortgages range in size
up to approximately $1.9 million with an
45
<PAGE> 50
average loan size of approximately $.6 million. At origination, substantially
all of the mortgages were on existing leased properties rather than on
properties in construction or on start-up properties. The origination of
commercial mortgages was subject to underwriting procedures, including: (i)
maximum loan to value ratio of 75% of the property's appraised value; (ii)
specified debt coverage requirements; (iii) on-site inspections; (iv)
third-party appraisals; and (v) personal guarantees of borrowers. For these
reasons, the Company does not consider its commercial loans to be high risk. The
weighted average interest rate on the Company's commercial mortgage loan
portfolio was 9.83% and 10.07% at December 31, 1995 and 1994, respectively.
The following table provides information at December 31, 1995, regarding
the Company's commercial mortgage loans on real estate by property type, state
and contractual maturity (excluding loan loss reserves and discount):
<TABLE>
<CAPTION>
PERCENT OF
AMOUNT TOTAL
-------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Commercial Mortgage Loans by Property Type
Retail................................................ $ 74,321 43.9%
Office................................................ 43,527 25.7
Office and warehouse.................................. 38,888 22.9
Other................................................. 12,775 7.5
-------- -----
Total........................................ $169,511 100.0%
======== =====
Commercial Mortgage Loans by State
Florida............................................... $ 37,475 22.1%
Georgia............................................... 32,530 19.2
Colorado.............................................. 21,428 12.6
Virginia.............................................. 13,873 8.2
Tennessee............................................. 12,316 7.3
Texas................................................. 9,750 5.8
All others............................................ 42,139 24.8
-------- -----
Total........................................ $169,511 100.0%
======== =====
Commercial Mortgage Loans by Contractual Maturity
1995.................................................. $ 26,316 15.5%
1996.................................................. 17,781 10.5
1997.................................................. 19,633 11.6
1998.................................................. 16,387 9.7
After 1998............................................ 89,394 52.7
-------- -----
Total........................................ $169,511 100.0%
======== =====
</TABLE>
INVESTMENT REAL ESTATE
At December 31, 1995, the Company's investment real estate was $32.4
million. Investment real estate included two office buildings, adjacent land,
and related improvements utilized by its Parent, other affiliates, and unrelated
third party tenants. In addition, it included property acquired through
foreclosure on commercial mortgage loans. At December 31, 1995, the Company
owned $13.6 million of commercial properties obtained through foreclosure. For
substantially all commercial mortgages which the Company has foreclosed, an
independent appraisal was obtained and, if warranted, the Company established a
specific reserve based on its judgment as to the amount which may not be
recoverable. As of December 31, 1995, the specific reserve amounted to $4.0
million. During 1995 the Company moved from its previous home office property
into an office building owned by an affiliate.
46
<PAGE> 51
The Company also establishes a general reserve for all commercial mortgages
where a specific reserve or write-down has not been established. As of December
31, 1995, the general reserve amounted to $1.0 million.
INSURANCE RATINGS
The ability of an insurance company to compete successfully depends in part
on its financial strength, operating performance and claims-paying ability as
rated by Best and other rating agencies. The Company is presently rated "A-"
(Excellent) by Best. Best's 15 categories of ratings for insurance companies
currently range from "A++" (Superior) to "F" (In Liquidation). According to
Best, an "A" or "A-" rating is assigned to companies which, in Best's opinion,
have achieved excellent overall performance when compared to the standards of
the life insurance industry and generally have demonstrated a strong ability to
meet their obligations to policyholders over a long period of time. In
evaluating a company's statutory financial and operating performance, Best
reviews the company's statutory profitability, leverage and liquidity, as well
as the company's spread of risk, quality and appropriateness of its reinsurance
program, quality and diversification of assets, the adequacy of its policy
reserves and surplus, capital structure and the experience and competency of its
management. Best ratings are based upon factors of concern to policyholders,
agents and intermediaries and are not directed toward the protection of
investors.
On October 24, 1995, Duff & Phelps placed its "A+" (Single-A-Plus) rating
of the Company on Rating Watch-Uncertain because of the October 20, 1995,
announcement by the Company's Parent that the Parent was considering strategic
alternatives regarding the Company, including the pending sale of the Company
(see "Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Pending Sale of the Company"). Duff & Phelps reported that the
claims paying ability rating would remain on Rating Watch-Uncertain until more
information becomes known about the Company's ultimate position within the
organization or another organization. In 1995, Standard & Poor's revised the
rating scale used in assigning its qualified solvency ratings of insurance
companies and, as a result, revised the Company's rating from "BBq" to "Aq."
Ratings such as those held by the Company are important to maintaining public
confidence in the Company and its ability to market its annuity products. Any
lowering of the Company's ratings could materially and adversely affect the
Company's ability to market its products, particularly the sale of annuities
through financial institutions, and could increase the surrender of its annuity
policies. Both of these consequences could, depending upon the extent thereof,
have a materially adverse effect on the Company's liquidity and, under certain
circumstances, net income. The Company believes that its present ratings will
enable it to continue to compete successfully.
GOVERNMENT REGULATION AND LEGISLATION
GENERAL REGULATION
The Company is subject to regulation by the State of Louisiana, its state
of domicile, and the other states in which it transacts business. The laws of
such states are designed for the protection of policyholders rather than
security-holders. The Company is a member of a holding company system in
Louisiana. All transactions within a holding company system affecting insurers
must be both reasonable in relation to its outstanding liabilities and adequate
for its needs. State laws also require prior notice or regulatory agency
approval of changes in control of an insurer or its holding company and of
material intercorporate transfers of assets within the holding company
structure. Generally, under insurance holding company statutes, a state
insurance authority must approve in advance the direct or indirect acquisition
of 10% or more of the voting securities of an insurance company chartered in its
state.
The laws of the various states establish regulatory agencies with broad
administrative powers to approve policy forms, grant and revoke licenses to
transact business, regulate trade practices, license agents, and prescribe the
type and amount of investments permitted. Insurance companies are required to
file detailed annual statements with the state insurance regulators in each of
the states in which they do business, and their business and accounts are
subject to examination by such agencies at any time. In
47
<PAGE> 52
addition, insurance regulators periodically examine the insurer's financial
condition, adherence to statutory account practices, and compliance with
insurance department rules and regulations.
As part of their routine regulatory oversight process, state insurance
departments conduct detailed examinations periodically (generally once every
three years) of the books, records and accounts of insurance companies domiciled
in their states. Such examinations are generally conducted in cooperation with
the departments of two or three other states under guidelines promulgated by the
National Association of Insurance Commissions ("NAIC"). The Company's last
examination occurred during 1994 for the three year period ended December 31,
1993. Final reports issued by the Louisiana Commissioner of Insurance did not
raise any significant issues or adjustments.
REGULATION AT FEDERAL LEVEL
Although the federal government generally does not directly regulate the
insurance business, federal initiatives often have an impact on the business in
a variety of ways. Current and proposed federal measures that may significantly
affect the insurance business include limitations on antitrust immunity, minimum
solvency requirements and the removal of barriers restricting banks from
engaging in the insurance and mutual fund business.
Congress has from time to time in the past considered possible legislation
that would adversely affect the federal income tax treatment of certain annuity
products offered by the Company. There can be no assurance that future tax
legislation will not contain provisions that may result in adverse effects on
the Company's products.
A substantial amount of the Company's annuity policies are marketed through
financial institutions. In a recent decision, the United States Supreme Court
upheld the United States Comptroller of the Currency's decision to permit
national banks to sell annuities in towns with more than 5,000 inhabitants.
REGULATION OF DIVIDENDS AND OTHER PAYMENTS
As a Louisiana domiciled insurance company, the Company is subject to
Louisiana requirements relating to dividends and restrictions on payments to
affiliates. The Louisiana Insurance Code (the "Insurance Code") provides that no
Louisiana stock insurance company shall declare and pay any dividends to its
stockholders unless (i) its capital is fully paid in cash and is unimpaired and
(ii) it has a surplus beyond its capital stock and the initial minimum surplus
required and all other liabilities equal to 15% of its capital stock, provided
that this restriction shall not apply to an insurance company when its paid-in
capital and surplus exceed the minimum required by the Insurance Code by 100% or
more. Additional dividend restrictions are imposed by the Louisiana Insurance
Holding Company System Regulatory Law (the "Insurance Holding Company Law").
Specifically, extraordinary dividends by insurance companies are subject to a
prior approval requirement by the Louisiana Commissioner of Insurance (the
"Louisiana Commissioner") and an insurance company's surplus as regards
policyholders following any dividends or distributions to affiliates must be
reasonable to the insurance company's outstanding liabilities and adequate to
its financial needs. An extraordinary dividend is defined as an amount in excess
of the lesser of (a) 10% of surplus as of the preceding December 31, or (b) the
net gain from operations for the preceding calendar year. The Insurance Holding
Company Law also subjects all transactions between a Louisiana insurance company
and its affiliates to certain fairness and reasonableness standards, and,
furthermore, certain types of transactions with its affiliates are subject to
prior notice to the Louisiana Insurance Commissioner who may disapprove the
transaction if it is determined that such transaction does not meet certain
fairness and reasonableness standards or if it may adversely affect the
interests of policyholders. If insurance regulators determine that payment of a
dividend or any other payment to an affiliate (such as a payment under a tax
allocation agreement or for employee or other services or pursuant to a surplus
debenture) would, because of the financial condition of the paying insurance
company or otherwise, be hazardous to such insurance company's policyholders or
creditors, the regulators may block payment of such dividend or such other
payment to the affiliate that would otherwise be permitted without prior
approval. Under the current statutory and regulatory scheme in Louisiana, the
Company has, as of
48
<PAGE> 53
December 31, 1995, the capacity to pay dividends of $9.2 million. No dividends
were paid during 1993, 1994 or 1995 in order to retain capital in the Company.
INSURANCE REGULATORY CHANGES
The NAIC and insurance regulators have undertaken a process of re-examining
existing laws and regulations and their application to insurance companies. In
particular, this re-examination has focused on insurance company investment and
solvency issues and, in some instances, has resulted in new interpretations of
existing law, the development of new laws and the implementation of
non-statutory guidelines. The NAIC has formed committees to study and formulate
regulatory proposals on such diverse issues as the use of surplus debentures,
accounting for reinsurance transactions and the adoption of risk-based capital
rules. It is not possible to predict the future impact of changing state and
federal regulation on the operations of the Company.
Statutory filings require classifications of investments and require the
establishment of an Asset Valuation Reserve ("AVR") account which consists of
two main components: a "default component" to provide for future credit-related
losses on fixed income investments and an "equity component" to provide for
losses on all types of equity investments, including real estate. The AVR at
December 31, 1995, was $20.9 million. Also required is the establishment of a
reserve called the Interest Maintenance Reserve ("IMR"), which is a reserve for
fixed income realized capital gains and losses, net of taxes, related to changes
in interest rates. The IMR is required to be amortized into statutory earnings
on a basis reflecting the remaining period to maturity of the fixed income
securities sold. The deferred realized gains and losses included in the IMR at
December 31, 1995, was $2.7 million, net of taxes.
INSURANCE REGULATORY INFORMATION SYSTEM
The NAIC has developed the Insurance Regulatory Information System ("IRIS")
which involves calculation of ratios covering eleven (11) categories of
financial data with defined "usual ranges" for each category. The ratios are
designed to provide regulators "early warnings" as to when a given company might
warrant special attention. The Company had only two ratios outside the usual
range in 1995. These two relate to the decrease in premiums in 1995 and the
effect on reserves of the continued run-off of the credit life business.
RISK-BASED CAPITAL REQUIREMENTS
The NAIC has developed risk-based capital ("RBC") requirements for life
insurance companies. The formula, which is set forth in instructions adopted by
the NAIC, is designed to take into account asset risks, insurance risks,
interest rate risks and other relevant risks with respect to the insurer's
business. The NAIC has further provided for categorization of life insurance
companies according to the extent to which they meet specified RBC thresholds,
with increasing degrees of regulatory scrutiny or intervention provided for
companies in categories of lesser RBC compliance. The following degrees or
levels of regulatory action are triggered by certain events with respect to an
insurer's RBC compliance as follows: (i) a "company action level event"
(requiring the insurer to file and obtain approval of a comprehensive financial
plan for the improvement of its RBC compliance): (ii) a "regulatory action level
event" (resulting in, in addition to the requirement of a financial plan,
regulatory actions including examination of the insurer's assets, liabilities
and operations followed by an order specifying such corrective actions as are
determined to be required); (iii) an "authorized control level event" (resulting
in, in addition to the regulatory actions specified above, such actions as are
necessary to cause the insurer to be placed under regulatory control under the
applicable rehabilitation and/or liquidation statutes if deemed to be in the
best interests of policyholders, creditors and the public): and (iv) a
"mandatory control level event" (resulting in, on a mandatory basis, such
actions as are necessary to cause the insurer to be placed under regulatory
control under the applicable rehabilitation and/or liquidation statutes). The
Company is adequately capitalized under the RBC requirements and believes that
the thresholds will not have any significant regulatory effect on it. However,
should the Company's RBC position decline in the future, its continued ability
to pay
49
<PAGE> 54
dividends and the degree of regulatory supervision or control to which it is
subject may be affected. At December 31, 1995, the Company's risk-based capital
ratio was approximately 229%.
ASSESSMENTS AGAINST INSURERS
Guaranty laws exist in all states, the District of Columbia and Puerto
Rico. Life insurers doing business in any of these regions can be assessed for
policyholder losses incurred by insolvent life insurance companies. The amount
and timing of any future assessment on the Company under these laws cannot be
reasonably estimated and are beyond its control. Regulatory actions against life
insurers encountering financial difficulty have prompted the various state
guaranty associations to assess life insurance companies for the deemed loss. A
large part of the assessments paid by the Company pursuant to these laws may be
used as credits for a portion of premium taxes.
COMPETITION
As a marketer of annuity products, the Company faces intense competition.
Competitors include an increasing number of insurance companies which have begun
to offer annuity products. Many of the Company's competitors are substantially
larger and have more capital and other resources than the Company. Competition
can take many forms including convenience in obtaining an annuity, customer
service, marketing and distribution channels as well as crediting rates.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following analysis should be read in conjunction with the Company's
Consolidated financial statements and accompanying notes presented elsewhere
herein.
United Companies Life Insurance Company ("the Company") is a wholly-owned
subsidiary of United Companies Financial Corporation ("UCFC"), a financial
services holding company founded in 1946. UCFC has mortgage operations that are
focused on the origination, sale and servicing of first mortgage,
nonconventional, home equity loans; and insurance operations that are focused,
principally on the sale of deferred annuities. On February 2, 1996, UCFC entered
into an agreement to sell all of the outstanding capital stock of the Company,
subject to approval of UCFC's stockholders and regulatory authorities and
satisfaction of certain other conditions. See "Pending Sale of the Company" and
Note 9 to Notes to Consolidated financial statements.
The Company, a life insurance company domiciled in Louisiana and organized
in 1955, is currently authorized to conduct business in 47 states, the District
of Columbia and Puerto Rico. The primary products of the Company are deferred
annuities, marketed on a commission basis principally through financial
institutions and independent agents. As of December 31, 1995, premiums for these
annuities averaged approximately $21,000 per policy and are generally sold to
middle income customers seeking tax deferred insurance products, primarily to
provide savings for retirement.
The Company's deferred annuity policies typically guarantee an interest
crediting rate for the first policy year. Thereafter, the interest crediting
rate generally may be adjusted by the Company at any time (subject to certain
minimum crediting rates stated in the policy). A policyholder is permitted at
any time to withdraw all or part of the accumulated premiums plus the amount of
interest credited on the policy, less a surrender charge if applicable. The
initial surrender charge is typically 9% - 10% of accumulated premium or
accumulated value, depending on the particular contract, and decreases to zero
during a penalty period of from five to ten years. Approximately 78% of the
Company's deferred annuity policies at December 31, 1995, were subject to a
surrender penalty.
The interest earned on the annuity policies accumulates on a tax-deferred
basis until withdrawal by the policyholder. The deferred annuity contracts
written by the Company provide a death benefit equal to the amount of the
accumulated premium and interest earned less the amount of any prior
withdrawals.
50
<PAGE> 55
The Company has continued to focus its efforts on expanding its
distribution network of financial institutions and independent general agents,
and expansion of the independent general agents' share of the distribution
network has been a primary goal since 1993. Independent general agents sold
approximately 55% of the total dollar amount of annuities written in 1995
compared to 46% in 1994 and 20% in 1993. Annuity sales in 1995 were $136 million
compared to $250 million in 1994 and $208 million in 1993. The Company believes
that the decrease in annuity sales in 1995 is due in part to the interest rate
environment, particularly the relative relationships between short-term and
intermediate-term interest rates and to the focus of the Company's resources on
development of its variable annuity product. In addition, a financial
institution which produced approximately 10% of the Company's annuity sales in
1994 discontinued the sale of the Company's annuities in 1995, subsequent to the
merger of such financial institution.
Fluctuations in and the level of interest rates directly impact the
operations of the Company. The average spread on the annuity business was 2.20%
in 1993, and increased to 2.73% during 1994. This spread declined to 2.37% for
1995. This decrease can be attributed to the more favorable interest rate
environment that existed in 1994 compared to 1995. Surrenders of annuity
policies increased in 1995 and 1994 compared to the prior years due in part to
the reduction in interest rates on new and existing annuity contracts and to a
rising interest rate environment and an increase in the number of annuity
contracts which were beyond the surrender penalty period.
The Company has continued its efforts to improve the quality and liquidity
of its investment portfolio as the weighted average rating of the publicly
traded bond portfolio was improved from "A" to "AA" in 1992, the amount of
non-investment grade publicly traded bonds in the portfolio was reduced from
$86.7 million or 14.7% of the bond portfolio at the end of 1990 to $22 million
or 1.9% of the portfolio at December 31, 1995. The assets allocated to
investments in mortgage-backed securities have increased from $218 million at
year-end 1990 to $777.7 million at December 31, 1995. At December 31, 1995, the
weighted average rating of the publicly traded bond portfolio was "AA," the
amortized cost of assets allocated to investments in investment grade fixed
maturity securities was $345.6 million or 30.2% of the portfolio and in
investment grade mortgage-backed securities was $733.5 million or 64.0% of the
portfolio. At December 31, 1995, the amortized cost of the Company's holdings of
non-investment grade traded bonds was $22 million or 1.9% of the portfolio.
Invested assets of the Company also include residential and commercial real
estate mortgages originated and serviced by United Companies Lending Corporation
("UC Lending"), an affiliate.
The annuities sold by the Company are monetary in nature and therefore
sensitive to changes in the interest rate environment. Profitability of the
Company is directly affected by its ability to invest annuity premiums at yields
above the interest crediting rates on the related policy liabilities. One of the
primary financial objectives is to effectively manage this interest spread over
time in changing interest rate environments. This is accomplished, in part, by
adjusting the interest crediting rate paid on its existing and new annuity
policies. During periods of declining interest rates, the fair value of the
Company's investments, primarily fixed maturity investments, increases; however,
yields earned on investments made during such periods decline. In contrast,
during periods of rising interest rates, the fair value of the investment
portfolio declines and the risk of policy surrenders increases. An unanticipated
increase in surrenders would impact the Company's liquidity, potentially
requiring the sale of certain investments prior to their maturities, which may
be at a loss.
Reserves for annuity policies constitute the Company's primary liabilities.
The duration of these liabilities is affected by a number of factors, including
interest rates, surrender penalties, ratings, public confidence in the insurance
industry, generally, and in the Company, specifically, governmental regulations
and tax laws. Since insurance commissions incurred at the origination of annuity
policies are generally deferred and recognized over the estimated life of the
policies, any unexpected increase in surrenders of annuity contracts would
require more rapid recognition of these expenses, thereby adversely impacting
profitability.
51
<PAGE> 56
RESULTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 1995 COMPARED TO YEAR ENDED DECEMBER 31, 1994
Net income for 1995 was $8.0 million, compared to $5.9 million for 1994.
The increase in net income for 1995 resulted primarily from improved investment
results from the Company's interest in a limited partnership.
The following table sets forth certain financial data for the period
indicated:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------
1995 1994
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Total revenues............................................... $128,117 $120,942
Total expenses............................................... 116,017 111,862
Income before taxes.......................................... 12,100 9,080
Net income................................................... 8,035 5,886
</TABLE>
REVENUES
The following table sets forth information regarding the components of the
Company's revenues for the periods indicated:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------
1995 1994
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Net investment income........................................ $123,107 $114,380
Net insurance premiums....................................... 8,508 11,373
Realized investment losses................................... (3,498) (4,811)
-------- --------
Total.............................................. $128,117 $120,942
======== ========
</TABLE>
Net investment income totaled $123.1 million on average investments of
approximately $1.5 billion for 1995, compared to net investment income of $114.4
million on average investments of approximately $1.4 billion during the same
period of 1994. At December 31, 1995, the amortized cost of the fixed income
portfolio totaled $1.1 billion and was comprised principally of $733.5 million
in investment grade mortgage-backed securities and $345.6 million in investment
grade bonds. In addition, net income before income taxes for 1995 increased $4.8
million as compared to 1994 by results from an investment in a limited
partnership. At December 31, 1995, the weighted average rating of the publicly
traded bond portfolio, according to nationally recognized statistical rating
agencies, was "AA." During 1994, the Company established a trading account for a
portion of its investment portfolio invested in common stocks. At December 31,
1995, the carrying value of investments in the Company's trading account was
$752,000 reflecting a $207,000 unrealized loss, which is included in investment
income for 1995.
Interest, charges and fees on mortgage real estate loans decreased $5.3
million during 1995 compared to the same period of 1994. A reduction in the
holding periods of home equity loans acquired by the Company from UC Lending was
the primary reason for the reduction in interest charges and fees on loans in
1995. At December 31, 1995, the Company's mortgage loans on real estate were
comprised of $168.9 million in home equity mortgage loans and $167.4 million in
commercial real estate mortgage loans, compared to $158.5 million and $153.0
million, respectively at December 31, 1994. The mortgage loan portfolio of the
Company is serviced by UC Lending. The Company has full credit recourse to UC
Lending with respect to substantially all home equity mortgage loans acquired by
it from UC Lending. Although the Company, since 1991, had limited its investment
in commercial real estate loans, the Company decided in 1995 to invest on a
limited basis in new commercial real estate loans, substantially all of which
were originated by UC Lending. During 1995, the Company funded $21.3 million in
new commercial real estate loans and refinanced $18.2 million of existing
commercial loans. The servicing of
52
<PAGE> 57
the commercial loan portfolio will be transferred from UC Lending to the Company
pursuant to the terms of the proposed sale of the Company. See "Pending Sale of
the Company."
The Company estimates that non-accrual loans reduced mortgage loan interest
by approximately $121,000 and $124,000 during 1995 and 1994, respectively. Loans
are placed on a non-accrual status when they are 150 days past due. During the
year ended December 31, 1995, the average amount of non-accrual mortgage loans
owned by the Company was $2.4 million, compared to approximately $2.6 million
during the same period of 1994. At December 31, 1995, the Company owned
approximately $7.2 million of commercial loans which were on an accrual status,
but which the Company considers as potential problem loans, compared to $7.6
million at December 31, 1994. The Company evaluates each of these commercial
loans to estimate its risk of loss in the investment and provides for such loss
through a charge to earnings.
Investment income for the year of 1995 was also reduced by $.9 million as
compared to the same period of 1994 for the excess of the amortization of prior
loan sale gains over the related pass-through income. An increase in the
amortization of prior loan sale gains was the result of an adjustment in the
estimated prepayment assumptions of certain mortgage loans. This adjustment was
made in connection with the Company's evaluation which is performed as of each
balance sheet date of the prepayment assumptions used in calculating loan sale
gains in relation to the current rate of prepayment, and if necessary, revising
the estimate using the original discount rate. Any losses arising from adverse
prepayment experience are recognized immediately while favorable experience is
recognized prospectively.
Net insurance premiums declined approximately $2.9 million for the year of
1995 compared to the same period of 1994. Net insurance premiums reflect
revenues associated primarily with pre-need life insurance and credit insurance.
Management has chosen to focus on deferred annuities, its primary product line,
and on developing its variable annuity product introduced in the fourth quarter
of 1995, and thus new sales of pre-need life insurance and credit insurance have
been discontinued. The decrease in premium income reflects that decision.
Realized investment gains and losses may vary significantly from year to
year since the decision to sell investments is determined principally by
considerations on investment timing and tax consequences. Realized investment
gains and losses can also result from early redemption of securities at the
election of the issuer (calls) and changes in write-downs and reserves.
Realized gains (losses) were as follows for the indicated periods:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------
1995 1994
------- -------
(IN THOUSANDS)
<S> <C> <C>
Sales of fixed maturity securities................... $ 423 $ (121)
Calls and maturities of fixed maturity securities.... (42) 98
Sales of equity securities........................... 172 (8)
Sales of investment real estate...................... -- 279
Write-downs/reserve changes.......................... (4,051) (5,059)
------- -------
Realized investment losses........................... $(3,498) $(4,811)
======= =======
</TABLE>
53
<PAGE> 58
EXPENSES
The following table presents the components of the Company's expenses for
the periods indicated:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------
1995 1994
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Interest on annuity policies...................... $ 79,086 $ 73,065
Amortization of deferred policy acquisition
costs........................................... 13,159 13,528
Insurance commissions............................. 432 328
Insurance benefits................................ 9,930 12,654
Other operating................................... 13,410 12,287
-------- --------
Total.................................. $116,017 $111,862
======== ========
</TABLE>
Interest on annuity policies increased $6.0 million in 1995 compared to the
same period of 1994, primarily as a result of a $70 million increase in average
annuity reserves. However, annuity reserves decreased $8.2 million during 1995
from 1994 primarily because of annuity surrenders. As expected, annuity
surrenders increased in comparison with 1994, primarily because of the current
interest rate environment and the effect of policies no longer subject to
surrender charges. Management continues to aggressively manage its interest
spread between earnings and crediting rates in an effort to balance
competitiveness and profitability goals. Average renewal credited rates ranged
from 5.60% to 5.75% and 5.60% to 6.45% for years ended December 31, 1995 and
1994, respectively.
Net insurance commissions for the year of 1995 increased by approximately
$.1 million from the same period of 1994. Refunds of commissions on the unearned
premiums of the Company's credit life business exceeded the net commissions
after capitalization during a portion of 1994 and contributed to the increase in
1995. Commissions paid on issuance of the Company's deferred annuity products
are generally capitalized as deferred policy acquisition costs ("DPAC") and
amortized over the estimated life of the policy. The accounting method
prescribed for determining the cumulative amount of DPAC requires a regular
reevaluation of the estimated present value of gross profits to be earned on a
block of policies. If, based on actual experience and other information, the
estimate of the present value of gross profits significantly changes, either
positively or negatively, the cumulative amount of DPAC is redetermined and the
resulting adjustment is charged against or credited to income. Factors used in
determining DPAC include policy surrender levels, policy crediting rates and
investment yields. During 1995, the Company capitalized as deferred policy
acquisition costs approximately $11.9 million in commissions paid on sales of
annuities, compared to $20.7 million during 1994. Amortization of commission
expense on annuities capitalized in prior periods was $11.0 million during 1995,
compared to $9.5 million during 1994.
Amortization of DPAC decreased $.4 million in 1995 compared to 1994. In
1995, total amortization was increased by the impact of the increase in
production in 1994, but was decreased by the reduction in amortization of the
declining credit life business. In addition, the Company adjusted its
assumptions and related factors to bring them in line with current Company
experience during its annual review and updates. Insurance benefits for the year
ended December 31, 1995 decreased $2.7 million, compared to the comparable
period of 1994, generally reflecting the run-off of credit life insurance.
Other operating expenses, which include general insurance and taxes,
licenses and fees, increased approximately $1.1 million during 1995, compared to
the comparable period in 1994. This increase is primarily attributable to the
start-up costs, including legal and printing expenses, associated with the
Company's new variable annuity product introduced in the fourth quarter of 1995,
and increased corporate expenses allocated from its parent.
54
<PAGE> 59
YEAR ENDED DECEMBER 31, 1994 COMPARED TO YEAR ENDED DECEMBER 31, 1993
Net income for 1994 was $5.9 million, compared to a net loss of $8.3
million for 1993. The increase in net income in 1994 resulted primarily from an
improved interest margin earned on annuities and a non-recurring $15.0 million
pre-tax investment loss on preferred stock of Foster Mortgage Corporation, an
affiliate, in 1993.
The following table sets forth certain financial data for the periods
indicated:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
---------------------
1994 1993
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Total revenues................................................. $120,942 $108,952
Total expenses................................................. 111,862 121,317
Income (loss) before income taxes.............................. 9,080 (12,365)
Net income (loss).............................................. 5,886 (8,258)
</TABLE>
REVENUES
The following table sets forth information regarding the components of the
Company's revenues for the periods indicated:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
---------------------
1994 1993
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Net investment income.......................................... $114,380 $109,661
Net insurance premiums......................................... 11,373 18,684
Realized investment losses..................................... (4,811) (19,393)
-------- --------
Total................................................ $120,942 $108,952
======== ========
</TABLE>
Net investment income totaled $114.4 million on average investments of
approximately $1.4 billion for 1994, compared to net investment income of $109.7
million on average investments of approximately $1.4 billion during the same
period of 1993. Annuity sales of $250 million in 1994 set a Company annual sales
record, was an increase of 20.2% over 1993, and contributed to the increase in
funds available for investment. At December 31, 1994, the amortized cost of the
fixed income portfolio totaled $1.1 billion and was comprised principally of
$791 million in investment grade mortgage-backed securities and $291 million in
investment grade bonds. At December 31, 1994, the weighted average rating of the
publicly traded bond portfolio, according to nationally recognized statistical
rating agencies, was "AA." During 1994, the Company established a trading
account for a portion of its investment portfolio invested in common stocks. At
December 31, 1994, the carrying value of investments in the Company's trading
account was $679,000 reflecting a $22,751 unrealized gain, which is included in
investment income for 1994.
Interest, charges and fees on loans decreased $2.1 million in 1994 compared
to 1993. At December 31, 1994, the Company's portfolio of loans was comprised of
$159.1 million in first mortgage home equity loans and $175.6 million in first
mortgage commercial real estate loans, compared to $263.6 million and $209.3
million, respectively, in 1993. The mortgage loan portfolio of the Company is
serviced by UC Lending. The Company has full credit recourse to UC Lending with
respect to all home equity mortgage loans acquired by it from UC Lending. A
reduction in the volume of and related holding periods for home equity loans
acquired by the Company from UC Lending contributed to the reduction in
interest, charges and fees on loans in 1994.
The Company estimates that non-accrual loans reduced mortgage loan interest
for 1994 and 1993 by approximately $124,000 and $420,000, respectively. During
1994, the average amount of non-accrual loans owned by the Company was
approximately $2.6 million, compared to approximately $8.1 million during 1993.
At December 31, 1994, the Company owned approximately $7.6 million of commercial
55
<PAGE> 60
loans which were on an accrual status, but which the Company considered as
potential problem loans, compared to $8.1 million at December 31, 1993. The
Company evaluates each of these commercial loans to estimate its risk of loss in
the investment and provides for such loss through a charge to earnings.
Net insurance premiums reflect revenues associated primarily with sales of
pre-need life insurance and credit insurance. Management has chosen to focus on
deferred annuities, its primary product line, and on developing a variable
annuity product which was introduced in 1995. Therefore, the sale of credit life
insurance was discontinued in 1993. The decrease in premium income reflects that
decision.
Realized investment gains and losses may vary significantly from year to
year since the decision to sell investments is determined principally by
considerations of investment timing and tax consequences. Realized investment
gains and losses can also result from early redemption of securities at the
election of the issuer (calls) and changes in write-downs and reserves.
Realized gains (losses) were as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER
31,
----------------------
1994 1993
------- --------
(IN THOUSANDS)
<S> <C> <C>
From:
Sales of fixed maturity securities.......................... $ (121) $ (701)
Calls and maturities of fixed maturity securities........... 98 1,187
Sales of equity securities.................................. (8) 62
Sales of mortgage loans on real estate...................... -- 1,018
Sales of investment real estate............................. 279 195
Sales of other investments.................................. -- --
Write-downs/reserve changes................................. (5,059) (21,154)
------- --------
Realized investment losses.................................... $(4,811) $(19,393)
======= ========
</TABLE>
The write-downs in 1993 include a $15.0 million loss associated with the
Company's ownership of preferred stock of Foster Mortgage Corporation, an
affiliate.
EXPENSES
The following table presents the components of the Company's expenses for
the periods indicated:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------
1994 1993
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Interest on annuity policies................................. $ 73,065 $ 76,086
Amortization of deferred policy acquisition costs............ 13,528 10,229
Insurance commissions........................................ 328 3,116
Insurance benefits........................................... 12,654 18,200
Other operating.............................................. 12,287 13,686
-------- --------
Total.............................................. $111,862 $121,317
======== ========
</TABLE>
Interest on annuity policies declined $3.0 million in 1994 compared to
1993, as the result of a reduction in the average interest crediting rate on the
Company's annuity policies, offset by the impact of an increase in annuity
reserves. Average annuity reserves were $1.4 billion during 1994, an increase of
approximately $117 million from 1993. In comparison with 1993, annuity
surrenders increased in 1994, but were managed to a level less than expected,
notwithstanding the aggressive policy crediting rate strategy.
Net insurance commissions for 1994 decreased by approximately $2.8 million
from the same period of 1993. This decrease was primarily attributable to the
discontinuation of credit life insurance sales by the Company in 1993.
Commissions paid on issuance of the Company's deferred annuity products are
generally capitalized as DPAC and amortized over the estimated life of the
policy. The accounting method
56
<PAGE> 61
prescribed for determining the cumulative amount of DPAC requires a regular
reevaluation of the estimated present value of gross profits to be earned on a
block of policies. If, based on actual experience and other information, the
estimate of the present value of gross profits significantly changes, either
positively or negatively, the cumulative amount of DPAC is redetermined and the
resulting adjustment is charged against or credited to income. Factors used in
determining DPAC include policy surrender levels, policy crediting rates and
investment yields. During 1994, the Company capitalized as DPAC approximately
$20.7 million in commissions paid on sales of annuities, compared to $13.7
million during 1993. Amortization of commission expense on annuities capitalized
in prior periods was $9.5 million during 1994, compared to $5.6 million during
1993.
Amortization of DPAC increased $3.3 million in 1994, compared to 1993. In
1994, total amortization was impacted by the amortization of the large increase
in production from 1993. In addition, the Company adjusted its assumptions and
related factors to bring them in line with current company experience during its
annual review and update.
Insurance benefits for 1994 decreased $5.5 million, compared to 1993,
generally reflecting the run-off of credit life insurance, which the Company
discontinued in 1993.
Other operating expenses for 1994 decreased approximately $1.4 million,
compared to 1993. Other operating expenses in 1993 included a non-recurring $2.1
million estimated loss in connection with the termination of a third party
administrative contract for credit life insurance. Personnel expenses increased
approximately $1.1 million in 1994 compared to 1993 primarily because of an
increase in the cost of the Company's employee benefit and incentive plans. A
$1.2 million reduction in expenses in 1994 compared to 1993 also resulted from
an increase in acquisition expenses deferred as DPAC in 1994 over 1993.
Assessments by state guaranty associations also increased approximately $920,000
in 1994 over 1993.
ASSET QUALITY AND RESERVES
The quality of the Company's commercial loan and bond portfolios
significantly affects the profitability of the Company. The values of and
markets for these assets are dependent on a number of factors, including general
economic conditions, interest rates and governmental regulations. Adverse
changes in such factors, which become more pronounced in periods of economic
decline, may affect the quality of these assets and the Company's resulting
ability to sell these assets for acceptable prices. General economic
deterioration can result in increased delinquencies on existing loans,
reductions in collateral values and declines in the value of investments
resulting from a reduced capacity of issuers to repay the bonds. The Company has
full credit recourse to UC Lending for principal and interest on its home equity
loans originated by UC Lending.
Substantially all of the loans owned by the Company were originated by UC
Lending, with the home equity loans being originated primarily through its
branch (i.e., retail) network or wholesale loan programs. The Company's
investment in mortgage loans on real estate at December 31, 1995, was comprised
primarily of $168.9 million in home equity loans and $167.4 million in
commercial loans.
At December 31, 1995, the contractual balance of loans serviced by UC
Lending for the Company was approximately $338.7 million. Included in the
serviced portfolio are the Company's commercial loans, a substantial portion of
which were originated in the following states: Florida (22.1%), Georgia (19.2%),
Colorado (12.6%), Virginia (8.2%), Tennessee (7.3%), Texas (5.8%) and Louisiana
(5.2%). No other state accounted for more than 5% by outstanding principal
balance of the Company's commercial real estate loan portfolio. The risk
inherent in such concentrations is dependent not only upon regional and general
economic stability which affects property values, but also the financial
well-being and credit-worthiness of the borrower.
Management continues to emphasize reducing the level of non-earning assets
owned by focusing on expediting the foreclosure process on its commercial real
estate loans and disposing of the properties on a timely basis. The balance of
foreclosed loans totaled $13.6 million at December 31, 1995, compared to $19.3
million at December 31, 1994. The Company can neither quantify the impact of
property value
57
<PAGE> 62
declines, if any, on its loans nor predict whether, to what extent, or how long
such declines may exist. In a period of such declines, the rates of
delinquencies, foreclosures and losses on loans could be higher than those
previously experienced. Adverse economic conditions (which may or may not affect
real property values) may affect the timely payment by borrowers of scheduled
payments of principal and interest on the home equity loans, and, accordingly
the actual rates of delinquencies, foreclosures and losses.
The following table provides a summary of mortgage loans owned by the
Company which are past due 30 days or more, and loans charged-off as of the
dates indicated:
<TABLE>
<CAPTION>
CONTRACTUAL DELINQUENCIES % OF % OF
BALANCE CONTRACTUAL CONTRACTUAL NET LOANS AVERAGE
YEAR ENDED OF LOANS BALANCE BALANCE CHARGED-OFF LOANS
- ---------------------------------------------------------- ----------- ------------- ----------- ----------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Year ended December 31, 1995
Home equity............................................. $ 169,175 $ 1,020 .60% $ -- --%
Commercial.............................................. 169,512 3,238 1.91% 194 .11%
--------- ------- -------
Total............................................. $ 338,687 $ 4,258 1.26% $ 194 .06%
========= ======= =======
Year ended December 31, 1994
Home equity............................................. $ 158,943 $ 1,516 .96% $ -- --%
Commercial.............................................. 154,790 2,335 1.51% 1,510 .98%
--------- ------- -------
Total............................................. $ 313,733 $ 3,851 1.23% 1,510 .48%
========= ======= =======
Year ended December 31, 1993
Home equity............................................. $ 263,456 $ 1,304 .49% $ 33 .01%
Commercial.............................................. 188,686 9,692 5.14% 475 .25%
--------- ------- -------
Total............................................. $ 452,142 $10,996 2.43% $ 508 .11%
========= ======= =======
</TABLE>
The above delinquencies of home equity loans are covered by full credit
recourse to UC Lending except $.2 million, $.3 million, and $.7 million at
December 31, 1995, 1994 and 1993, respectively. The Company, however, retains
the entire risk associated with its commercial real estate loans.
The Company owns senior and subordinated pass-through certificates issued
in 1990 for commercial mortgage loans previously owned by the Company for which
an election has been made under the real estate mortgage investment conduit
provisions of the Internal Revenue Code of 1986, as amended (the "Code"). These
certificates are included in bonds in the accompanying consolidated financial
statements. The outstanding principal balance of all of the senior and
subordinated certificates was $46.8 million as of December 31, 1995. The
principal balance of the subordinated certificates at December 31, 1995, all of
which were owned by the Company, was $26.5 million. Losses associated with
defaults and related foreclosures which may occur on the loans backing these
pass-through certificates first reduce the principal balance of the subordinated
certificates. The losses resulting from such foreclosures were $1.7 million,
$2.5 million, and $.8 million, for the periods ending December 31, 1995, 1994
and 1993, respectively.
The Company provides an estimate for future credit losses in an allowance
for losses. A summary analysis of the changes in the Company's allowance for
losses for the indicated periods is as follows:
<TABLE>
<CAPTION>
1995 1994
------------------------------ ----------------------------
REAL MORTGAGE REAL MORTGAGE
BONDS ESTATE(1) LOANS BONDS ESTATE LOANS
------- --------- -------- ------- ------- --------
<S> <C> <C> <C> <C> <C> <C>
Balance at beginning of period................................ $ 317 $ 5,120 $1,778 $ 1,515 $ 4,473 $ 2,639
Losses charged to allowance................................... (1,664) (2,638) (194) (3,047) (1,929) (1,510)
Recoveries on loans previously charged to allowance........... -- -- -- -- 15 --
------- ------- ------ ------- ------- -------
Net charge-offs............................................... (1,664) (2,638) (194) (3,047) (1,914) (1,510)
Loss provision................................................ 2,013 1,505 533 1,849 2,561 (649)
------- ------- ------ ------- ------- -------
Balance at end of period...................................... $ 666 $ 3,987 $2,117 $ 317 $ 5,120 $ 1,778
======= ======= ====== ======= ======= =======
Specific reserves............................................. $ 666 $ 3,987 $1,117 $ 317 $ 5,120 $ 752
Unallocated reserves.......................................... -- -- 1,000 -- -- 1,026
------- ------- ------ ------- ------- -------
Total Reserves........................................ $ 666 $ 3,987 $2,117 $ 317 $ 5,120 $ 1,778
======= ======= ====== ======= ======= =======
</TABLE>
- ---------------
(1) The provision for real estate losses relate to losses from properties
acquired in satisfaction of debt.
58
<PAGE> 63
At December 31, 1995 and 1994, the Company owned $13.6 million and $19.3
million, respectively, of property acquired in settlement of loans, excluding
the specific reserves attributed to these properties, which is included in the
Company's allowance for loan losses to reduce the carrying value of these
properties to their market value.
The Company's fixed maturity securities portfolio consists primarily of
mortgage-backed securities and corporate bonds, comprising 67.9% and 29.3% of
the portfolio at December 31, 1995, respectively. Investment purchases are made
with the intention of holding fixed maturity securities until maturity. Prior to
January 1, 1994, securities were generally carried at cost adjusted for discount
accretion and premium amortization. At December 31, 1995, the amortized cost of
the Company's fixed maturity portfolio was $1.1 billion, consisting primarily of
$777.7 million in mortgage-backed securities and $335.2 million in corporate
bonds. At December 31, 1995, bonds with an amortized cost of approximately $1.1
billion or 95.6% of the Company's portfolio of fixed maturity securities were
classified in an available-for-sale category and the carrying value adjusted to
fair value by means of an adjustment to stockholder's equity. The remainder of
the portfolio consists primarily of private placement investments traded
directly and are classified as held-to-maturity and valued at cost. At December
31, 1995, the Company owned $0.8 million in equity securities classified as
trading securities. The pre-tax net unrealized gain in the available-for-sale
fixed maturity and equity portfolio (fair value over amortized cost) at December
31, 1995, was $45.4 million, compared to a pre-tax unrealized loss of $72.1
million at December 31, 1994.
The Company has an investment in certain limited partnerships which were
formed for the purpose of participating in privately placed mezzanine
investments. These investments generally include higher risk subordinated debt
combined with equity securities. The partnerships are carried on an equity basis
at $25.6 million and $26.7 million at December 31, 1995 and 1994, respectively.
Income attributable to the partnerships for 1995 was $6.3 million and $1.5
million for 1994.
LIQUIDITY AND CAPITAL RESOURCES
The Company's principal cash requirements consist of funding the payment of
policyholder claims and surrenders. Liquidity requirements for the Company's
operations are generally met by funds provided from the sale of annuities and
cash flow from its investments in fixed income securities and mortgage loans.
Net cash flow from annuity operations is used to build the Company's
investment portfolio, which in turn produces future cash flows from investment
income and provides a secondary source of liquidity. Net cash provided by
operating activities for 1995 and 1994 was approximately $88.4 million and $62.6
million, respectively, resulting primarily from cash earnings on investments.
The Company monitors available cash and cash equivalents to maintain adequate
balances for current payments while maximizing cash available for longer term
investment activities. The Company's financing activities during the years ended
December 31, 1995 and 1994 reflect cash received primarily from sales by the
Company of its annuity products of approximately $135.3 million and $249.7
million, respectively. The Company believes that the decrease in annuity sales
in 1995 compared to the same period of 1994 is due in part to the interest rate
environment, particularly the relative relationship between short term and
intermediate term interest rates, and to the focus of the Company's resources on
development of its variable annuity product. In addition, a financial
institution which produced approximately 10% of the Company's annuity sales in
1994 discontinued the sale of annuities of the Company in 1995 subsequent to the
merger of such financial institution. As reflected in the net cash used by
investing activities during the same periods, investment purchases, which
include loans purchased on an interim basis from UCLC, were approximately $1.34
billion and $1.20 billion, respectively, reflecting the investment of these
funds and the reinvestment of proceeds from maturities of investment. Cash used
by financing activities during 1995 and 1994 also reflects payments of $222.8
million and $191.8 million, respectively, primarily on annuity products
resulting from policyholder surrenders and claims. The increase in annuity
surrenders during 1995 was expected, due in part to an increase in the amount of
annuity policies which were beyond the surrender penalty period and to the
general interest rate environment during this period. The interest margin on the
Company's annuity liabilities during the year ended December 31, 1995 was 2.37%
compared to 2.73%
59
<PAGE> 64
during the same period of 1994. Investments at December 31, 1995, included
approximately $336.3 million in home equity and commercial mortgage loans, and
the amortized cost of the bond portfolio included $367.5 million in corporate
and government bonds and private debt placements and $777.7 million in
mortgage-backed securities.
The investment portfolio is also managed to provide a secondary source of
liquidity as investments can be sold, if necessary, to fund abnormal levels of
policy surrenders, claims and expenses. An unanticipated increase in surrenders
would impact the Company's liquidity, potentially requiring the sale of certain
assets, such as bonds and loans, prior to their maturities, which may be at a
loss.
Reserves for annuity policies comprise the primary liabilities of the
Company.
The Company believes it has established adequate reserves on these products
as well as on its other insurance products. The effective life of these
liabilities is influenced by a number of factors, including interest rates,
surrender penalties, ratings, public confidence in the insurance industry
generally, and in the Company specifically, governmental regulations and tax
laws. The Company employs an actuarial model to measure the interest rate
sensitivity of these liabilities to assist in the selection of assets with
appropriate characteristics.
The Company is a Louisiana domiciled insurance company, and, as such, is
subject to certain regulatory restrictions on the payment of dividends. The
Louisiana statutes allow payments of dividends without the approval of the
commissioner to the extent of the lesser of ten percent of surplus as of the
prior year end, or the current year's net gain from operations. At December 31,
1995, the Company could pay dividends of $9.2 million without such approval. No
dividends were paid during 1995 or 1994 in order to retain capital in the
Company.
RATINGS
In the second quarter of 1995, A.M. Best Company ("Best"), an independent
rating organization, reaffirmed its "A-" (Excellent) rating of the Company.
Best's ratings depend in part on its analysis of an insurance company's
financial strength, operating performance and claims paying ability. In
addition, the Company's claims paying ability has been rated "A+"
(Single-A-Plus) by Duff & Phelps Credit Rating Company ("Duff & Phelps"). On
October 24, 1995, Duff & Phelps placed its "A+" rating of the Company on its
Rating Watch-Uncertain list because of the October 20, 1995, announcement by the
Company's Parent that strategic alternatives which it was considering included
the pending sale of the Company (see "Pending Sale of the Company" below). Duff
& Phelps reported that the claims paying ability rating would remain on Rating
Watch-Uncertain until more information becomes known about the Company's
ultimate position within the organization or another organization. In 1995,
Standard & Poor's, a division of The McGraw-Hill Companies, Inc. revised the
rating scale used in assigning its qualified solvency ratings of insurance
companies and, as a result, revised the Company's rating from "BBq" to "Aq."
Ratings such as those held by the Company can affect the Company's ability to
market its annuity products. Any lowering of the Company's ratings could
materially and adversely affect the Company's ability to market its products,
particularly the sale of annuities through financial institutions, and could
increase the surrender of its annuity policies. Both of these consequences
could, depending upon the extent thereof, have a materially adverse effect on
the Company's liquidity and, under certain circumstances, net income. The
Company believes that its ratings will enable it to continue to compete
successfully.
PENDING SALE OF THE COMPANY
On February 2, 1996, UCFC signed a stock purchase agreement ("Agreement")
dated as of January 30, 1996, for the sale of all of the outstanding capital
stock of the Company to UC Life Holding Corp., a new Delaware corporation formed
by Knightsbridge Capital Fund I, L.P. ("Knightsbridge"), for $164 million plus
earnings of the Company from January 1, 1996, to closing of the transaction.
Knightsbridge, which is a private investment partnership with institutional
partners, was formed in 1995 to
60
<PAGE> 65
make equity investments in companies engaged primarily in the life insurance
industry. Knightsbridge is a Delaware limited partnership, the limited partners
of which are primarily affiliates of leading domestic and international banking
organizations. The general partner is Knightsbridge Management L.L.C.
Under the terms of the Agreement, the sales price is comprised of cash,
estimated, as of January 30, 1996, to be approximately $109 million, and real
estate and other assets owned by the Company to be distributed to UCFC prior to
the closing. The real estate to be distributed includes portions of the United
Plaza office park, including UCFC's home office. In addition, UCFC will purchase
a convertible promissory note from an affiliate of the purchaser for $15 million
in cash.
The purchaser also agreed that the Company would continue to be an investor
in first lien home equity loans originated by UCFC's lending operations and that
the purchaser would use commercially reasonable efforts to maintain the
Company's home office operations in its present location in Baton Rouge,
Louisiana following the closing for at least two years. The Agreement is subject
to approval by UCFC's shareholders and regulatory authorities and the
satisfaction of other conditions, and provides that the closing will occur on or
before July 31, 1996.
THE COMPANY'S DIRECTORS AND EXECUTIVE OFFICERS
The directors and executive officers of the Company as of March 15, 1996
are listed below, together with information as to their ages, dates of election
and principal business occupation during the last five years (if other than
their present business occupation).
<TABLE>
<CAPTION>
PRINCIPAL BUSINESS OCCUPATION
NAME DURING LAST FIVE YEARS
- -------------------------------- ---------------------------------------------------
<S> <C>
J. Terrell Brown................ Mr. Brown is a director and is Chief Executive
(Age 56) Officer of the Company, is Chairman of the Board
and Chief Executive Officer of the Company's
parent, United Companies Financial Corporation
("UCFC") and is Chief Executive Officer of each
of UCFC's subsidiaries. Mr. Brown has served as a
director and executive officer of the Company
since 1964. Mr. Brown is also a director of
Hibernia Corporation and Sizeler Property
Investors, Inc.
Robert B. Thomas, Jr............ Mr. Thomas is Chairman of the Board and President
(Age 50) of the Company and is an Executive Vice President
of UCFC. Mr. Thomas joined the Company in
February 1993 as Chairman of the Board and was
named President of the Company in 1994. Mr.
Thomas also serves as a Director of United
Variable Services, Inc. Prior to his employment
with the Company, Mr. Thomas served as a
principal of Lewis and Ellis, Inc., a Dallas,
Texas actuarial consulting firm and, through
Lewis and Ellis, served as consulting actuary to
the Company for approximately 15 years.
John D. Dienes.................. Mr. Dienes was named a director of the Company in
(Age 54) 1995 and is President and Chief Operating Officer
of UCFC. Mr. Dienes joined UCFC in 1994 as
Executive Vice President and Chief Operating
Officer. Prior to his employment with UCFC, Mr.
Dienes served as Executive Vice President and
director of Western Corporate Banking for
NationsBank Corporation, Dallas, Texas, his
employer since 1988. At the time Mr. Dienes
joined UCFC, he had over 30 years of experience
in the financial industry.
</TABLE>
61
<PAGE> 66
<TABLE>
<CAPTION>
PRINCIPAL BUSINESS OCCUPATION
NAME DURING LAST FIVE YEARS
- -------------------------------- ---------------------------------------------------
<S> <C>
Dale E. Redman.................. Mr. Redman has served as a director of the Company
(Age 48) since 1983. He is Executive Vice President, Chief
Financial Officer and Assistant Secretary of UCFC
and is Vice Chairman of each of the subsidiaries
of UCFC. Prior to his appointment as Chief
Financial Officer and Executive Vice President in
1988, Mr. Redman served as Secretary and
Treasurer of UCFC. Mr. Redman is also a director
of Piccadilly Cafeterias, Inc.
Gary L. Warrington.............. Mr. Warrington has served as a director of the
(Age 56) Company since 1988 and serves as Executive Vice
President of the Company, Senior Vice President
of UCFC and President of United Variable
Services, Inc. Mr. Warrington joined the Company
as Vice President and Controller in 1982 and
served as President of the Company from 1988 to
1994.
Lindsay C. Seals................ Mr. Seals has served as a director of the Company
(Age 60) since 1988 and serves as Executive Vice President
of the Company, Senior Vice President of UCFC and
Executive Vice President of United Variable
Services, Inc. Mr. Seals joined the Company in
1971 and since that time has served in various
management positions with the Company.
Kitty S. Kennedy................ Ms. Kennedy has served as Executive Vice President,
(Age 47) Chief Actuary and Chief Administrative Officer
since 1993 and serves as Senior Vice President of
UCFC. Ms. Kennedy joined the Company in 1984, was
named Senior Vice President in 1991 and has
served in various management positions with the
Company.
Donald M. Woodard............... Mr. Woodard is Senior Vice President and Controller
(Age 47) of the Company. Mr. Woodard joined the Company in
June 1994. Prior to his employment with the
Company, Mr. Woodard served as Chief Financial
Officer of National Financial Insurance Company
and American Insurance Company of Texas, both of
Dallas, Texas.
Francis G. Miller............... Mr. Miller is a Senior Vice President, Information
(Age 49) Services, of the Company and is a Senior Vice
President of UCFC. He transferred to the Company
in August 1993 from UCFC, which he had joined in
1989.
R. Andrew Davidson, III......... Mr. Davidson is Senior Vice President of
(Age 43) Investments for the Company. Mr. Davidson joined
the Company in October 1992 as Vice President.
Prior to his employment with the Company, Mr.
Davidson served as Investment Adviser/Portfolio
Analyst with Southwest Corporate FCU in Dallas,
Texas, his employer since 1990. At the time Mr.
Davidson joined the Company, he had over 11 years
of experience in the insurance industry.
C. Keith Cook................... Mr. Cook is a Senior Vice President in the
(Age 41) Marketing Division of the Company. Mr. Cook was
named Senior Vice President in 1994. Mr. Cook
joined the Company in 1974 and has served in
various positions within the Company.
</TABLE>
62
<PAGE> 67
EXECUTIVE COMPENSATION
The following table sets forth certain information on the annual and
long-term compensation paid by the Company and its affiliates for the Chief
Executive Officer and each of the other four most highly compensated executive
officers of the Company for the three years ended December 31, 1995, 1994, and
1993. The salary and bonus of each of the executive officers, except that of Mr.
Brown, were paid by the Company. Mr. Brown's salary and bonus were paid by UCFC,
a portion of which was allocated to the Company.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL COMPENSATION LONG-TERM
-------------------------------------------- COMPENSATION AWARDS
OTHER --------------------------
ANNUAL RESTRICTED
NAME AND COMPENSATION STOCK AWARDS OPTIONS(3)/ ALL OTHER
PRINCIPAL POSITION YEAR SALARY BONUS($)(1) ($)(2) ($)(5) SARS(#) COMPENSATION(4)
- --------------------------- ---- -------- ----------- ------------ ------------ ----------- ---------------
<S> <C> <C> <C> <C> <C> <C> <C>
J. Terrell Brown........... 1995 $393,750 $ 833,666 $304,000 50,000 $39,308
Chief Executive Officer 1994 378,304 297,205 -- -- 41,240
1993 375,625 76,395 -- 55,000 32,114
Robert B. Thomas, Jr....... 1995 219,625 395,818 160,000 -- 20,505
Chairman of the Board 1994 209,366 168,116 -- -- 21,882
and President 1993 175,269 49,732 -- 22,000 --
Kitty S. Kennedy........... 1995 108,970 49,988 -- -- 16,015
Executive Vice President, 1994 100,320 40,800 -- -- 15,280
Chief Actuary and 1993 -- -- -- -- --
Chief Administrative
Officer
Gary L. Warrington......... 1995 158,980 71,541 -- -- 18,047
Executive Vice President 1994 158,980 63,592 -- -- 21,939
1993 158,208 14,308 -- 3,300 10,849
Lindsay C. Seals........... 1995 106,600 48,204 -- -- 17,443
Executive Vice President 1994 103,333 41,600 -- -- 16,474
1993 99,773 9,000 -- 2,200 6,680
</TABLE>
- ---------------
NOTES:
(1) Amounts awarded under the United Companies Financial Corporation Management
Incentive Plan for the respective years, even if deferred. Included in the
amount awards to J. Terrell Brown in 1995, 1994 and 1993 were $16,562,
$16,729 and $16,998, respectively, which were deferred pursuant to an
unfunded salary deferral agreement entered into between UCFC and Mr. Brown
in 1989. The aggregate amount payable by UCFC to Mr. Brown at December 31,
1995 was $136,023.
(2) No personal benefits, which are non-cash compensation, are disclosed in the
"Other Annual Compensation" column since they did not exceed the lesser of
either $50,000 or 10% of the total annual salary and bonus for any of the
named executive officers.
(3) Represents options granted under the United Companies Financial Corporation
stock option plans for employees after giving effect to stock dividends.
All options have been granted at an exercise price equal to 100% of the
fair market value of the Common Stock on the date of the grant. For
additional information regarding current holdings of options, see table
below entitled "Aggregate Option Exercises in Last Fiscal Year and Year-End
1995 Option Values."
(4) Amount reported include amounts contributed or accrued for 1995, 1994, and
1993 for the named officers under the United Companies Financial
Corporation Employee Stock Ownership Plan ("ESOP") and Employees' Savings
Plan and Trust. Amounts for J. Terrell Brown for 1995, 1994, and 1993
include $16,729, $16,998 and $17,134, respectively, in loans to Mr. Brown
made by UCFC for payment of a portion of the premium on a life insurance
policy. The loans were made without interest and are secured by an
assignment of the policy.
(5) Reflects the value of the shares of restricted stock based upon the closing
price of the Company's Common Stock reported on the National Association of
Securities Dealers Quotations National
63
<PAGE> 68
Stock Market (the "Nasdaq Stock Market") on the date of award. The shares
of the restricted stock vest in 50% increments on the anniversary date of
the award in each of the two years thereafter. The awards are also subject
to certain performance-based conditions. During the restriction period for
the shares of restricted stock, the named executive officer is entitled to
receive dividends and exercise voting privileges on such restricted shares.
At December 29, 1995, the shares of restricted stock held by Messrs. Brown
and Thomas had a fair market value of $501,125 and $263,750, respectively.
OPTIONS GRANTED IN LAST FISCAL YEAR
The following table sets forth information regarding the options granted
during the year ended December 31, 1995, to the Named Executive Officer:
<TABLE>
<CAPTION>
OPTIONS GRANTED IN LAST FISCAL YEAR POTENTIAL
INDIVIDUAL GRANTS REALIZATION
----------------------------------------- AT ASSUMED ANNUAL
% OF TOTAL RATES
NUMBER OF OPTIONS OF STOCK PRICE
SECURITIES GRANTED TO APPRECIATION
UNDERLYING EMPLOYEES EXERCISE FOR OPTION TERM
OPTIONS IN FISCAL PRICE --------------------
NAME GRANTED(#)(1) YEAR ($/SH)(1) EXPIRATION DATE 5%($) 10%($)
- -------------------- ------------- ---------- -------- --------------- ------- ---------
<S> <C> <C> <C> <C> <C> <C>
J. Terrell Brown.... 50,000 7.5 22.375 June 14, 2000 703,576 1,782,999
</TABLE>
- ---------------
(1) The options granted to the Named Executive Officer were awarded under the
Company's 1993 Stock Incentive Plan (the "1993 Plan"). The options granted
under the 1993 Plan are not exercisable, except in limited circumstances,
until three years have elapsed from the date such options are granted. The
exercise price of the options, which can be no less than 100% of the fair
market value of a share of Common Stock on the date of grant, has been
adjusted to reflect a 100% stock dividend paid by the Company on October
20, 1995. The number of shares underlying the above options have also been
adjusted to reflect such stock dividend. The options will expire ten years
from the date of grant.
AGGREGATE OPTION EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR-END 1995 OPTION VALUES
The following table sets forth information as of December 31, 1995,
regarding the number and value of exercisable and unexercisable options to
purchase Common Stock of UCFC held by the Company's Chief Executive Officer and
the other four most highly compensated officers.
<TABLE>
<CAPTION>
VALUE OF UNEXERCISED
NUMBER OF UNEXERCISED IN-THE-MONEY OPTIONS AT
SHARES OPTIONS AT FISCAL YEAR END FISCAL YEAR END($)(1)(2)(3)
ACQUIRED VALUE --------------------------- ---------------------------
NAME ON EXERCISE(%) REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ------------------------------------------ -------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
J. Terrell Brown............ -- -- 153,824 160,000 3,534,794 2,394,995
Robert B. Thomas, Jr........ -- -- 22,000 22,000 489,625 438,999
Kitty S. Kennedy............ -- -- -- 8,800 -- 175,600
Gary L. Warrington.......... 36,682 563,381 -- 6,600 -- 131,700
Lindsay C. Seals............ -- -- -- 4,400 -- 87,800
</TABLE>
- ---------------
(1) All options were awarded under the United Companies Financial Corporation
Stock Options plans for Employees and were awarded at the fair market value
of the shares of Common Stock Options Plans for Employees and were awarded
at the fair market value of the shares of Common Stock on the date of the
grant.
(2) Values in each column are based on the closing price, as reported on the
National Association of Securities Dealers Quotations National Stock Market
of the Company's Common Stock on December 31, 1995 ($26.375).
(3) The exercise prices of the reported options range from $5.53 to $12.84 per
share (as adjusted for stock dividends).
64
<PAGE> 69
Directors of the Company receive no fees for their services as members of
the Board of Directors. No shares of capital stock of the Company are owned by
the executive officer or director. The Company is a wholly-owned subsidiary of
UCFC.
LEGAL PROCEEDINGS
There are no material pending legal proceedings to which the Separate
Account or the Distributor is a party. The nature of the Company's business is
such that it is routinely involved in litigation or subject to other items of
pending or threatened litigation. Although the outcome of certain of these
matters cannot be predicted, management of the Company believes, based upon
information currently available, that the resolution of these matters will not
result in any material adverse effect on its financial condition.
EXPERTS
The financial statements included (or incorporated by reference) in this
Prospectus and the related financial statement schedules included elsewhere in
the registration statement have been audited by Deloitte & Touche LLP,
independent auditors, as stated in their report appearing herein and elsewhere
in the registration statement, and are so included in reliance upon the reports
of such firm given upon their authority as experts in accounting and auditing.
ADDITIONAL INFORMATION ABOUT THE SEPARATE ACCOUNT
Additional information concerning the Separate Account, including audited
financial statements of the Separate Account, is contained in a Statement of
Additional Information, which is available without charge, by contacting the
Company at P.O. Box 3257, Baton Rouge, LA 70821-3257, (800) 825-7568.
REGISTRATION STATEMENT
A Registration Statement has been filed with the Securities and Exchange
Commission under the Securities Act of 1933, as amended, with respect to the
Contracts and Certificates offered hereby. This Prospectus does not contain all
the information set forth in the Registration Statement and amendments thereto
and exhibits filed as a part thereof, to all of which reference is hereby made
for further information concerning the Company and the Contracts and
Certificates offered hereby. Statements contained in this Prospectus as to the
content of Contracts and Certificates and other legal instruments are summaries.
For a complete statement of the terms thereof, reference is made to such
instruments as filed.
LEGAL OPINIONS
Legal matters in connection with the Contracts and Certificates described
herein are being passed upon by the law firm of Blazzard, Grodd & Hasenauer,
P.C., Westport, Connecticut.
FINANCIAL STATEMENTS
Financial statements of the Company are included in this Prospectus. The
financial statements of the Company included herein should be considered only as
bearing upon the ability of the Company to meet its obligations under the
Contracts and Certificates.
65
<PAGE> 70
INDEPENDENT AUDITORS' REPORT
To the Stockholders and
Board of Directors of
United Companies Life Insurance Company
We have audited the accompanying consolidated balance sheets of United
Companies Life Insurance Company (a wholly-owned subsidiary of United Companies
Financial Corporation) and its subsidiary as of December 31, 1995 and 1994, and
the related consolidated statements of income, stockholder's equity, and cash
flows for each of the three years in the period ended December 31, 1995. Our
audits also included the financial statement schedules listed in the Index at
Item 14. These financial statements and financial statement schedules are the
responsibility of the Company's management. Our responsibility is to express an
opinion on the financial statements and financial statement schedules 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, such consolidated financial statements present fairly, in
all material respects, the financial position of United Companies Life Insurance
Company and its subsidiary at December 31, 1995 and 1994, and the results of
their operations and their cash flows for each of the three years in the period
ended December 31, 1995 in conformity with generally accepted accounting
principles. Also, in our opinion, such financial statements schedules, when
considered in relation to the basic consolidated financial statements taken as a
whole, present fairly in all material respects the information set forth
therein.
DELOITTE & TOUCHE LLP
Baton Rouge, Louisiana
February 29, 1996
66
<PAGE> 71
UNITED COMPANIES LIFE INSURANCE COMPANY AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------
1995 1994
---------- ----------
(IN THOUSANDS)
<S> <C> <C>
Investments:
Fixed maturity securities:
Available-for-sale at fair value...................... $1,140,160 $ 959,857
Held-to-maturity at amortized cost.................... 50,919 57,074
Equity securities at fair value.......................... 794 721
Mortgage loans on real estate............................ 336,269 311,537
Investment real estate................................... 32,423 17,292
Policy loans............................................. 20,291 20,243
Investments in limited partnerships...................... 25,594 26,672
Short-term investments................................... 22,804 54,664
Other invested assets.................................... 2,469 5,034
---------- ----------
Total investments............................... 1,631,723 1,453,094
Cash....................................................... 3,028 13,169
Investment in indebtedness of affiliate.................... 10,000 10,000
Accrued investment income.................................. 16,529 15,032
Due from reinsurers........................................ 33,583 34,985
Deferred policy acquisition costs.......................... 90,703 91,915
Property-net............................................... 575 20,299
Deferred income tax benefit................................ -- 17,128
Other assets............................................... 3,256 2,532
Assets held in separate accounts........................... 211 --
---------- ----------
Total assets.................................... $1,789,608 $1,658,154
========== ==========
LIABILITIES AND STOCKHOLDER'S EQUITY
Annuity reserves........................................... $1,417,803 $1,425,973
Policy benefit reserves.................................... 111,209 116,501
Unearned premium reserves.................................. 1,793 4,491
Repurchase agreements...................................... 40,857 --
Deferred income tax payable................................ 22,770 --
Other liabilities.......................................... 8,440 9,010
Liabilities related to separate accounts................... 211 --
---------- ----------
Total liabilities............................... 1,603,083 1,555,975
---------- ----------
Stockholder's equity:
Common stock, $2 par value;
Authorized -- 4,200,528 shares;
Issued -- 4,200,528 shares............................ 8,401 8,401
Additional paid-in capital............................... 28,980 28,980
Retained earnings........................................ 119,667 111,632
Net unrealized gains (losses) on securities.............. 29,477 (46,834)
---------- ----------
Total stockholder's equity...................... 186,525 102,179
---------- ----------
Total liabilities and stockholder's equity...... $1,789,608 $1,658,154
========== ==========
</TABLE>
See notes to consolidated financial statements.
67
<PAGE> 72
UNITED COMPANIES LIFE INSURANCE COMPANY AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------
1995 1994 1993
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Revenues:
Net investment income.............................. $123,107 $114,380 $109,661
Net insurance premiums............................. 8,508 11,373 18,684
Realized investment losses......................... (3,498) (4,811) (19,393)
-------- -------- --------
Total..................................... 128,117 120,942 108,952
-------- -------- --------
Expenses:
Interest on annuity policies....................... 79,086 73,065 76,086
Amortization of deferred policy acquisition
costs........................................... 13,159 13,528 10,229
Insurance commissions.............................. 432 328 3,116
Insurance benefits................................. 9,930 12,654 18,200
Other operating expenses........................... 13,410 12,287 13,686
-------- -------- --------
Total..................................... 116,017 111,862 121,317
-------- -------- --------
Income (loss) before income taxes.................... 12,100 9,080 (12,365)
-------- -------- --------
Provision (benefit) for income taxes:
Current............................................ 5,259 5,915 (2,263)
Deferred........................................... (1,194) (2,721) (1,844)
-------- -------- --------
Total..................................... 4,065 3,194 (4,107)
-------- -------- --------
Net income (loss).................................... $ 8,035 $ 5,886 $ (8,258)
======== ======== ========
</TABLE>
See notes to consolidated financial statements.
68
<PAGE> 73
UNITED COMPANIES LIFE INSURANCE COMPANY AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------
1995 1994 1993
----------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss).............................. $ 8,035 $ 5,886 $ (8,258)
Adjustments to reconcile net income to net cash
provided by operating activities:
Decrease (increase) decrease in deferred
policy acquisition costs................. 1,212 (8,419) (3,488)
(Increase) decrease in policy loans......... (48) (609) 332
(Increase) in accrued interest and accounts
receivable............................... (1,497) (498) (129)
Decrease in due from reinsurers............. 1,402 1,574 1,158
Decrease in other invested assets........... 2,565 2,241 921
(Increase) in other assets.................. (1,215) (1,924) (875)
(Decrease) in policy benefit reserves....... (5,292) (6,827) (1,699)
Interest on annuity policies................ 79,086 73,065 76,086
(Decrease) in unearned premium reserves..... (2,698) (5,769) (6,878)
Deferred income tax (benefit)............... (1,194) (2,721) (1,844)
Increase (decrease) in other liabilities.... 359 (1,404) 813
Provision for loan losses................... 4,051 5,059 4,994
Amortization and depreciation............... 1,648 1,883 1,914
Amortization of prior loan sale gains....... 2,451 2,012 735
Investment (gains) losses................... (381) (256) 14,400
Net cash flows from trading investment
securities............................... (73) (679) --
----------- -------- --------
Net cash provided by operating
activities............................ 88,411 62,614 78,182
----------- -------- --------
Cash flows from investment activities:
Proceeds from sales of loans held for
investment.................................. 1,111,636 940,099 457,945
Principal collected on loans................... 71,294 94,084 95,752
Loan originations and acquisitions............. (39,547) (8,799) (4,560)
Loans purchased from affiliates................ (1,168,648) (893,099) (572,576)
Proceeds from sales, calls or maturities of
available-for-sale securities............... 75,937 84,155 --
Proceeds from maturities or calls of
held-to-maturity securities................. 2,188 2,256 136,429
Purchase of available-for-sale securities...... (136,503) (300,384) --
Purchase of held-to-maturity securities........ -- -- (293,816)
Change in investment in limited partnerships... 1,078 26 6,126
Change in short-term investments............... 31,860 (17,813) (20,926)
Capital expenditures........................... (1,258) (656) (133)
----------- -------- --------
Net cash (used) by investing
activities............................ (51,963) (100,131) (195,759)
----------- -------- --------
Cash flows from financing activities:
Deposits received from annuities and interest
sensitive products.......................... 135,325 249,738 207,681
Payments on annuities and interest sensitive
products.................................... (222,791) (191,812) (136,489)
Increase (decrease) in repurchase agreement.... 40,857 (30,000) 30,000
Decrease in debt with maturities of three
months
or less..................................... -- -- (15,570)
Proceeds from capital contribution............. -- -- 15,000
Other.......................................... 20 44 242
----------- -------- --------
Net cash (used) provided by financing
activities............................ (46,589) 27,970 100,684
----------- -------- --------
(Decrease) in cash............................... (10,141) (9,547) (16,893)
Cash at beginning of period...................... 13,169 22,716 39,609
----------- -------- --------
Cash at end of period............................ $ 3,028 $ 13,169 $ 22,716
=========== ======== ========
</TABLE>
See notes to consolidated financial statements.
69
<PAGE> 74
UNITED COMPANIES LIFE INSURANCE COMPANY
CONSOLIDATED STATEMENTS OF STOCKHOLDER'S EQUITY
<TABLE>
<CAPTION>
NET
UNREALIZED
ADDITIONAL GAINS TOTAL
COMMON PAID-IN RETAINED (LOSSES) STOCKHOLDER'S
STOCK CAPITAL EARNINGS ON SECURITIES EQUITY
------ ---------- -------- ------------- -------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Balance, December 31, 1992............. $8,401 $13,980 $114,004 $136,385
Net loss............................... (8,258) (8,258)
Capital contribution................... 15,000 15,000
------ ------- -------- ------- --------
Balance, December 31, 1993............. 8,401 28,980 105,746 143,127
Net income............................. 5,886 5,886
Mark-to-market adjustment on
investments.......................... (46,834) (46,834)
------ ------- -------- ------- --------
Balance, December 31, 1994............. 8,401 28,980 111,632 (46,834) 102,179
Net income............................. 8,035 8,035
Mark-to-market adjustment on
investments.......................... 76,311 76,311
------ ------- -------- ------- --------
Balance, December 31, 1995............. $8,401 $28,980 $119,667 $29,477 $186,525
====== ======= ======== ======= ========
</TABLE>
See notes to consolidated financial statements
70
<PAGE> 75
UNITED COMPANIES LIFE INSURANCE COMPANY AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
1. ACCOUNTING POLICIES
1.1 PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include United Companies Life
Insurance Company (the "Company") and its wholly-owned subsidiary, United
Variable Services, Inc. All significant intercompany
balances and transactions have been eliminated in the consolidated financial
statements.
1.2 ORGANIZATION
United Companies Life Insurance Company (the "Company") is a wholly-owned
subsidiary of United Companies Financial Corporation ("UCFC" or the "Parent"), a
financial services holding company founded in 1946. UCFC focuses on the
origination, sale and servicing of first mortgage, nonconventional, home equity
loans and insurance.
The Company, a life insurance company domiciled in Louisiana and organized
in 1955, is currently authorized to conduct business in 47 states, the District
of Columbia and Puerto Rico. The primary products of the Company are tax
deferred annuity contracts marketed to individuals principally through financial
institutions and independent agents.
1.3 INVESTMENTS
1.3(A) FIXED MATURITY AND EQUITY SECURITIES
During the first quarter of 1994, the Company implemented the provisions of
Financial Accounting Standards Board ("FASB") Statement of Financial Accounting
Standards No. 115 ("SFAS 115"), which revised the method of accounting for
certain of the Company's investments. Prior to adoption of SFAS 115, the Company
reported its investments in fixed income investments at amortized cost, adjusted
for declines in value considered to be other than temporary. SFAS 115 requires
the classification of securities in one of three categories:
"available-for-sale," "held-to-maturity" or "trading." Securities classified as
held-to-maturity are carried at amortized cost, whereas securities classified as
trading securities or available-for-sale are recorded at fair value. Effective
with the adoption of SFAS 115, the Company determined the appropriate
classification of its investments and, if necessary, adjusted the carrying value
of such securities, accordingly, as if the unrealized gains or losses had been
realized. The adjustment, net of applicable income taxes, for investments
classified as available-for-sale is recorded in "Net unrealized gains (losses)
on securities" and is included in stockholder's equity on the balance sheet. The
adjustment for investments classified as trading is recorded in "Net investment
income" in the statement of income. In accordance with the provisions of SFAS
115, prior year investments were not restated.
1.3(B) MORTGAGE LOANS ON REAL ESTATE
Loans are carried at amortized cost, net of an allowance for losses. The
Company provides for estimated loan losses on loans owned by the Company by
establishing an allowance for loan losses through a charge to earnings. The
Company conducts periodic reviews of the quality of the loan portfolio and
estimates the risk of loss based upon historical loss experience, prevailing
economic conditions, estimated collateral value and such other factors which, in
management's judgment, are relevant in estimating the adequacy of the Company's
allowance for loan losses. While management uses the best information available
in conducting its evaluation, future adjustments to the allowance may be
necessary if there are significant changes in economic conditions, collateral
value or other elements used in conducting the review.
71
<PAGE> 76
UNITED COMPANIES LIFE INSURANCE COMPANY AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
1.3(C) INVESTMENT REAL ESTATE
The Company's investments in real estate are comprised of properties
received in settlement of loans ("foreclosed properties") and two office
buildings, adjacent land, and related improvements (its former home office
property). The Company records foreclosed properties at the lower of their
market value less estimated costs to sell ("market") or the outstanding loan
amount plus accrued interest ("cost"). The Company accomplishes this by
providing a specific reserve, on a property by property basis, for the
difference between market and cost. Market value is determined by property
appraisals performed either by its affiliate, United Companies Lending
Corporation ("UCLC"), or independent appraisers. The related adjustments are
included in the Company's provision for losses.
During 1995, the Company moved its offices from its previous location, and
converted One and Two United Plaza to investment real estate. One and Two United
Plaza are leased primarily by the Company to its Parent and other affiliates.
One and Two United Plaza are stated at cost less accumulated depreciation.
Depreciation is computed on the straight-line method over its estimated useful
life.
1.3(D) POLICY LOANS
Policy loans are reported at unpaid principal balance.
1.3(E) INVESTMENT IN LIMITED PARTNERSHIPS
The Company's investment in limited partnerships, whose affairs are not
controlled by the Company, is reflected on the equity method.
1.3(F) SHORT-TERM INVESTMENTS
At December 31, 1995, short-term investments totaled $22.8 million bearing
interest rates ranging from 5.25% to 5.61% per annum.
1.4 INVESTMENT IN INDEBTEDNESS OF AFFILIATE
The Company has invested in three subordinated debentures of an affiliate,
which are carried at cost.
1.5 DEFERRED POLICY ACQUISITION COSTS
Commissions and other costs related to the production of new and renewal
business have been deferred. The deferred costs related to traditional life
insurance are amortized over the premium payment period using assumptions
consistent with those used in computing policy benefit reserves. Deferred costs
related to annuities and interest sensitive products are amortized over the
estimated life of the policy in relation to the present value of estimated gross
profits on the contract. The Company periodically reviews the appropriateness of
assumptions used in calculating the estimated gross profits on annuity
contracts. Any change required in these assumptions may result in an adjustment
to deferred policy acquisition costs which would affect income.
1.7 PROPERTY -- NET
Property is stated at cost less accumulated depreciation. Depreciation is
computed on the straight-line and accelerated methods over the estimated useful
lives on the assets.
72
<PAGE> 77
UNITED COMPANIES LIFE INSURANCE COMPANY AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
1.8 POLICY BENEFIT RESERVES
Policy benefit reserves for traditional life insurance policies have been
provided on a net level premium method including assumptions as to investment
yield, mortality and withdrawals based on the Company's experience and industry
standards with provisions for possible adverse deviation. Investment yield
assumptions range from 5.5% to 8.5% per annum. Policy benefit reserves include
certain deferred profits on limited payment policies. These profits are being
recognized in income over the policy term.
Reserves for annuity policies and interest sensitive life policies
represent the policy account balance, or accumulated fund value, before
applicable surrender charges. Benefit claims incurred in excess of related
policy account balances and interest credited during the period to policy
account balances are charged to expense.
1.9 REPURCHASE AGREEMENTS
At December 31, 1995, the Company had a liability of approximately $40.9
million incurred pursuant to securities sold under agreements to repurchase
("repurchase agreements"). The securities sold under these agreements are
classified as "Available-for-sale" investment securities and are carried at
their aggregate market value of $42.2 million at December 31, 1995. The
repurchase agreements bear interest at 5.70% and 5.74% and matured in January,
1996.
1.10 INCOME TAXES
The Company files a consolidated federal income tax return with its Parent
and other affiliated companies. The Parent allocates to the Company its
proportionate share of the consolidated tax liability under a tax allocation
agreement whereby each affiliate's federal income tax provision is computed on a
separate return basis. Deferred income taxes are provided for the effect of
revenues and expenses which are reported in different periods for financial
reporting purposes than for tax purposes. Such differences result primarily from
deferring policy acquisition costs, providing for bond, real estate and loan
losses, differences in the methods of computing reserves, and depreciation.
1.11 PREMIUMS
Income on short duration single premium contracts, primarily credit
insurance products, is recognized over the contract period. Premiums on other
insurance contracts principally traditional life insurance and limited payment
life insurance policies, are recognized as revenue when due.
1.12 REINSURANCE
The Company generally reinsures with other insurance companies the portion
of any one risk which exceeds $100,000. On certain types of policies this limit
is $25,000. The Company is contingently liable for insurance ceded to
reinsurers. Premiums ceded under reinsurance agreements were $1.7 million, $2.1
million and $3.6 million in 1995, 1994 and 1993, respectively. Reserve credit
taken under reinsurance agreements totaled $32.9 million, $34.0 million and
$35.2 million at December 31, 1995, 1994 and 1993, respectively.
73
<PAGE> 78
UNITED COMPANIES LIFE INSURANCE COMPANY AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
The Company has assumed the following reinsurance from other insurers:
<TABLE>
<CAPTION>
INSURANCE
IN FORCE PREMIUMS
---------- --------
(IN THOUSANDS)
<S> <C> <C>
1995.................................................. $ 992,979 $2,589
1994.................................................. 1,106,148 2,966
1993.................................................. 1,106,721 3,039
</TABLE>
The Company has a receivable at December 31, 1995 of approximately $33.9
million from one reinsurer; however, the funds supporting the receivable are
escrowed in a separate trust account for the benefit of the Company by the
reinsurer. The following table reflects the effect of reinsurance agreements on
premiums and the amounts earned for the periods indicated.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------
1995 1994 1993
------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
Direct premiums................................. $ 7,659 $10,537 $19,294
Reinsurance assumed............................. 2,589 2,966 3,039
Reinsurance ceded............................... (1,740) (2,130) (3,649)
------- ------- -------
Net insurance premiums........................ $ 8,508 $11,373 $18,684
======= ======= =======
</TABLE>
1.13 PARTICIPATING POLICIES
Direct participating business, primarily related to the Company's pre-need
funeral policies, represented 8.2%, 7.2% and 6.3% of the life insurance in force
as of December 31, 1995, 1994 and 1993, respectively. The amount of dividends
paid on participating policies is based on published dividend scales and totaled
$1.2 million, $1.0 million and $1.5 million for the years ended December 31,
1995, 1994 and 1993, respectively.
1.14 ACCOUNTING STANDARDS
In May, 1993 and in October, 1994, respectively the FASB issued Statements
of Financial Accounting Standards Nos. 114 and 118 ("SFAS 114" and "SFAS 118")
which address the accounting by creditors for impairment of loans and specify
how allowances for credit losses related to certain loans should be determined.
The statements also address the accounting by creditors for all loans that are
restructured in a troubled debt restructuring involving modification of terms of
a receivable. The implementation of the provisions of SFAS 114 and SFAS 118 in
the first quarter of 1995 did not have a material effect on the financial
statements of the Company.
1.15 USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
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.
74
<PAGE> 79
UNITED COMPANIES LIFE INSURANCE COMPANY AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
1.16 RECLASSIFICATIONS
Certain prior year amounts have been reclassified to conform with the
current year presentation. Such reclassifications had no effect on net income.
2. INVESTMENTS
2.1 FIXED MATURITY SECURITIES
The Company's portfolio of fixed maturity securities consisted of the
following:
<TABLE>
<CAPTION>
DECEMBER 31, 1995
-------------------------------------------------------
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
---------- ---------- ---------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Available-for-Sale:
U.S. Government............. $ 11,504 $ 409 $ -- $ 11,913
Municipal................... 425 21 -- 446
Foreign..................... 20,394 1,916 -- 22,310
Corporate................... 328,546 22,452 679 350,319
Mortgage-backed............. 733,516 22,258 602 755,172
---------- --------- --------- ----------
Total.............. $1,094,385 $ 47,056 $ 1,281 $1,140,160
========== ========= ========= ==========
Held-to-Maturity:
Corporate................... $ 6,692 $ 550 $ -- $ 7,242
Mortgage-backed............. 44,227 1,414 3,272 42,369
---------- --------- --------- ----------
Total.............. $ 50,919 $ 1,964 $ 3,272 $ 49,611
========== ========= ========= ==========
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1994
-----------------------------------------------------
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
---------- ---------- ---------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Available-for-Sale:
U.S. Government............... $ 10,720 $ 31 $ 238 $ 10,513
Municipal..................... 425 13 -- 438
Foreign....................... 18,433 190 603 18,020
Corporate..................... 258,549 321 13,148 245,722
Mortgage-backed............... 743,359 22 58,217 685,164
---------- --------- --------- --------
Total................ $1,031,486 $ 577 $ 72,206 $959,857
========== ========= ========= =========
Held-to-Maturity:
Corporate..................... $ 10,828 $ 300 $ 211 $ 10,917
Mortgage-backed............... 46,246 110 2,188 44,168
---------- --------- --------- --------
Total................ $ 57,074 $ 410 $ 2,399 $ 55,085
========== ========= ========= =========
</TABLE>
75
<PAGE> 80
UNITED COMPANIES LIFE INSURANCE COMPANY AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
Included in the Company's mortgage-backed Held-to-Maturity Securities are
investments in subordinated junior certificates in securitized pools of
commercial real estate loans for which an election under the real estate
mortgage investment conduit provisions ("REMIC") of the Internal Revenue Code
was made. Associated with the ownership of those junior certificates are certain
credit risks for which the Company has established an estimate of future credit
losses as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------
1995 1994 1993
------- ------- ------
(IN THOUSANDS)
<S> <C> <C> <C>
Balance at beginning of period.................. $ 317 $ 1,515 $ 98
Losses charged to allowance..................... (1,664) (3,047) (811)
Loss provision.................................. 2,013 1,849 2,228
------- ------- ------
Balance at end of period........................ $ 666 $ 317 $1,515
======= ======= ======
</TABLE>
The cost and estimated fair value of fixed maturity securities by
contractual maturity are shown below. Expected maturities may differ from
contractual maturities because certain issuers may have the right to call or
prepay obligations with or without call or prepayment penalties.
<TABLE>
<CAPTION>
DECEMBER 31, 1995
------------------------------------------------
AVAILABLE-FOR-SALE HELD-TO-MATURITY
------------------------ --------------------
AMORTIZED FAIR AMORTIZED FAIR
COST VALUE COST VALUE
---------- ---------- --------- -------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
1 year or less................... $ 6,601 $ 6,513 $ -- $ --
Over 1 year through 5 years...... 80,080 84,349 2,286 2,361
Over 5 years through 10 years.... 266,238 285,826 4,406 4,881
After 10 years................... 7,950 8,300 -- --
Mortgage-backed securities....... 733,516 755,172 44,227 42,369
---------- ---------- -------- -------
Total................. $1,094,385 $1,140,160 $ 50,919 $49,611
========== ========== ======== =======
</TABLE>
Net unrealized gains on available-for-sale securities of $29.5 million
included in Stockholder's equity at December 31, 1995, are presented net of
deferred income taxes of $15.9 million. Net unrealized losses of $46.8 million
at December 31, 1994, were net of deferred income taxes of $25.2 million.
Proceeds from the sales, calls and maturities of investments in debt
securities during 1995 totaled $78.1 million and resulted in realized investment
gains of approximately $.5 million and realized investment losses of
approximately $2.1 million. During 1994 and 1993, proceeds totaled $86.4 million
and $136.4 million, respectively; resulting in realized capital gains of
$303,000 and $1.5 million, respectively. Realized losses for 1994 and 1993 were
$4.5 million and $3.2 million, respectively. In addition to losses incurred in
connection with the sale of investments during 1993, the Company reduced the
carrying value of a corporate bond by $.5 million to reflect the Company's
estimate of a permanent decline in the value of this investment. At December 31,
1995, securities with a cost of $9.4 million were on deposit with insurance
regulatory authorities.
In 1990, the Company securitized pools of commercial real estate loans
owned by it in two transactions and in connection therewith sold pass-through
certificates ("Series 90-1" and "Series 90-2") for which an election under the
real estate mortgage investment conduit provisions ("REMIC") of the Internal
Revenue Code of 1986, as amended were made. The Company retained as an
investment subordinated junior certificates in both issues, as well as a senior
certificate interest in Series 90-2.
76
<PAGE> 81
UNITED COMPANIES LIFE INSURANCE COMPANY AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
Included in "Held-to-maturity," fixed maturity securities are investments
in the two REMIC's of approximately $44.2 million at December 31, 1995 and $46.2
million at December 31, 1994.
A summary of the Company's investment at December 31, 1995 in the REMIC's
is as follows:
<TABLE>
<CAPTION>
CARRYING
REMAINING VALUE
DATE OF PRINCIPAL -------------- INTEREST MATURITY
ISSUE BALANCE RATE DATE
------------- --------- (IN THOUSANDS) -------- -------------
<S> <C> <C> <C> <C> <C>
United Companies Life
REMIC
Series 90-1, Class
B-1.............. Mar 29, 1990 $ 10,794 $ 10,296 10.05% Sep 25, 2009
Series 90-2, Class
A-3.............. Dec 18, 1990 20,250 19,974 9.88% May 25, 2000
Series 90-2, Class
B-1.............. Dec 18, 1990 15,709 13,957 9.88% Jan 25, 2009
-------- --------
$ 46,753 $ 44,227
======== ========
</TABLE>
2.2 EQUITY SECURITIES
The net unrealized capital gains and losses on common stocks are as
follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1995
----------------------------------------------
UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
------ ---------- ---------- -----
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Trading................................ $ 545 $215 $ 28 $ 752
Available-for-Sale..................... 467 -- 425 42
------ ---- ---- -----
Total....................... $1,012 $215 $433 $ 794
====== ==== ==== =====
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1994
----------------------------------------------
UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
------ ---------- ---------- -----
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Trading................................ $ 656 $ 51 $ 28 $ 679
Available-for-Sale..................... 467 -- 425 42
------ ----- ---- -----
Total....................... $1,123 $ 51 $453 $ 721
====== ==== ==== =====
</TABLE>
2.3 MORTGAGE LOANS ON REAL ESTATE
The following schedule summarizes the composition of mortgage loans on real
estate:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------
1995 1994
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Residential........................................... $169,175 $158,943
Unearned loan charges................................. (301) (418)
-------- --------
168,874 158,525
-------- --------
Commercial............................................ 169,512 154,790
Allowance for loan losses............................. (2,117) (1,778)
-------- --------
167,395 153,012
-------- --------
Total............................................... $336,269 $311,537
======== ========
</TABLE>
77
<PAGE> 82
UNITED COMPANIES LIFE INSURANCE COMPANY AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
Included in the loans owned at December 31, 1995 and 1994 were nonaccrual
loans of $2.4 million and $2.6 million, respectively.
The Company provides an estimate for future credit losses in an allowance
for loan losses. A summary analysis of the changes in the Company's allowance
for loan losses is as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------
1995 1994 1993
------ ------- ------
(IN THOUSANDS)
<S> <C> <C> <C>
Balance at beginning of year.................... $1,778 $ 2,639 $2,489
Loans charged to allowance...................... (194) (1,510) (508)
Loan loss provision............................. 533 649 658
------ ------- ------
Balance at end of year.......................... $2,117 $ 1,778 $2,639
====== ======= ======
Specific reserves............................... $1,117 $ 752 1,376
Unallocated reserves............................ 1,000 1,026 1,263
------ ------- ------
Total reserves....................... $2,117 $ 1,778 $2,639
====== ======= ======
</TABLE>
2.4 INVESTMENT REAL ESTATE
Investment real estate at December 31, 1995 and 1994 was as follows:
<TABLE>
<CAPTION>
1995 1994
------- -------
(IN THOUSANDS)
<S> <C> <C>
Investment real estate.................................. $22,845 $ 3,073
Foreclosed real estate.................................. 13,565 19,339
Allowance for losses.................................... (3,987) (5,120)
------- -------
$32,423 $17,292
======= =======
</TABLE>
The specific allowance for investment real estate losses was as follows:
<TABLE>
<CAPTION>
1995 1994 1993
------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
Balance, January 1............................. $ 5,120 $ 4,473 $ 4,062
Additions(a)................................... 1,505 2,561 2,607
Deductions(b).................................. (2,638) (1,914) (2,196)
------- ------- -------
Balance, December 31........................... $ 3,987 $ 5,120 $ 4,473
======= ======= =======
</TABLE>
- ---------------
(a) Charged to realized investment gains (losses).
(b) Resulting from sales.
78
<PAGE> 83
UNITED COMPANIES LIFE INSURANCE COMPANY AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
2.5 INVESTMENT IN LIMITED PARTNERSHIPS
Following is an analysis of the Company's investment in limited
partnerships:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------
1995 1994 1993
-------- -------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
Balance, beginning of year................... $ 26,672 $ 26,698 $32,824
Contributions and capitalized costs.......... 9,869 5,168 4,326
Net partnership income....................... 6,279 1,480 2,944
Distributions................................ (17,226) (6,674) (13,396)
-------- -------- -------
Balance, end of year......................... $ 25,594 $ 26,672 $26,698
======== ======== =======
</TABLE>
The limited partnerships were formed for the purpose of participating in
privately placed mezzanine investments. These investments, acquired in leveraged
investment transactions, generally include higher risk subordinated debt
combined with equity securities.
2.6 INVESTMENT INCOME
Investment income by type that exceeds five percent of total investment
income was as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------
1995 1994 1993
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Fixed maturity securities.................. $ 85,852 $ 74,443 $ 63,751
Mortgage loans on real estate.............. 35,056 42,763 45,709
All other investment income................ 14,386 8,925 11,243
-------- -------- --------
135,294 126,131 120,703
Less: Investment expenses.................. (12,187) (11,751) (11,042)
-------- -------- --------
Net investment income........... $123,107 $114,380 $109,661
======== ======== ========
</TABLE>
79
<PAGE> 84
UNITED COMPANIES LIFE INSURANCE COMPANY AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
2.7 REALIZED INVESTMENT GAINS (LOSSES)
Net realized investment gains (losses) were as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------
1995 1994 1993
------- ------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Fixed maturity securities:
Gross gains................................. $ 524 $ 303 $ 1,536
Gross losses................................ (1,807) (3,373) (1,816)
Loss provision.............................. (350) 1,198 (1,417)
------- ------- --------
Net losses on fixed maturity
securities....................... (1,633) (1,872) (1,697)
------- ------- --------
Equity securities:
Gross gains................................. 205 51 882
Gross losses................................ (33) (59) (15,715)
------- ------- --------
Net gains (losses) on equity
securities....................... 172 (8) (14,833)
------- ------- --------
Mortgage loans on real estate:
Losses on sale.............................. (194) -- --
Loss provision.............................. (339) (861) (150)
------- ------- --------
Net losses on mortgage loans on
real estate...................... (533) (861) (150)
------- ------- --------
Investment real estate:
Losses on sale.............................. (2,638) (2,840) (2,302)
Loss provision.............................. 1,134 (952) (411)
------- ------- --------
Net losses on investment real
estate........................... (1,504) (3,792) (2,713)
------- ------- --------
Realized investment losses......... $(3,498) $(4,811) $(19,393)
======= ======= ========
</TABLE>
3. PROPERTY-NET
Property is summarized as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1995 1994
------- -------
(IN THOUSANDS)
<S> <C> <C>
Land and buildings....................................... $ -- $27,350
Furniture, fixtures and equipment........................ 2,370 2,084
------- -------
Total......................................... 2,370 29,434
Less accumulated depreciation............................ (1,795) (9,135)
------- -------
Property-net.................................. $ 575 $20,299
======= =======
</TABLE>
80
<PAGE> 85
UNITED COMPANIES LIFE INSURANCE COMPANY AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
Rental expense on operating leases, including real estate, computer
equipment and automobiles, totaled $.7 million, $.5 million and $.4 million
during 1995, 1994 and 1993, respectively. Minimum annual commitments under
noncancellable operating leases are as follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
1995
------------
<S> <C>
1996.................................................... $ 509
1997.................................................... 503
1998.................................................... 503
1999.................................................... 481
2000.................................................... 241
------
Total........................................ $2,237
======
</TABLE>
4. INCOME TAXES
The provision (benefit) for income taxes attributable to operations is as
follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------
1995 1994 1993
------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
Current.......................................... $ 5,259 $ 5,915 $(2,263)
Deferred......................................... (1,194) (2,721) (1,844)
------- ------- -------
Total................................. $ 4,065 $ 3,194 $(4,107)
======= ======= =======
</TABLE>
Reported income tax expense attributable to operations differs from the
amount computed by applying the statutory federal income tax rate to income from
operations before income taxes for the following reasons:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------
1995 1994 1993
------ ------ -------
(IN THOUSANDS)
<S> <C> <C> <C>
Federal income tax (benefit) at statutory rate.... $4,235 $3,178 $(4,328)
Differences resulting from:
Reversal of temporary differences at prior tax
rates........................................ -- -- 48
Other........................................... (170) 16 173
------ ------ -------
Reported income tax provision benefit............. $4,065 $3,194 $(4,107)
====== ====== =======
</TABLE>
81
<PAGE> 86
UNITED COMPANIES LIFE INSURANCE COMPANY AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
The significant components of the Company's net deferred income tax benefit
and liability are as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------
1995 1994
------- --------
(IN THOUSANDS)
<S> <C> <C>
Deferred income tax benefit:
Policy reserves........................................ $21,530 $ 21,457
Investment securities.................................. -- 27,263
Real estate and loan income............................ 1,861 1,956
Other.................................................. -- 4
------- --------
Total......................................... 23,391 50,680
------- --------
Deferred income tax liabilities:
Other.................................................. 11 --
Investment securities.................................. 12,495 --
Real estate and loan income............................ 4,180 3,926
Deferred policy acquisition costs...................... 29,475 29,626
------- --------
Total......................................... 46,161 33,552
------- --------
Net deferred income tax (benefit) liability.............. $22,770 $(17,128)
======= ========
</TABLE>
Payments made for income taxes, net of refunds received, during the years
ended December 31, 1995, 1994 and 1993 were $4.6 million, $1.4 million and $.6
million, respectively.
Retained earnings at December 31, 1995 include approximately $5.2 million
of "Policyholders' Surplus" on which no federal income tax payment will be
required unless it is distributed as a dividend or exceeds the limits prescribed
by tax laws applicable to life insurance companies. A deferred income tax
liability has not been recognized for this amount. The maximum federal income
tax provision possibly required based on the current federal income tax rate
would be $1.8 million.
The Company had a current income tax payable, which is included in "Other
liabilities," in the amount of $2.3 million at December 31, 1995, and $1.7
million at December 31, 1994.
5. TRANSACTIONS WITH AFFILIATES
The Company has an agreement with UCLC to purchase qualifying residential
home equity mortgage loans originated or purchased and underwritten by UCLC.
These loans are usually held three to six months until resold to UCLC for sale
by UCLC in loan securitizations. Also, under an agreement, UCLC is obligated to
repurchase these home-equity loans previously sold to the Company at the time of
foreclosure. At December 31, 1995, approximately $166.5 million of home-equity
loans originated by UCLC were owned by the Company. During the years ended
December 31, 1995, 1994 and 1993 the Company purchased home-equity loans of
approximately $1,169 million, $893 million and $569.9 million, respectively,
from UCLC. Sales of these home-equity loans to UCLC by the Company were $1,112
million in 1995, $932.7 million in 1994, and $457.3 million in 1993. No gain or
loss was recorded by the Company in these transactions.
As of December 31, 1995, 1994 and 1993 UCLC serviced loans owned by the
Company having aggregate unpaid principal balances of approximately $338.4
million, $296.9 million and $338.7 million, respectively. The Company paid
servicing fees relative to these loans of approximately $.9 million in 1995,
$1.1 million in 1994 and $1.3 million in 1993.
82
<PAGE> 87
UNITED COMPANIES LIFE INSURANCE COMPANY AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
The Company leases home office space to its Parent and other affiliates.
Rent income attributable to these affiliates was approximately $1.0 million in
each of the years ended December 31, 1995, 1994 and 1993.
United Companies Realty & Development Co., Inc. ("UCRD"), an affiliate,
managed the home office buildings leased by the Company to its Parent and other
third party tenants under a real estate management contract in 1995, 1994 and
1993. The Company paid approximately $443,000, $306,000 and $312,000 to UCRD in
management fees in 1995, 1994 and 1993, respectively.
The Company is allocated certain costs from its Parent and affiliates under
a cost sharing agreement. Amounts allocated to the Company from UCFC and
affiliates were as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------
1995 1994 1993
------ ------ ------
<S> <C> <C> <C>
(IN THOUSANDS)
Personnel expense.................................. $2,014 $1,776 $ 937
Other operating expenses........................... 2,116 1,532 1,452
------ ------ ------
Total................................... $4,130 $3,308 $2,389
====== ====== ======
</TABLE>
In May 1993, the Company purchased three subordinated debentures from UCLC.
Listed below is summarized information on the subordinated debentures that were
issued by UCLC:
<TABLE>
<CAPTION>
DATE OF PRINCIPAL INTEREST MATURITY
SERIES ISSUE BALANCE RATE DATE
- ------ ------------- ------------ -------- -------------
<S> <C> <C> <C> <C>
A-1 May 14, 1993 $ 3,000,000 6.05% May 20, 1998
B May 14, 1993 3,000,000 6.64% May 20, 2000
C May 14, 1993 4,000,000 7.18% May 20, 2003
-----------
Total $10,000,000
===========
</TABLE>
Interest income received from UCLC with respect to those subordinated
debentures totaled approximately $668,000 in each of 1995 and 1994 and $345,000
in 1993. All principal is payable upon maturity.
The Company is a participant in UCFC's consolidated income tax agreement.
See Note 1.9.
6. EMPLOYEE BENEFIT PLANS
All employees who meet minimum age and service requirements participate in
UCFC's Employee Stock Ownership Plan ("ESOP"). Under the ESOP, UCFC makes tax
deductible contributions of its common stock (or cash which is used to purchase
its common stock or to repay debt used by the ESOP to purchase such stock) to a
trust for the benefit of participating employees. Contributions are allocated
among participants based on years of service and compensation. Upon retirement,
death or disability, the employee or a beneficiary receives the designated
common stock.
Contributions to the ESOP are determined on an annual basis. The Company's
contributions to the ESOP were $244,000, $189,000 and $74,000 for the years
ended December 31, 1995, 1994 and 1993, respectively.
Eligible employees may elect to participate in the UCFC Employees' Savings
Plan which is designed to be a qualified plan under Sections 401(a) and 401(k)
of the Internal Revenue Code of 1988, as amended. Under the plan, employees are
allowed to defer income on a pre-tax basis through contributions to the plan and
the Company matches a portion of such contributions. The Company's matching
83
<PAGE> 88
UNITED COMPANIES LIFE INSURANCE COMPANY AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
contributions totaled $170,000, $138,000 and $49,000 during 1995, 1994 and 1993,
respectively. Employees have five investment options, one of which is to invest
in the Parent's common stock.
7. REGULATORY ACCOUNTING
Accounting records of the Company are also maintained in accordance with
practices prescribed or authorized by insurance regulatory authorities.
Prescribed statutory accounting principles include a variety of publications of
the National Association of Insurance Commissioners, as well as state laws,
regulations, and general administrative rules. Permitted statutory accounting
practices encompass all accounting practices not so prescribed. The Company's
capital and surplus pursuant to the regulatory accounting basis as of December
31, 1995 and 1994 was $99.9 million and $90.0 million, respectively. On a
regulatory accounting basis, net gain from operations for the years ended
December 31, 1995, 1994 and 1993 was $12.8 million, $9.7 million and $13.0
million, respectively. Net income (loss) on a regulatory accounting basis, which
includes realized capital gains and losses, was $10.0 million, $5.8 million and
$(1.7) million for the years ended December 31, 1995, 1994 and 1993,
respectively. As a Louisiana domiciled insurance company, the Company is subject
to certain regulatory restrictions on the payment of dividends. At December 31,
1995 dividends of $9.2 million may be paid without prior regulatory approval.
The Company did not pay any dividends during 1995, 1994 or 1993 in order to
retain capital.
The Company received written approval from the Louisiana Department of
Insurance to invest in first lien residential mortgage loans originated by UCLC
on a short-term basis without recording the assignment of the mortgage loans to
the Company, which differs from prescribed statutory accounting practices.
Statutory accounting practices prescribed by the State of Louisiana require that
investments in mortgage loans be secured by unrestricted first liens on the
underlying property. As of December 31, 1995, statutory surplus was increased by
approximately $53.7 million as a result of this permitted practice.
8. DISCLOSURE ABOUT FINANCIAL INSTRUMENTS
Statement of Financial Accounting Standards No. 107 ("SFAS 107") requires
that the Company disclose the estimated fair values of its financial
instruments, both assets and liabilities recognized and not recognized in its
financial statements.
SFAS 107 defines financial instruments as cash and contractual rights and
obligations that require settlement in cash or by exchange of financial
instruments. Fair value is defined as the amount at which the instrument could
be exchanged in a current transaction between willing parties other than in a
forced or liquidation sale.
84
<PAGE> 89
UNITED COMPANIES LIFE INSURANCE COMPANY AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
The carrying value and fair value of the Company's financial assets and
liabilities were as follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1995 DECEMBER 31, 1994
------------------------ ------------------------
CARRYING FAIR CARRYING FAIR
VALUE VALUE VALUE VALUE
---------- ---------- ---------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Financial assets:
Investments:
Fixed maturity securities:
Available-for-sale.......... $1,140,160 $1,140,160 $ 959,857 $ 959,857
Held-to-maturity............ 50,919 49,611 57,074 55,085
Equity securities:
Trading..................... 752 752 679 679
Available-for-sale.......... 42 42 42 42
Mortgage loans on real
estate...................... 336,269 335,157 311,537 307,775
Investment real estate......... 32,423 38,978 17,292 15,179
Policy loans................... 20,291 20,291 20,243 20,243
Investment in limited
partnership................. 25,594 25,594 26,672 26,672
Short-term investments......... 22,804 22,804 54,664 54,664
Other invested assets.......... 2,469 2,469 5,034 5,034
Cash........................... 3,028 3,028 13,169 13,169
Financial liabilities:
Annuity reserves.................. 1,417,803 1,350,626 1,425,973 1,354,944
Repurchase agreements............. 40,857 40,857 -- --
</TABLE>
The above values do not reflect any premium or discount from offering for
sale at one time the Company's entire holdings of a particular financial
instrument. Fair value estimates are made at a specific point in time based on
relevant market information, if available. Because no market exists for certain
of the Company's financial instruments, fair value estimates for these assets
and liabilities were based on subjective estimates of market conditions and
perceived risks of the financial instruments. Fair value estimates were also
based on judgments regarding future loss and prepayment experience and were
influenced by the Company's historical information.
The following methods and assumptions were used to estimate the fair value
of the Company's financial instruments.
FIXED MATURITY AND EQUITY SECURITIES
The estimated fair value for the Company's investment portfolio was
generally determined from quoted market prices for publicly traded securities.
Certain of the securities owned by the Company may trade infrequently or not at
all; therefore, fair value for these securities was determined by management by
evaluating the relationship between quoted market values and carrying value and
assigning a liquidity factor to this segment of the investment portfolio.
MORTGAGE LOANS ON REAL ESTATE
The fair value of the Company's loan portfolio was determined by
segregating the portfolio by type of loan and further by its performing and
non-performing components. Performing loans were further segregated based on the
due date of their payments, an analysis of credit risk by category was performed
and a matrix of pricing by category was developed. Loans which were current were
valued at remaining
85
<PAGE> 90
UNITED COMPANIES LIFE INSURANCE COMPANY AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
principal balance which is believed to represent an estimate of market discount
from similar loans identified for sale. The fair value of delinquent loans was
estimated by using the Company's historical recoverable amount on defaulted
loans.
INVESTMENT REAL ESTATE
The fair value of the Company's investment real estate was based upon
independent appraisals of the properties.
POLICY LOANS
Policy loans are generally settled at the loan amount plus accrued
interest; therefore, the carrying value of these assets is a reasonable estimate
of their fair values.
OTHER INVESTED ASSETS
The fair value of the Company's investment in other invested assets
approximates their carrying value.
SHORT-TERM INVESTMENTS
The carrying amount of short-term investments approximates their fair
values because these assets generally mature in 90 days or less and do not
present any significant credit concerns.
INVESTMENT IN LIMITED PARTNERSHIPS
The fair value of the Company's investment in limited partnerships
approximated their carrying value.
ANNUITY RESERVES
The Company's annuity contracts generally do not have a defined maturity
and are considered as deposits under SFAS 97. SFAS 107 states that the fair
value to be disclosed for deposit liabilities with no defined maturities is the
amount payable on demand at the reporting date. Accordingly, the Company has
estimated the fair value of its annuity reserves as the cash surrender value of
these contracts.
REPURCHASE AGREEMENTS
The repurchase agreements mature in less than 60 days; therefore, the
carrying value of the repurchase agreements is considered to be a reasonable
estimate of fair value.
9. SUBSEQUENT EVENT
On February 2, 1996, UCFC signed a stock purchase agreement dated as of
January 30, 1996, for the sale of all of the outstanding capital stock of the
Company to UC Life Holding Corp., a new Delaware corporation, formed by
Knightsbridge Capital Fund I, L.P. for an aggregate amount of $164 million plus
earnings of the Company from January 1, 1996, to closing of the transaction.
Knightsbridge, which is a private investment partnership with institutional
partners, was formed in 1995 to make equity investments in companies engaged
primarily in the life insurance industry.
Under the terms of the agreement, the sales price is comprised of cash,
currently estimated to be $109 million, and real estate and other assets owned
by the Company to be distributed to UCFC prior to the closing. The real estate
to be distributed includes portions of the United Plaza office park, including
the
86
<PAGE> 91
UNITED COMPANIES LIFE INSURANCE COMPANY AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
home office. In addition, UCFC will purchase a convertible promissory note from
an affiliate of the purchaser for $15 million in cash. The note matures in 11
years and bears interest at 8% per annum payable at maturity.
The purchaser also agreed that the Company would continue to be an investor
in first lien home equity loans originated by UCFC's lending operations and that
the Company's home office operations would be maintained in its present location
in Baton Rouge, Louisiana following the closing for at least two years. The
agreement is subject to approval by UCFC's shareholders and regulatory
authorities and the satisfaction of other conditions, and provides that the
closing will occur on or before July 31, 1996.
10. CONTINGENCIES
The Company is subject to various litigation arising during the ordinary
course of business. While the outcome of such litigation cannot be predicted
with certainty, management does not expect the resolution of these matters to
have a material adverse effect on the financial condition or results of
operations of the Company.
11. QUARTERLY FINANCIAL DATA (UNAUDITED)
Summarized quarterly financial date is as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
--------------------------------------------------
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
-------- ------- ------------ -----------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
1995
Total revenues.......................... $ 32,036 $33,977 $ 31,779 $30,325
Income from operations before income
taxes................................ 3,170 4,563 2,671 1,696
Net income.............................. 2,266 2,963 1,732 1,074
1994
Total revenues.......................... $ 32,806 $34,512 $ 35,554 $34,880
Income from operations before income
taxes................................ 1,579 2,925 2,703 1,873
Net income.............................. 1,024 1,897 1,753 1,212
</TABLE>
87
<PAGE> 92
FINANCIAL STATEMENT SCHEDULES
S-1
<PAGE> 93
SCHEDULE I
UNITED COMPANIES LIFE INSURANCE COMPANY AND SUBSIDIARY
SUMMARY OF INVESTMENTS
DECEMBER 31, 1995
<TABLE>
<CAPTION>
AMOUNT SHOWN
TYPE OF INVESTMENT COST VALUE ON BALANCE SHEET
- ----------------------------------------------- ---------- ---------- ----------------
(IN THOUSANDS)
<S> <C> <C> <C>
Fixed maturity securities available for sale:
U.S. Government and agencies and
authorities............................... $ 698,913 $ 719,358 $ 719,358
Municipal.................................... 425 446 446
Foreign...................................... 20,394 22,310 22,310
Public utilities............................. 13,697 14,672 14,672
All other corporate bonds.................... 360,957 383,374 383,374
---------- ---------- ----------
Total fixed maturity securities
available
for sale.......................... 1,094,386 1,140,160 1,140,160
---------- ---------- ----------
Fixed maturity securities held to maturity:
All other corporate bonds.................... 50,919 49,611 50,919
---------- ---------- ----------
Total fixed maturity securities..... 1,145,305 1,189,771 1,191,079
---------- ---------- ----------
Equity securities:
Common Stock
Banks, trust and insurance companies...... --
Industrial and miscellaneous.............. 1,012 794 794
---------- ---------- ----------
Total equity securities............. 1,012 794 794
---------- ---------- ----------
Mortgage loans on real estate.................. 336,269 XXXXXX 336,269
Investment real estate......................... 32,423 XXXXXX 32,423
Policy loans................................... 20,291 XXXXXX 20,291
Investment in limited partnerships............. 25,594 XXXXXX 25,594
Short-term investments......................... 22,804 XXXXXX 22,804
Other long-term investments.................... 2,469 XXXXXX 2,469
---------- ---------- ----------
Total investments................... $1,586,167 XXXXXX $1,631,723
========== ========== ==========
</TABLE>
S-2
<PAGE> 94
SCHEDULE III
UNITED COMPANIES LIFE INSURANCE COMPANY AND SUBSIDIARY
SUPPLEMENTARY INSURANCE INFORMATION
FOR THE THREE YEARS ENDED DECEMBER 31, 1995
<TABLE>
<CAPTION>
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN F COLUMN G COLUMN H COLUMN I & J
---------- --------- ------------- --------- --------- -------------- -------- ---------------
DEFERRED POLICY
DEFERRED BENEFITS, ACQUISITION COST
POLICY FUTURE NET CLAIMS, AMORTIZATION AND
ACQUISITION POLICY UNEARNED PREMIUM INVESTMENT LOSSES, OTHER
COSTS BENEFITS(1) PREMIUMS REVENUES(3) INCOME ETC. OPERATING EXPENSES
--------- ------------- --------- ---------- ---------- -------- ------------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
Year ended December 31,
1995........................ $90,703 $ 1,529,012 $ 1,793 $ 8,508 $123,107 $ 9,930 $ 26,569
Year ended December 31,
1994........................ $91,915 $ 1,542,474 $ 4,491 $11,373 $114,380 $12,654 $ 25,815
Year ended December 31,
1993........................ $83,495 $ 1,418,311 $10,260 $18,684 $109,661 $18,200 $ 23,915
</TABLE>
NOTES:
(1) Column C includes accumulated fund values on annuity and interest sensitive
products.
(2) Column E is omitted as amounts are not material and are included with Column
C.
(3) Column F excludes premiums on annuity and interest sensitive products which
are accounted for as deposits.
S-3
<PAGE> 95
SCHEDULE IV
UNITED COMPANIES LIFE INSURANCE COMPANY AND SUBSIDIARY
REINSURANCE
FOR THE THREE YEARS ENDED DECEMBER 31, 1995
<TABLE>
<CAPTION>
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E COLUMN F
------------ -------- -------- ---------- ---------- ----------
PERCENTAGE
CEDED TO ASSUMED OF AMOUNT
DIRECT OTHER FROM OTHER NET ASSUMED TO
AMOUNT COMPANIES COMPANIES AMOUNT NET AMOUNT
-------- --------- ---------- ---------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
December 31, 1995
Life insurance in force........... $554,131 $149,080 $ 992,979 $1,398,030 71.0%
======== ======== ========== ==========
Premiums
Life insurance................. $ 6,016 $ 1,625 $ 2,588 $ 6,979 37.1
Accident and health
insurance................... 1,643 115 1 1,529 --
-------- -------- ---------- ----------
Total premiums........... $ 7,659 $ 1,740 $ 2,589 $ 8,508 30.4
======== ======== ========== ==========
December 31, 1994
Life insurance in force........... $709,883 $177,585 $1,106,148 $1,638,446 67.5
======== ======== ========== ==========
Premiums
Life insurance................. $ 7,467 $ 1,931 $ 2,959 $ 8,495 34.8
Accident and health
insurance................... 3,070 199 7 2,878 0.2
-------- -------- ---------- ----------
Total premiums........... $10,537 $ 2,130 $ 2,966 $ 11,373 26.1
======== ======== ========== ==========
December 31, 1993
Life insurance in force........... $956,788 $215,917 $1,106,721 $1,847,591 59.9
======== ======== ========== ==========
Premiums
Life insurance................. $12,657 $ 3,196 $ 3,020 $ 12,481 23.2
Accident and health
insurance................... 6,637 453 19 6,203 --
-------- -------- ---------- ----------
Total premiums........... $19,294 $ 3,649 $ 3,039 $ 18,684 15.5%
======== ======== ========== ==========
</TABLE>
S-4
<PAGE> 96
SCHEDULE V
UNITED COMPANIES LIFE INSURANCE COMPANY AND SUBSIDIARY
VALUATION AND QUALIFYING ACCOUNTS
FOR THE THREE YEARS ENDED DECEMBER 31, 1995
<TABLE>
<CAPTION>
COLUMN C COLUMN D
COLUMN A COLUMN B ADDITIONS DEDUCTIONS(2) COLUMN E(3)
---------- -------- ----------------------- ------------- -----------
BALANCE CHARGED
AT TO COSTS CHARGED BALANCE AT
BEGINNING AND TO OTHER END
OF YEAR EXPENSES ACCOUNTS(1) OF YEAR
--------- --------- ----------- ------------- -----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
December 31, 1995
Allowance for loan losses..... $1,778 $ 533 $ -- $ 194 $ 2,117
Allowance for real estate
losses..................... 5,120 1,505 -- 2,638 3,987
Allowance for bond losses..... 317 2,013 -- 1,664 666
Unearned loan charges......... 419 -- -- 118 301
------ ------- ------- ------- -------
Total................ $7,634 $ 4,051 $ -- $ 4,419 $ 7,071
====== ======= ======= ======= =======
December 31, 1994
Allowance for loan losses..... $2,639 $ (649) $ -- $ 1,510 $ 1,778
Allowance for real estate
losses..................... 4,473 2,561 -- 1,914 5,120
Allowance for bond losses..... 1,515 1,849 -- 3,047 317
Unearned loan charges......... 592 -- -- 173 419
------ ------- ------- =------ -------
Total................ $9,219 $ 5,059 $ -- $ 6,644 $ 7,634
====== ======= ======= ======= =======
December 31, 1993
Allowance for loan losses..... $2,489 $ 658 $ -- $ 508 $ 2,639
Allowance for real estate
losses..................... 4,062 2,607 -- 2,196 4,473
Allowance for bond losses..... 98 2,228 -- 811 1,515
Unearned loan charges......... 764 -- -- 172 592
------ ------- ------- =------ -------
Total................ $7,413 $ 5,493 $ -- $ 3,687 $ 9,219
====== ======= ======= ======= =======
</TABLE>
- ---------------
NOTES:
(1) Represents the approximate amount of unearned loan charges on installment
loans originated during the period.
(2) Represents loans and bonds charged off and loan charges earned during the
period.
(3) All of the above are deducted in the balance sheet from the asset to which
they apply.
S-5
<PAGE> 97
TABLE OF CONTENTS OF THE
STATEMENT OF ADDITIONAL INFORMATION
<TABLE>
<CAPTION>
ITEM PAGE
- ------ ----
<S> <C>
Company............................................................................ 3
Experts............................................................................ 3
Legal Opinions..................................................................... 3
Distributor........................................................................ 3
Yield Calculation for Money Market Sub-Account..................................... 3
Performance Information............................................................ 4
Annuity Provisions................................................................. 7
Financial Statements............................................................... 7
</TABLE>
S-6
<PAGE> 98
APPENDIX
EXAMPLES OF APPLICATION OF MARKET VALUE ADJUSTMENT
The MVA Account currently offers the following Guarantee Periods: 3 years,
5 years, and 7 years.
Each subsequent Purchase Payment and transfer into the MVA Account will be
allocated to a new Guarantee Period with a new Effective Date specified and a
Current Interest Rate. These new Guarantee Period Account(s) will count toward
the ten investment option limit.
Contingent Deferred Sales Charges are calculated before the imposition of
any Market Value Adjustment.
Any Free Withdrawal is allocated on a pro-rata basis between all investment
options (Fixed, MVA or Separate Account) affected by the withdrawal. In the
event of a full withdrawal, the Free Withdrawal provision is not available.
The Market Value Adjustment Factor is:
( ) n/12
( (1 + i) )
( ---------------- ) - 1
( (1 + j + .005) )
( )
where:
<TABLE>
<C> <S>
i = Current Interest Rate credited to the Owner's Contract Value or
the Certificate Holder's Account Value allocated to a Guarantee
Period as of the beginning of the Guarantee Period.
j = Current Interpolated U.S. Constant Maturity Treasury Rate ("CITR")
for the time remaining in the current Guarantee Period plus the
difference between i and the corresponding CITR rate at time of
purchase.
n = Number of full months remaining in the Guarantee Period.
</TABLE>
The examples below assume the following:
<TABLE>
<C> <S>
1. An initial Purchase Payment of $10,000.00 is allocated to the
7-Year MVA Account on January 1, 1995.
2. The Guaranteed Interest Rate on the 7-Year Guarantee Period was
10%.
3. On January 1, 1995, the 7-Year Treasury Rate was 9%.
4. On April 7, 1998, the following Treasury Rates were in effect:
1-Year Treasury................................. 6%
3-Year Treasury................................. 8%
5-Year Treasury................................. 9%
7-Year Treasury................................. 10%
5. No additional Purchase Payments were made and there were no
partial withdrawals or transfers.
</TABLE>
EXAMPLE 1:
Assume there is a complete withdrawal on April 7, 1998 and the Account
Value is $13,651.43.
The Contingent Deferred Sales Charge (CDSC) applicable on April 7, 1998 is
7%. (See "Charges and Deductions -- Deduction for Contingent Deferred Charge.")
The dollar amount of the CDSC is $700.
A-1
<PAGE> 99
The MVA Factor is calculated as follows:
( )n/12
( (1 + i) )
( -------------- ) - 1
( (1 + j + .005) )
where i = .10
n = 44
j = (CITR + (Current Interest Rate at Issue -- Corresponding
Treasury Rate at Issue))
((44 - 36)X.09) + ((60 - 44)X.08)
CITR = ------------------------------------ = .0833333
(60 - 36)
( )44/12
( (1 + .10) )
MVA FACTOR = (-------------------------------------- ) - 1 = +.005575
( (1 + (.0833333 + (.10 - .09) + .005) )
( )
The Withdrawal Value = Account Value + (MVA Adjustment X Account Value) -
CDSC - Contract Maintenance Charge
Withdrawal Value = $13,651.43 + ($13,651.43 X .005575) - $700 - $30 =
$12,997.54
EXAMPLE 2:
Assume the same facts as above except there is a partial withdrawal on
April 7, 1998 of $5,000.00.
The Contingent Deferred Sales Charge (CDSC) applicable on April 7, 1998 is
7%. (See "Charges and Deductions -- Deduction for Contingent Deferred Sales
Charge.") The dollar amount of the CDSC for a complete withdrawal is $700.
Because this is a partial withdrawal, a portion can be withdrawn without the
imposition of the CDSC (Free Withdrawal). (See "Charges and
Deductions -- Deduction for Contingent Deferred Sales Charge -- Free
Withdrawal.") The Free Withdrawal amount is measured at the beginning of the
Contract/Certificate Year as the greater of the earnings in the Account or 10%
of Purchase Payments.
The MVA Factor will be the same as in Example 1, i.e. + .005575. Free
Withdrawal for 1998 is the larger of the following:
(
( $13,313.48 - $10,000.00 = $3,313.48
( 10% X $10,000.00 = $1,000.00
(
Therefore, the Free Withdrawal Amount is $3,313.48.
The amount of the CDSC = ($5,000.00 - $3,313.48) X .07 = $118.06
The Withdrawal Value = Amount of Withdrawal + (MVA Adjustment X Amount of
Withdrawal) - CDSC
= $5,000 + (.005575 X $5,000) - $118.06
= $4,909.82
A-2
