The following table shows a breakout of property, net of accumulated depreciation, owned and occupied by the Company and the distribution of real estate by type.
Investment real estate Commercial 15,841,887 78% Residential development 2,384,564 12% ---------- --- 18,226,451 90% ---------- --- Grand total $20,393,768 100% ========== ====
The purpose of this section is to discuss and analyze the Company's consolidated results of operations, financial condition and liquidity and capital resources. This analysis should be read in conjunction with the consolidated financial statements and related notes, which appear elsewhere in this report. The Company reports financial results on a consolidated basis. The consolidated financial statements include the accounts of UTG and its subsidiaries at December 31, 2001.
Any forward-looking statement contained herein or in any other oral or written statement by the company or any of its officers, directors or employees is qualified by the fact that actual results of the company may differ materially from any such statement due to the following important factors, among other risks and uncertainties inherent in the Company's business:
Premiums and policy fee revenues, net of reinsurance premiums and policy fees, decreased 11% when comparing 2001 to 2000 and 10% from 2000 to 1999. The Company currently writes little new business. A majority of the new business currently written is universal life insurance. Collected premiums on universal life and interest sensitive products is not reflected in premiums and policy revenues because accounting principles generally accepted in the United States of America requires that premiums collected on these types of products be treated as deposit liabilities rather than revenue. Unless the Company acquires a block of in-force business or marketing significantly increases on traditional business, management expects premium revenue to continue to decline at a rate consistent with prior experience. The Companies' average persistency rate for all policies in force for 2001 and 2000 has been approximately 91.6% and 89.8%, respectively. Persistency is a measure of insurance in force retained in relation to the previous year.
Net investment income decreased 6% when comparing 2001 to 2000 and increased 11% when comparing 2000 to 1999. During 2000, the Company received $632,000 in investment earnings from a joint venture real estate development project that was in its latter stages. The earnings from this activity represent approximately 4% of the 2000 investment income.
Approximately 99% of the realized loss in 1999 were from two parcels of real estate. In June 1999, the Company sold its shopping center in Gulfport, MS realizing a loss on sale of $401,000. This property was originally acquired through the foreclosure of a mortgage loan. The property was income producing, but due to the distance from the Company's headquarters, was difficult to manage and required the use of an outside property manager. Given this circumstance and the eventual need for updates and improvements, the Company determined it was in its best long-term interest to sell the property. At year-end the Company wrote down another parcel of real estate $178,000 that it determined to attempt to and ultimately did sell during 2000. The write down was the result of Management's determination of the amount it would be willing to accept for the property. The Company had other gains and losses during the periods that comprised the remaining amounts reported but were immaterial on an individual basis.
Amortization of cost of insurance acquired decreased 1% in 2001 compared to 2000 and decreased 14% in 2000 compared to 1999. Cost of insurance acquired is established when an insurance company is acquired. The Company assigns a portion of its cost to the right to receive future cash flows from insurance contracts existing at the date of the acquisition. The cost of policies purchased represents the actuarially determined present value of the projected future cash flows from the acquired policies. Cost of insurance acquired is comprised of individual life insurance products including whole life, interest sensitive whole life and universal life insurance products. Cost of insurance acquired is amortized with interest in relation to expected future profits, including direct charge-offs for any excess of the unamortized asset over the projected future profits. The interest rates utilized in the amortization calculation are 9% on approximately 25% of the balance and 15% on the remaining balance. The interest rates vary due to risk analysis performed at the time of acquisition on the business acquired. The amortization is adjusted retrospectively when estimates of current or future gross profits to be realized from a group of products are revised. The Company did not have any charge-offs during the periods covered by this report. Amortization of cost of insurance acquired is particularly sensitive to changes in persistency of certain blocks of insurance in-force. Persistency is a measure of insurance in force retained in relation to the previous year. The Company's average persistency rate for all policies in force for 2001, 2000 and 1999 has been approximately 91.6%, 89.8% and 89.4%, respectively.
Interest expense declined 13% comparing 2001 to 2000 and declined 41% comparing 2000 to 1999. The Company repaid $1,302,495, $1,540,800 and $3,149,369 in outside debt in 2001, 2000 and 1999 respectively, through operating cashflows and dividends from UG to FCC. In April 2001, the Company issued $3,885,996 in new debt to purchase common stock owned primarily by James E. Melville and Larry E. Ryherd, two former officers and directors of the Company and their respective families. On July 31, 2000, $2,560,000 in convertible debt of UTG held by First Southern was converted to equity. At December 31, 2001, UTG had $4,400,670 in notes payable. The remaining debt bears interest at a fixed rate of 7% on 88% of the debt and a floating rate of 1% under prime on 12% of the debt. Principal payments of $777,199 are due annually over the next five years. Management believes overall sources available are more than adequate to service this debt. These sources include current cash balances of UTG, expected future operating cashflows and repayment of affiliate receivables held by UTG.
The Company had a net income (loss) of $2,439,573, $(696,426) and $1,075,909 in 2001, 2000 and 1999 respectively. Significant one time charges and accruals to operating expenses combined with an increase in death claims during 2000 were the primary differences in the 2001 to 2000 results. The Company continues to monitor and adjust those items within its control.
The Company does not own any derivative investments or "junk bonds". As of December 31, 2001, the carrying value of fixed maturity securities in default as to principal or interest was immaterial in the context of consolidated assets or shareholders' equity. The Company has identified securities it may sell and classified them as "investments held for sale". Investments held for sale are carried at market, with changes in market value charged directly to shareholders' equity. To provide additional flexibility and liquidity, the Company has categorized almost all fixed maturity investments acquired in 2000 and 2001 as available for sale. It was determined it would be in the Company's best financial interest to classify these new purchases as available for sale to provide additional liquidity and flexibility.
In 1999, the Company began investing more of its funds in mortgage loans. This is the result of its affiliation with FSNB. FSNB has been able to provide the Company with additional expertise and experience in underwriting commercial and residential mortgage loans, which provide more attractive yields than the traditional bond market. During 2001 and 2000, the Company issued approximately $4,535,000 and $21,863,000 respectively, in new mortgage loans. These new loans were generated through FSNB and its personnel and funded by the Company through participation agreements with FSNB. FSNB services the loans covered by these participation agreements. The Company pays FSNB a .25% servicing fee on these loans and a one-time fee at loan origination of .50% of the original loan amount to cover costs incurred by FSNB relating to the processing and establishment of the loan. All mortgage loans held by the Company are first position loans. The Company has one loan totaling $28,536 that is in default and in the process of foreclosure at December 31, 2001.
Policy loans remained consistent for the periods presented. Industry experience for policy loans indicates few policy loans are ever repaid by the policyholder other than through termination of the policy. Policy loans are systematically reviewed to ensure that no individual policy loan exceeds the underlying cash value of the policy.
Cost of insurance acquired decreased 4% in 2001 compared to 2000. At December 31, 2001, cost of insurance acquired was $33,666,336 and amortization totaled $1,572,920 for the year. When an insurance company is acquired, the Company assigns a portion of its cost to the right to receive future cash flows from insurance contracts existing at the date of the acquisition. The cost of policies purchased represents the actuarially determined present value of the projected future cash flows from the acquired policies. Cost of insurance acquired is amortized with interest in relation to expected future profits, including direct charge-offs for any excess of the unamortized asset over the projected future profits.
Notes payable increased 142% in 2001 compared to 2000. At December 31, 2001, UTG had $4,400,670 in notes payable. During 2001, the Company repaid $1,302,495 of its debt. In April 2001, the Company issued $3,885,996 in new debt in exchange for the acquisition of UTG and FCC common stock. This debt bears interest at a fixed rate of 7% per annum with payments of principal to be made in five equal installments due until maturity in 2006. Other remaining debt of $514,674 bears interest at a floating rate of 1% under prime, with no principal payments due until its maturity in 2012. Management believes overall sources available are more than adequate to service this debt. These sources include current cash balances of UTG, expected future operating cashflows and repayment of affiliate receivables held by UTG. The Company's long-term debt is discussed in more detail in Note 11 of the Notes to the Financial Statements.
Cash provided by (used in) investing activities was $138,994, $(3,940,958) and $(4,928,225), for 2001, 2000 and 1999, respectively. The most significant aspect of cash provided by (used in) investing activities are the fixed maturity transactions. Fixed maturities account for 81%, 42% and 68% of the total cost of investments acquired in 2001, 2000 and 1999, respectively. The Company has not directed its investable funds to so-called "junk bonds" or derivative investments.
The NAIC's risk-based capital requirements require insurance companies to calculate and report information under a risk-based capital formula. The risk-based capital formula measures the adequacy of statutory capital and surplus in relation to investment and insurance risks such as asset quality, mortality and morbidity, asset and liability matching and other business factors. The RBC formula is used by state insurance regulators as an early warning tool to identify, for the purpose of initiating regulatory action, insurance companies that potentially are inadequately capitalized. In addition, the formula defines new minimum capital standards that will supplement the current system of low fixed minimum capital and surplus requirements on a state-by-state basis. Regulatory compliance is determined by a ratio of the insurance company's regulatory total adjusted capital, as defined by the NAIC, to its authorized control level RBC, as defined by the NAIC. Insurance companies below specific trigger points or ratios are classified within certain levels, each of which requires specific corrective action. The levels and ratios are as follows:
Ratio of Total Adjusted Capital to Authorized Control Level RBC Regulatory Event (Less Than or Equal to) ---------------- ----------------------- Company action level 2* Regulatory action level 1.5 Authorized control level 1 Mandatory control level 0.7 * Or, 2.5 with negative trend.
Ratio of Total Adjusted Capital to Authorized Control Level RBC Regulatory Event (Less Than or Equal to) ---------------- ----------------------- Company action level 2* Regulatory action level 1.5 Authorized control level 1 Mandatory control level 0.7
During 2000, Congress passed the Gramm-Leach-Bliley Financial Services Modernization Act, which requires financial institutions, including all insurers, to take certain steps to enhance privacy protections of nonpublic personal information for consumers. The law is one of the most sweeping systems of privacy protection and regulation ever imposed in our nation's history. It requires financial companies to tell consumers how their financial information is protected, and what a company's financial information sharing practices are, both within a corporate family and with unrelated third parties. Companies must inform their customers of their privacy policies and practices at the start of their business relationship, and then at least once a year for the duration of the relationship. Companies also must disclose the types of information that are shared. The privacy protections under the act became effective November 13, 2000. Financial institutions had until July 1, 2001, to establish and implement privacy policies. The Company has implemented new procedures and complied with the requirements of this legislation.
Statement 142 requires that goodwill no longer be amortized to earnings, but instead be reviewed for impairment. This change provides investors with greater transparency regarding the economic value of goodwill and its impact on earnings. The amortization of goodwill ceased for the Company upon the adoption of the statement at January 1, 2002. The adoption of Statement 142 will result in an expense reduction of approximately $90,000 per year, subject to any impairment write-down that might arise from a management review.
We have also audited Schedule I as of December 31, 2001, and Schedules II, IV and V as of December 31, 2001 and 2000, of UNITED TRUST GROUP, INC. and subsidiaries and Schedules II, IV and V for each of the three years in the period then ended. In our opinion, these schedules present fairly, in all material respects, the information required to be set forth therein.
UNITED TRUST GROUP, INC. CONSOLIDATED BALANCE SHEETS As of December 31, 2001 and 2000
ASSETS 2001 2000 ------------ ------------ Investments: Fixed maturities held to maturity, at amortized cost (market $77,725,410 and $122,623,563) $ 75,005,395 $ 121,922,963 Investments held for sale: Fixed maturities, at market (cost $97,584,094 and $42,914,186) 98,628,440 43,128,280 Equity securities, at market (cost $3,937,812 and $5,509,132) 3,852,716 5,129,571 Mortgage loans on real estate at amortized cost 23,386,895 32,896,671 Investment real estate, at cost, net of accumulated depreciation 18,226,451 13,296,245 Policy loans 13,608,456 14,090,900 Short-term investments 581,382 1,686,397 ------------ ------------ 233,289,735 232,151,027
LIABILITIES AND SHAREHOLDERS' EQUITY Policy liabilities and accruals: Future policy benefits $ 236,449,241 $ 240,238,991 Policy claims and benefits payable 2,781,920 2,639,248 Other policyholder funds 1,255,990 1,445,857 Dividend and endowment accumulations 13,055,024 13,515,427 Deferred income taxes 13,569,523 12,056,497 Notes payable 4,400,670 1,817,169 Other liabilities 5,465,896 6,292,841 ------------ ------------ Total liabilities 276,978,264 278,006,030 ------------ ------------ Minority interests in consolidated subsidiaries 7,771,793 8,899,648 ------------ ------------
Shareholders' equity: Common stock - no par value, stated value $.02 per share. Authorized 7,000,000 shares - 3,549,791 and 4,175,066 shares issued and outstanding after deducting treasury shares of 75,236 and 47,507 70,996 83,501 Additional paid-in capital 42,789,636 47,730,980 Retained earnings (accumulated deficit) 1,004,238 (1,435,335) Accumulated other comprehensive income 908,744 335,287 ------------ ------------ Total shareholders' equity 44,773,614 46,714,433 ------------ ------------ Total liabilities and shareholders' equity $ 329,523,671 $ 333,620,111 ============ ============
UNITED TRUST GROUP, INC. CONSOLIDATED STATEMENTS OF OPERATIONS Three Years Ended December 31, 2001
Premiums and policy fees $ 20,444,514 $ 23,045,858 $ 25,559,708 Reinsurance premiums and policy fees (3,172,098) (3,556,172) (3,978,565) Net investment income 15,067,059 16,085,833 14,529,537 Realized investment gains(losses), net 436,840 (260,078) (530,894) Other income 589,017 431,682 477,325 ------------- ------------- ------------- 33,365,332 35,747,123 36,057,111
Income (loss) before income taxes, minority interest and equity in income (loss) of investees 4,192,162 (707,069) 1,855,553 Income tax expense (1,181,133) (228,783) (690,454) Minority interest in (income) loss of consolidated subsidiaries (571,456) 239,426 (142,745) Equity in income of investees 0 0 53,555 ------------- ------------- -------------
Diluted income (loss) per share from continuing operations and net income (loss) $ 0.65 $ (0.17)$ 0.38 ============= ============= =============
UNITED TRUST GROUP, INC. CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY Three Years Ended December 31, 2001
Common stock Balance, beginning of year $ 83,501 $ 79,405 $ 49,809 Issued during year 0 4,096 29,986 Treasury shares acquired (555) 0 (390) Retired during year (11,950) 0 0 ----------- ----------- ----------- Balance, end of year $ 70,996 $ 83,501 $ 79,405 =========== =========== ===========
Additional paid-in capital Balance, beginning of year $ 47,730,980 $ 45,175,076 $ 27,403,172 Issued during year 0 2,555,904 17,921,469 Treasury shares acquired (172,927) 0 (149,565) Retired during year (4,768,417) 0 0 ----------- ----------- ----------- Balance, end of year $ 42,789,636 $ 47,730,980 $ 45,175,076 =========== =========== ===========
Retained earnings (accumulated deficit) Balance, beginning of year $ (1,435,335) $ (738,909) $ (1,814,818) Net income (loss) 2,439,573 $ 2,439,573 (696,426) $ (696,426) 1,075,909 $ 1,075,909 ----------- ----------- ----------- Balance, end of year $ 1,004,238 $ (1,435,335) $ (738,909) =========== =========== ===========
Accumulated other comprehensive income (deficit) Balance, beginning of year $ 335,287 $ (1,138,900) $ (276,852) Other comprehensive income (deficit) Unrealized holding gain (loss) on securities net of minority interest and reclassification adjustment 573,457 573,457 1,474,187 1,474,187 (862,048) (862,048) ----------- ----------- ----------- ----------- ----------- ------------ Comprehensive income $ 3,013,030 $ 777,761 $ 213,861 =========== =========== ============ Balance, end of year $ 908,744 $ 335,287 $ (1,138,900) =========== =========== ===========
Cash flows from financing activities: Policyholder contract deposits 11,361,882 12,724,345 14,176,188 Policyholder contract withdrawals (9,342,372) (10,962,425) (11,222,814) Cash received in merger 0 0 607,508 Payments of principal on notes payable (1,302,495) (1,540,800) (3,149,369) Purchase of stock of affiliates (632,131) (87,399) (56,053) Purchase of treasury shares (1,176,653) 0 (149,955) ------------ ------------ ----------- Net cash provided by (used in) financing activities (1,091,769) 133,721 205,505 ------------ ------------ -----------
Net increase (decrease) in cash and cash equivalents 412,272 (5,962,728) (5,350,659) Cash and cash equivalents at beginning of year 15,065,076 21,027,804 26,378,463 ------------ ------------ ----------- Cash and cash equivalents at end of year $ 15,477,348 $ 15,065,076 $ 21,027,804 ============ ============ =========== See accompanying notes.
D. BASIS OF PRESENTATION - The financial statements of United Trust Group, Inc., and its subsidiaries have been prepared in accordance with accounting principles generally accepted in the United States of America which differ from statutory accounting practices permitted by insurance regulatory authorities.
I. FUTURE POLICY BENEFITS AND EXPENSES - The liabilities for traditional life insurance and accident and health insurance policy benefits are computed using a net level method. These liabilities include assumptions as to investment yields, mortality, withdrawals, and other assumptions based on the life insurance subsidiaries' experience adjusted to reflect anticipated trends and to include provisions for possible unfavorable deviations. The Company makes these assumptions at the time the contract is issued or, in the case of contracts acquired by purchase, at the purchase date. Future policy benefits for individual life insurance and annuity policies are computed using interest rates ranging from 2% to 6% for life insurance and 2.5% to 9.25% for annuities. Benefit reserves for traditional life insurance policies include certain deferred profits on limited-payment policies that are being recognized in income over the policy term. Policy benefit claims are charged to expense in the period that the claims are incurred. Current mortality rate assumptions are based on 1975-80 select and ultimate tables. Withdrawal rate assumptions are based upon Linton B or Linton C, which are industry standard actuarial tables for forecasting assumed policy lapse rates.
Benefit reserves for universal life insurance and interest sensitive life insurance products are computed under a retrospective deposit method and represent policy account balances before applicable surrender charges. Policy benefits and claims that are charged to expense include benefit claims in excess of related policy account balances. Interest crediting rates for universal life and interest sensitive products range from 4.0% to 5.5% for 2001 and 4.5% to 5.5% for the years ended December 31, 2000 and 1999, respectively.
------------- ------------- ------------- Cost of insurance acquired, End of year $ 33,666,336 $ 35,239,256 $ 36,832,068 ============= ============= =============
2002 $ 4,571,000 $ 6,086,000 $ 1,515,000 2003 4,371,000 6,066,000 1,695,000 2004 4,140,000 6,034,000 1,894,000 2005 3,875,000 6,084,000 2,209,000 2006 3,560,000 6,422,000 2,862,000
Acquisition costs deferred: Commissions 108,000 184,000 566,000 Other expenses 59,000 89,000 154,000 ------------- ------------- ------------- Total 167,000 273,000 720,000
------------- ------------- ------------- Change for the year (840,577) (1,179,040) (1,197,012) ------------- ------------- -------------
Deferred, end of year $ 3,107,919 $ 3,948,496 $ 5,127,536 ============= ============= =============
Net amortization of deferred policy acquisition costs $ 1,007,577 $ 1,452,040 $ 1,917,012 Commissions 255,397 637,273 976,886 ---------- ----------- ------------ Total $ 1,262,974 $ 2,089,313 $ 2,893,898 ========== =========== ============
M. COST IN EXCESS OF NET ASSETS PURCHASED - Cost in excess of net assets purchased is the excess of the amount paid to acquire a company over the fair value of its net assets. Costs in excess of net assets purchased are amortized on the straight-line basis over a 40-year period. Management continually reviews the value of goodwill based on estimates of future earnings. As part of this review, management determines whether goodwill is fully recoverable from projected undiscounted net cash flows from earnings of the subsidiaries over the remaining amortization period. If management were to determine that changes in such projected cash flows no longer supported the recoverability of goodwill over the remaining amortization period, the carrying value of goodwill would be reduced with a corresponding charge to expense (no such changes have occurred). Accumulated amortization of cost in excess of net assets purchased was $1,780,146 and $1,690,146 as of December 31, 2001 and 2000, respectively.
At December 31, 2001, substantially all of consolidated shareholders' equity represents net assets of UTG's subsidiaries. The payment of cash dividends to shareholders by UTG and FCC is not legally restricted. However, the state insurance department regulates insurance company dividend payments where the company is domiciled. UG's dividend limitations are described below.
2001 2000 1999 ------------- ------------- ------------- Current tax expense $ 53,539 $ 85,440 $ 12,654 Deferred tax expense 1,127,594 143,343 677,800 ------------- ------------- ------------- $ 1,181,133 $ 228,783 $ 690,454 ============= ============= =============
UTG UG FCC ----------- ----------- ------------ 2006 $ 101,718 $ 0 $ 0 2007 179,894 0 0 2019 0 1,165,779 0 2020 0 0 525,451 2021 164,902 0 0 ----------- ----------- ------------ TOTAL $ 446,514 $ 1,165,779 $ 525,451 =========== =========== ============
The Company has established a deferred tax asset of $748,211 for its operating loss carryforwards and has established an allowance of $183,908. The total allowances established on deferred tax assets decreased $195,518 in 2001.
UTG has a net operating loss carryforward of $446,514 at December 31, 2001. UTG has averaged approximately $256,000 in taxable income over the past three years and must average taxable income of approximately $90,000 over the next five years to fully realize its net operating loss carryforwards, as UTG's operating loss carryforwards do not begin to expire until the year 2006. UG must average approximately $65,000 of taxable income per year to fully realize its net operating loss carryforward for which no allowance is established. Management believes future earnings of UG will be sufficient to fully utilize net operating loss carryforwards. FCC must average approximately $28,000 of taxable income to fully realize its net operating loss carryforwards. FCC's operating loss carryforward does not expire until the year 2020. Management has established an allowance of $183,908 for FCC's loss carryforwards.
2001 2000 1999 ------------ ------------ ------------- Tax computed at statutory rate $ 1,467,257 $ (247,474) $ 649,444 Changes in taxes due to: Cost in excess of net assets purchased 31,500 31,500 31,500 Current year loss for which no benefit 0 546,231 0 realized Benefit of prior losses (159,456) (139,061) (6,309) Other (158,168) 37,587 15,819 ------------ ------------ ------------- Income tax expense $ 1,181,133 $ 228,783 $ 690,454 ============ ============ =============
December 31, ------------------------------------------------ 2001 2000 1999 ------------- ------------- ------------- Fixed maturities and fixed maturities Held for sale $ 10,831,162 $ 11,775,706 $ 11,886,968 Equity securities 131,263 116,327 91,429 Mortgage loans 2,715,834 1,777,374 1,079,332 Real estate 488,168 611,494 389,181 Policy loans 970,142 997,381 991,812 Other long-term investments 0 655,418 63,528 Short-term investments 110,229 158,378 147,726 Cash 606,128 936,433 850,836 ------------- ------------- ------------- Total consolidated investment income 15,852,926 17,028,511 15,500,812 Investment expenses (785,867) (942,678) (971,275) ------------- ------------- ------------- Consolidated net investment income $ 15,067,059 $ 16,085,833 $ 14,529,537 ============= ============= =============
Below Investment Grade Investments 2001 2000 1999 ------------------------- ----------- ---------- ---------- Public Utilities $ 2,091,138 $ 0 $ 251,878 CMO 43,189 239,165 0 Corporate 271,420 23,000 276,649 ----------- ---------- ---------- Total $ 2,405,747 $ 262,165 $ 528,527 =========== ========== ==========
Cost or Gross Gross Estimated Amortized Unrealized Unrealized Market 2001 Cost Gains Losses Value ------------------------------ ------------ ----------- ------------ ------------ Investments held for sale: U.S. Government and govt. Agencies and authorities $ 35,240,384 $ 942,455 $ 0 $ 36,182,839 States, municipalities and Political subdivisions 192,059 10,197 0 202,256 Collateralized mortgage Obligations 53,777,577 447,019 (220,973) 54,003,623 Public utilities 0 0 0 0 All other corporate bonds 8,374,074 321 (134,673) 8,239,722 ------------ ----------- ------------ ------------ 97,584,094 1,399,992 (355,646) 98,628,440 Equity securities 3,937,812 953,448 (1,038,544) 3,852,716 ------------ ----------- ------------ ------------ Total $ 101,521,906 $ 2,353,440 $ (1,394,190) $ 102,481,156 ============ =========== ============ ============
Fixed maturities held to maturity: U.S. Government and govt. Agencies and authorities $ 6,904,757 $ 280,101 $ (893) $ 7,183,965 States, municipalities and Political subdivisions 11,788,567 360,714 (119,497) 12,029,784 Collateralized mortgage Obligations 128,471 4,820 0 133,291 Public utilities 22,219,127 859,864 (70,947) 23,008,044 All other corporate bonds 33,964,473 1,410,244 (4,391) 35,370,326 ------------ ----------- ------------ ------------ Total $ 75,005,395 $ 2,915,743 $ (195,728) $ 77,725,410 ============ =========== ============ ============
Cost or Gross Gross Estimated Amortized Unrealized Unrealized Market 2000 Cost Gains Losses Value ------------------------------- ------------ ----------- ------------ ------------ Investments held for sale: U.S. Government and govt. Agencies and authorities $ 35,281,562 $ 245,119 $ (82,369) $ 35,444,312 States, municipalities and Political subdivisions 190,593 15,413 0 206,006 Collateralized mortgage Obligations 5,919,553 58,179 (15,138) 5,962,594 Public utilities 0 0 0 0 All other corporate bonds 1,522,478 0 (7,110) 1,515,368 ------------ ----------- ------------ ------------ 42,914,186 318,711 (104,617) 43,128,280 Equity securities 5,413,507 637,191 (921,127) 5,129,571 ------------ ----------- ------------ ------------ Total $ 48,327,693 $ 955,902 $ (1,025,744) $ 48,257,851 ============ =========== ============ ============
Fixed Maturities Held for Sale Estimated Amortized Market December 31, 2001 Cost Value ------------------------------------- ------------ ------------ Due in one year or less $ 2,050,564 $ 2,070,454 Due after one year through five years 30,977,228 31,727,237 Due after five years through ten years 10,621,666 10,659,999 Due after ten years 157,059 167,127 Collateralized mortgage obligations 53,777,577 54,003,623 ------------ ------------ Total $ 97,584,094 $ 98,628,440 ============ ============
An analysis of sales, maturities and principal repayments of the Company's fixed maturities portfolio for the years ended December 31, 2001, 2000 and 1999 is as follows:
Cost or Gross Gross Proceeds Amortized Realized Realized From Year ended December 31, 1999 Cost Gains Losses Sale ------------------------------- ------------ ---------- ------------ ------------ Scheduled principal repayments, Calls and tenders: Held for sale $ 1,430,000 $ 0 $ 0 $ 1,430,000 Held to maturity 31,037,532 16,480 (21,722) 31,032,290 Sales: Held for sale 0 0 0 0 Held to maturity 0 0 0 0 ------------ ---------- ------------ ------------ Total $ 32,467,532 $ 16,480 $ (21,722) $ 32,462,290 ============ ========== ============ ============
The financial statements include various estimated fair value information at December 31, 2001 and 2000, as required by Statement of Financial Accounting Standards 107, Disclosure about Fair Value of Financial Instruments ("SFAS 107"). Such information, which pertains to the Company's financial instruments, is based on the requirements set forth in that Statement and does not purport to represent the aggregate net fair value of the Company.
An estimate of fair value is based on management's review of the individual real estate holdings. Management utilizes sales of surrounding properties, current market conditions and geographic considerations. Management conservatively estimates the fair value of the portfolio is equal to the carrying value.
2001 2000 ------------------------------------------------------------ Estimated Estimated Carrying Fair Carrying Fair Assets Amount Value Amount Value ------------ ------------ ------------ ------------ Fixed maturities $ 75,005,395 $ 77,725,410 $ 121,922,963 $ 122,623,563 Fixed maturities held for sale 98,628,440 98,628,440 43,128,280 43,128,280 Equity securities 3,852,716 3,852,716 5,129,571 5,129,571 Mortgage loans on real estate 23,386,895 23,360,333 32,896,671 32,841,254 Investment in real estate 18,226,451 18,226,451 13,296,245 13,296,245 Policy loans 13,608,456 13,608,456 14,090,900 14,090,900 Short-term investments 581,382 581,382 1,686,397 1,686,397
The Company's insurance subsidiaries are domiciled in Ohio, Illinois and West Virginia and prepare their statutory-based financial statements in accordance with accounting practices prescribed or permitted by the respective insurance department. These principles differ significantly from accounting principles generally accepted in the United States of America. "Prescribed" statutory accounting practices include state laws, regulations, and general administrative rules, as well as a variety of publications of the National Association of Insurance Commissioners ("NAIC"). "Permitted" statutory accounting practices encompass all accounting practices that are not prescribed; such practices may differ from state to state, from company to company within a state, and may change in the future. The NAIC recently completed the process of codifying statutory accounting practices, the result of which is to constitute the only source of "prescribed" statutory accounting practices. The new rules promulgated by the codifying of statutory accounting practices became effective January 1, 2001. Accordingly, these uniform rules change prescribed statutory accounting practices and result in changes to the accounting practices that insurance enterprises use to prepare their statutory financial statements. Implementation of the codification rules did not have a material financial impact on the financial condition of the Company's life insurance subsidiaries. UG's total statutory shareholders' equity was $16,105,265 and $14,288,015 at December 31, 2001 and 2000, respectively. The Company's life insurance subsidiaries reported combined statutory operating income before taxes (exclusive of intercompany dividends) of approximately $2,913,000, $2,091,000 and $3,843,000 for 2001, 2000 and 1999, respectively.
UG entered a coinsurance agreement with Park Avenue Life Insurance Company ("PALIC") as of September 30, 1996. Under the terms of the agreement, UG ceded to PALIC substantially all of its paid-up life insurance policies. Paid-up life insurance generally refers to non-premium paying life insurance policies. PALIC and its ultimate parent The Guardian Life Insurance Company of America ("Guardian"), currently hold an "A" (Excellent), and "A+" (Superior) rating, respectively, from A.M. Best, an industry rating company. The agreement with PALIC accounts for approximately 66% of the reinsurance receivables, as of December 31, 2001.
On September 30, 1998, UG entered into a coinsurance agreement with The Independent Order of Vikings, an Illinois fraternal organization ("IOV"). Under the terms of the agreement, UG agreed to assume on a coinsurance basis, 25% of the reserves and liabilities arising from all inforce insurance contracts issued by the IOV to its members. At December 31, 2001, the IOV insurance inforce was approximately $1,696,000, with reserves being held on that amount of approximately $403,500.
David A. Morlan, individually and on behalf of all others similarly situated v. Universal Guaranty Life Ins., United Trust Assurance Co., United Security Assurance Co., United Trust Group, Inc. and First Commonwealth Corporation, (U.S. Court of Appeals for the Seventh Circuit, Appeal No. 01-3795)
The Company continues to believe that it has meritorious grounds to defend both the original and related lawsuit, and it intends to defend the cases vigorously. The Company believes that the defense and ultimate resolution of the lawsuit should not have a material adverse effect upon the business, results of operations or financial condition of the Company. Nevertheless, if the lawsuit were to be successful, it is likely that such resolution would have a material adverse effect on the Company's business, results of operations and financial condition. At December 31, 2001, the Company maintains a liability of $300,000 to cover estimated legal costs associated with the defense of this matter.
During the fourth quarter of 2001, UG purchased real estate from an outside third party through the formation of an LLC in which UG is a two-thirds owner. The other one-third partner is Millard V. Oakley, who is a Director of both UTG and FCC. Hampshire Plaza, LLC consists of a twenty story, 254,000 square foot office tower, an attached 72,000 square foot retail plaza, and an attached parking garage with approximately 350 parking spaces located in Manchester, New Hampshire for $6,333,336. At December 31, 2001, the property was carried at $6,491,734.
On September 4, 2001, FSF and FSBI (and their principals) restructured the manner in which they hold shares of UTG by forming a new limited liability company under Kentucky law, First Southern Holdings, LLC ("FSH"). FSBI contributed to FSH shares of UTG common stock held by it and cash in exchange for a 99% membership interest in FSH. FSF contributed to FSH shares of UTG common stock held by it, subject to notes payable which were assumed by FSH in exchange for a 1% membership interest in FSH.
On April 12, 2001, UTG also purchased in a separate transaction 10,891 shares of UTG common stock from Robert E. Cook at a price of $8.00 per share. At the closing, Mr. Cook received $17,426 in cash and a five year promissory note of UTG (substantially similar to the promissory notes issued pursuant to the Melville and Ryherd Purchase Agreements described above) in the principal amount of $69,702. Mr. Cook was a director of UTG and FCC who resigned his position on January 8, 2001. Mr. Cook proposed the stock purchase to Jesse T. Correll who agreed to purchase Mr. Cook's stock on substantially the same terms as the purchases of the stock held by Messrs. Melville and Ryherd as described above.
United Income, Inc. ("UII") had a service agreement with United Security Assurance Company ("USA"). The agreement was originally established upon the formation of USA which was a 100% owned subsidiary of UII. Changes in the affiliate structure have resulted in USA no longer being a direct subsidiary of UII, though still a member of the same affiliated group. The original service agreement remained in place without modification. USA paid UII monthly fees equal to 22% of the amount of collected first year premiums, 20% in second year and 6% of the renewal premiums in years three and after. UII had a subcontract agreement with UTG to perform services and provide personnel and facilities. The services included in the agreement were claim processing, underwriting, processing and servicing of policies, accounting services, agency services, data processing and all other expenses necessary to carry on the business of a life insurance company. UII's subcontract agreement with UTG states that UII pay UTG monthly fees equal to 60% of collected service fees from USA as stated above. The service fees received from UII were recorded in UTG's financial statements as other income. With the merger of UII into UTG in July 1999, the sub-contract agreement ended and UTG assumed the direct contract with USA. This agreement was terminated upon the merger of USA into UG in December 1999.
USA paid $677,807 under their agreement with UII for 1999. UII paid $223,753 under their agreement with UTG for 1999. Additionally, UII paid FCC $30,000 in 1999 for reimbursement of costs attributed to UII. These reimbursements are reflected as a credit to general expenses.
Since the Company's affiliation with FSF, UG has acquired mortgage loans through participation agreements with FSNB. FSNB services the loans covered by these participation agreements. UG pays a .25% servicing fee on these loans and a one-time fee at loan origination of .50% of the original loan amount to cover costs incurred by FSNB relating to the processing and establishment of the loan. UG paid $79,730, $34,721 and $11,578 in servicing fees and $22,626, $91,392 and $0 in origination fees to FSNB during 2001, 2000 and 1999, respectively.
On June 5, 2001, the board of directors of UTG authorized the repurchase from time to time in the open market or in privately negotiated transactions of up to $1 million of UTG's common stock. Repurchased shares will be available for future issuance for general corporate purposes. Through February 28, 2002, UTG has spent $353,455 in the acquisition of 50,795 shares under this program.
In April 2001, UTG completed the purchase of 22,500 shares of UTG common stock and 544 shares of First Commonwealth Corporation common stock from James E. Melville and family pursuant to the Melville Purchase Agreement in exchange for five year promissory notes of UTG in the aggregate principal amount of $288,800. Also, in April 2001, UTG completed the purchase of 559,440 shares of UTG common stock from Larry E. Ryherd and family pursuant to the Ryherd Purchase Agreement in exchange for cash and a five-year promissory note of UTG in the principal amount of $3,527,494.
Included in the stock acquisition agreement is an earnings covenant whereby UTG warrants UTG and its subsidiaries and affiliates will have future earnings of at least $30,000,000 for a five-year period beginning January 1, 1998. Such earnings are computed based on statutory results excluding inter-company activities such as inter-company dividends plus realized and unrealized gains and losses on real estate, mortgage loans and unaffiliated common stocks. At the end of the covenant period, an adjustment is to be made equal to the difference between the then market value and statutory carrying value of real estate still owned that existed at the beginning of the covenant period. Should UTG not meet the covenant requirements, any shortfall will first be reduced by the actual average tax rate for UTG for the period, then will be further reduced by one-half of the percentage, if any, representing UTG's ownership percentage of the insurance company subsidiaries. This result will then be reduced by $250,000. The remaining amount will be paid by UTG in the form of UTG common stock valued at $15.00 per share with a maximum number of shares to be issued of 500,000. However, there shall be no limit to the number of shares transferred to the extent that there are legal fees, settlements, damage payments or other losses as a result of certain legal action taken. The price and number of shares shall be adjusted for any applicable stock splits, stock dividends or other recapitalizations. At December 31, 2001, the Company had total earnings of $14,505,204 applicable to this covenant.
For the year ended December 31, 2001 ------------- ---- --------------- --- ------------- Income Shares Per-Share (Numerator) (Denominator) Amount ------------- --------------- ------------- Basic EPS Income available to common shareholders $ 2,439,573 3,733,432 $ 0.65 =============
For the year ended December 31, 2000 ------------- ---- --------------- --- ------------- Income Shares Per-Share (Numerator) (Denominator) Amount ------------- --------------- ------------- Basic EPS Income available to common shareholders $ (696,426) 4,056,439 $ (0.17) =============
Effect of Dilutive Securities Convertible notes 0 0 Options 0 231
UTG had stock options outstanding at year end 1999 for 451 shares of common stock at $13.07 per share, 105,000 shares of common stock at $17.50 per share that were not included in the computation of diluted EPS because the exercise price was greater than the average market price of the common shares for each respective year presented. UTG had stock options for 231 shares of common stock at $.047 per share, which were included in the calculation of diluted earnings per share for UTG for the year ended December 31, 1999, since they were assumed by UTG in the 1999 merger of UII into UTG. The stock options outstanding for 451 shares, 105,000 shares, and 231 shares all expired during 2000, ending these stock option plans.
On July 31, 1997, UTG issued convertible notes for cash in the amount of $2,560,000 to seven individuals, all officers or employees of UTG. During the first three years the notes could be converted into 204,800 shares of common stock at $12.50 per share. The potential conversion of the notes was not included in the computation of diluted EPS for the years ended December 31, 1998 and 1997, respectively, because the exercise price was greater than the average market price of the common shares. In 1999, FSBI acquired all the outstanding UTG convertible notes from the original holders. Pursuant to an agreement, FSBI converted the notes to 204,800 shares of UTG common stock on July 31, 2000.
UTG had granted stock options to FSF of 1,450,000 shares of UTG which were outstanding as of year end 1998. The option shares under this option are to be reduced by two shares for each share of UTG common stock that FSF or its affiliates purchases from UTG shareholders in private or public transactions after the execution of the option agreement. The option is additionally limited to a maximum when combined with shares owned by FSF of 51% of the issued and outstanding shares of UTG after giving effect to any shares subject to the option. Due to the passage of time and the 51% limitation, all remaining stock options of 19,108 at $15.00 per share expired on July 1, 2001. No options were exercised during 2001. These options were not included in the computation of diluted EPS because the exercised price was greater than the average market price of the common shares for each respective year.
At December 31, 2001 and 2000, the Company had $4,400,670 and $1,817,169 in long-term debt outstanding, respectively. The debt is comprised of the following components:
The subordinated debt was incurred June 16, 1992 as a part of the acquisition of the now dissolved Commonwealth Industries Corporation, (CIC). On October 22, 2001, UTG paid $1,302,495 of the outstanding principal of the subordinated 20 year notes, and amended the interest rate on the outstanding principal balance of the remaining notes from an 8.5% fixed rate, to a 1% under prime variable rate, with interest to begin accruing at the effective time of the amendments. Prior to these amendments, the 20-year notes accrued interest at the rate of 8 1/2% per annum. At 12/31/01 the 1% under prime variable rate was 3.75%. A lump sum principal payment on the balance of the notes remains due June 16, 2012.
The other notes payable were incurred to facilitate the repurchase of stock in April 2001. These notes bear interest at the rate of 7% per annum (paid quarterly) with payments of principal to be made in five equal annual installments, the first such payment of principal to be due on April 12, 2002.
In April 2001, the Company issued $3,885,996 in new debt in exchange for the acquisition of UTG and FCC common stock from two former officers and directors of the Company and their respective families.
On December 31, 1999, UTG issued 681,818 shares of authorized but unissued common stock to acquire 100% ownership of North Plaza of Somerset, Inc. ("North Plaza"). North Plaza owns for investment purposes, a shopping center in Somerset, Kentucky, approximately 12,000 acres of timberland in Kentucky, and a 50% partnership interest in an additional 11,000 acres of Kentucky timberland. North Plaza has no debt. The net assets have been valued at $7,500,000, which equates to $11.00 per share for the new shares issued.
On June 5, 2001, UTG and FCC jointly announced their respective Boards of Directors approved a definitive agreement whereby UTG would acquire the remaining common shares (approximately 18%) of FCC which UTG does not currently own. Under the terms of the agreement, FCC will be merged with and into UTG, with UTG continuing as the surviving entity in the merger.
Tax Before-Tax (Expense) Net of Tax 1999 Amount or Benefit Amount ------------------------------------- -------------- -------------- -------------
Premiums and policy fees, net $ 5,337,148 $ 5,201,585 $ 4,470,307 $ 4,480,646 Net investment income 4,252,494 4,009,489 3,927,944 3,895,906 Total revenues 9,933,932 9,348,373 8,471,566 7,993,252 Policy benefits including Dividends 6,119,515 5,502,941 5,128,773 5,528,128 Commissions and amortization of DAC and COI 1,097,759 804,071 775,825 1,004,470 Operating expenses 2,827,918 1,732,641 2,095,530 3,459,697 Operating income (loss) (244,223) 1,166,057 408,328 (2,037,231) Net income (loss) (47,394) 686,907 163,169 (1,499,108) Basic earnings (loss) per share (0.01) 0.17 0.04 (0.39) Diluted earnings (loss) per share (0.01) 0.17 0.04 (0.39)
Premiums and policy fees, net $ 6,007,511 $ 5,705,270 $ 5,337,120 $ 4,531,242 Net investment income 3,640,387 3,603,212 3,628,538 3,657,400 Total revenues 9,835,111 9,136,482 8,964,360 8,121,158 Policy benefits including Dividends 6,115,079 5,569,046 4,864,370 4,740,390 Commissions and amortization of DAC and COI 1,366,288 1,131,407 1,070,869 1,173,088 Operating expenses 2,080,905 1,882,088 1,678,571 1,891,810 Operating income (loss) 74,962 392,486 1,198,404 189,701 Net income (loss) 132,461 123,481 883,271 (63,304) Basic earnings (loss) per share 0.05 0.05 0.29 (0.01) Diluted earnings (loss) per share 0.07 0.07 0.29 (0.00)