Property owned Amount % of Total Home Office $ 1,992,317 18%
Investment real estate Commercial $ 6,491,734 60% Residential development $ 2,384,564 22% $ 8,876,298 82%
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. The Company plans to invest an additional $2,000,000 over the next few years in order to renovate and improve existing office space within the building. The intent of these improvements would be made in order to lease the office space in the near future. A significant portion of the existing office leases expires in early to mid 2002. At December 31, 2001, the property was carried at $6,491,734.
FINANCIAL HIGHLIGHTS (000's omitted, except per share data) 2001 2000 1999 1998 1997 ---------------- --------------- --------------- --------------- -------------- Premium income net of reinsurance $ 17,272 $ 19,490 $ 21,581 $ 26,396 $ 28,639 Total revenues $ 33,602 $ 35,232 $ 35,759 $ 40,632 $ 43,354 Net gain/(loss) $ 2,185 $ (1,847) $ (378) $ (1,950) $ (1,845) Net loss per share $ 40.19 $ (33.90) $ (6.93) $ (35.74) $ (32.65) Total assets $ 309,900 $ 314,242 $ 320,875 $ 328,737 $ 332,572 Total long term debt $ 11,537 $ 12,839 $ 14,864 $ 17,370 $ 18,242 Dividends paid per share NONE NONE NONE NONE NONE
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 FCC and its subsidiaries at December 31, 2001.
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 traditional business, consequently, traditional premiums will decrease as the amount of traditional business in-force decreases. Collected premiums on universal life and interest sensitive products is not reflected in premiums and policy revenues because accounting principles generally accepted in the United States of America require 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, premium revenue will 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.
During early 1999, the Company re-evaluated its real estate holdings, especially those properties acquired through acquisitions of other companies and mortgage loan foreclosures, and determined it would be in the long term interest of the Company to dispose of certain of these parcels. Parcels targeted for sale were generally non-income or low income producing and located in parts of the country where management has little other reason to travel.
During 2000, real estate continued to account for almost all of the realized gain and loss activity. By third quarter of 2000, the Company had sold the remaining real estate properties identified for disposal in prior years. The Company recorded net realized gains of $728,000 from these sales. By fourth quarter 2000, remaining real estate consisted of development real estate located in Springfield, IL. In December 2000, management studied its development properties, analyzing such issues as remaining time to fully develop without over saturation, historic sales trends, management time and resources to continue development and other alternatives such as modifying current plans or discontinuing entirely. Management determined it would be in the long term best interests of the Company to discontinue development and attempt to liquidate the remaining properties. As such, a realized loss of $913,000 was recorded in December 2000 to reduce the book value of these properties to the amount management determined it would accept net of selling costs to facilitate liquidation. During the fourth quarter of 2000, the Company recorded a $170,000 increase to the allowance maintained for potential mortgage loan losses.
Approximately 99% of the realized loss in 1999 is 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 sell, 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.
On June 1, 2001, the Company began performing administrative work as a third party administrator ("TPA") for an unaffiliated life insurance company. The business being administered is a closed block with approximately 260,000 policies, a majority of which are paid up. The Company receives monthly fees based on policy in force counts and certain other activity indicators such as number of premium collections performed. During 2001, the Company received $299,905 for this work. These TPA revenue fees are included in the line item "other income" on the Company's consolidated statements of operations. The Company intends to pursue other TPA arrangements. Management believes it is a good source of generating additional revenues while utilizing the Company's strength, excess capacity and efficient administrative services.
Commissions and amortization of deferred policy acquisition costs decreased 32% in 2001 compared to 2000 and decreased 25% in 2000 compared to 1999. The Company performs actuarial analysis of the recoverability of the asset based on current trends and known events compared to assumptions used in the establishment of the original asset. No impairments were recorded in 2001 or 2000.
During the fourth quarter of 1999, the Company transferred the policy administration functions of its insurance subsidiary APPL from Huntington, WV to its Springfield, IL location. The transfer was completed to reduce operating costs. APPL policy administration was then converted to the same computer system used to administer the other insurance subsidiaries. Following the transfer and system conversion, all insurance administration is located at the Springfield, IL office and administered on the same computer system. This action resulted in cost savings of approximately $250,000 per year in administrative costs. During 2001, the Company transferred all remaining functions from Huntington, WV to the Springfield, IL location and sold the West Virginia property. The closing of the Huntington office resulted in approximately $250,000 per year in operating expense savings.
Interest expense declined 21% comparing 2001 to 2000 and declined 8% comparing 2000 to 1999. At December 31, 2001, FCC had $11,536,698 in notes payable, and no debt is owed to outside parties. During 2001 and 2000, FCC repaid $1,302,495 and $2,025,000 of its debt through dividends received from its insurance subsidiary, UG.
Fixed Maturities ---------------- Rating % of Portfolio ------- ---------------------- 2001 2000 ---------- ---------- Investment Grade AAA 61% 48% AA 6% 16% A 24% 27% BBB 8% 9% Below investment grade 1% 0% ---------- ---------- 100% 100% ========== ==========
Cost of insurance acquired decreased 7% in 2001 compared to 2000. At December 31, 2001, cost of insurance acquired was $14,219,005 and net amortization totaled $1,151,284 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.
Many of the Company's products contain surrender charges and other features which reward persistency and penalize the early withdrawal of funds. With respect to such products, surrender charges are generally sufficient to cover the Company's unamortized deferred policy acquisition costs with respect to the policy being surrendered.
Cash provided by (used in) operating activities was $1,603,246, $(2,645,902) and $(1,381,527) in 2001, 2000 and 1999, respectively. Reporting regulations require cash inflows and outflows from universal life insurance products to be shown as financing activities when reporting on cash flows. The net cash provided by operating activities plus policyholder contract deposits less policyholder contract withdrawals equaled $3,622,756 in 2001, $(883,982) in 2000 and $1,571,847 in 1999. Management utilizes this measurement of cash flows as an indicator of the performance of the Company's insurance operations.
Cash provided by (used in) investing activities was $181,337, $(3,814,275) and $(4,974,503), 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%, 43% 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.
Net cash provided by (used in) financing activities was $92,684, $(347,279) and $370,651 for 2001, 2000 and 1999, respectively. The Company continues to pay down on its outstanding debt. Such payments are included within this category.
At December 31, 2001, FCC had $11,536,698 in notes payable. During 2001, the Company repaid $1,302,495 on its affiliated subordinated debt. Contractual obligations on the Company's long-term debt require total payments of $9,408,099 due in 4-5 years and $2,128,599 due after 5 years.
Since FCC is a holding company, funds required to meet its debt service requirements and other expenses are primarily provided by its subsidiaries. On a parent only basis, FCC's cash flow is dependent on revenues from management and cost sharing arrangements with its subsidiaries and its earnings received on invested assets and cash balances. At December 31, 2001, substantially all of the consolidated shareholders equity represents net assets of its subsidiaries. Cash requirements of FCC primarily relate to servicing its long-term debt. The Company's insurance subsidiaries have maintained adequate statutory capital and surplus and have not used surplus relief or financial reinsurance, which have come under scrutiny by many state insurance departments. The payment of cash dividends to shareholders is not legally restricted. However, insurance company dividend payments are regulated by the state insurance department where the company is domiciled. UG's dividend limitations are described below.
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.
The Company's insurance subsidiaries are assessed contributions by life and health guaranty associations in almost all states to indemnify policyholders of failed companies. In several states the company may reduce premium taxes paid to recover a portion of assessments paid to the states' guaranty fund association. This right of "offset" may come under review by the various states, and the company cannot predict whether and to what extent legislative initiatives may affect this right to offset. Also, some state guaranty associations have adjusted the basis by which they assess the cost of insolvencies to individual companies. The Company believes that its reserve for future guaranty fund assessments is sufficient to provide for assessments related to known insolvencies. This reserve is based upon management's current expectation of the availability of this right of offset, known insolvencies and state guaranty fund assessment bases. However, changes in the basis whereby assessments are charged to individual companies and changes in the availability of the right to offset assessments against premium tax payments could materially affect the company's results.
Ratio of Total Adjusted Capital to Authorized Control Level RBC Regulatory Event (Less Than or Equal to) ---------------- ----------------------------
A task force of the NAIC undertook a project to codify a comprehensive set of statutory insurance accounting rules and regulations. Project results were approved by the NAIC with an implementation date of January 1, 2001. Many states in which the Company does business implemented these new rules with the same effective date as proposed by the NAIC. The Company implemented these new regulations effective January 1, 2001 as required. Implementation of these new rules did not have a material financial impact on the insurance subsidiaries financial position or results of operations. The NAIC continues to modify and amend issue papers regarding codification. The Company will continue to monitor this issue as changes and new proposals are made.
Independent Auditors' Report for the Years ended December 31, 2001, 2000, 1999..........................32
We have audited the accompanying consolidated balance sheets of First Commonwealth Corporation (a Virginia corporation) and subsidiaries as of December 31, 2001 and 2000, and the related consolidated statements of operations, shareholders' equity, and cash flows for each of the three years in the period ended December 31, 2001. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.
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 $3,934,512 and $5,505,832) 3,852,716 5,126,271 Mortgage loans on real estate at amortized cost 23,386,895 32,896,671 Investment real estate, at cost, net of accumulated depreciation 8,876,298 3,933,357 Policy loans 13,608,456 14,090,900 Short-term investments 550,001 1,654,567 -------------- --------------- 223,908,201 222,753,009
Cash and cash equivalents 14,837,274 12,960,007 Investment in parent 350,000 350,000 Receivable from affiliate 37 291,934 Accrued investment income 2,938,529 3,461,199 Reinsurance receivables: Future policy benefits 33,776,688 35,083,244 Policy claims and other benefits 4,042,779 3,911,258 Cost of insurance acquired 14,219,005 15,370,289 Deferred policy acquisition costs 6,353,919 7,853,496 Cost in excess of net assets purchased, net of accumulated amortization 6,895,110 7,647,847 Income taxes receivable: Current 174,893 195,068 Deferred 0 1,148,545 Property and equipment, net of accumulated depreciation 2,284,117 2,567,619 Other assets 118,963 648,002 -------------- --------------- Total assets $ 309,899,515 $ 314,241,517 ============== ===============
LIABILITIES AND SHAREHOLDERS' EQUITY Policy liabilities and accruals: Future policy benefits $ 244,526,762 $ 248,089,964 Policy claims and benefits payable 2,781,920 2,639,248 Other policyholder funds 1,255,990 1,445,857 Dividend and endowment accumulations 12,972,024 13,416,427 Notes payable 11,536,698 12,839,193 Income taxes payable, deferred 272,444 0 Other liabilities 4,541,184 5,357,543 -------------- --------------- Total liabilities 277,887,022 283,788,232 -------------- --------------- Minority interests in consolidated subsidiaries 0 1,326,992 -------------- ---------------
Shareholders' equity: Common stock - $1 par value per share. Authorized 62,500 shares - 54,385 and 54,393 shares issued and outstanding after deducting treasury shares of 1,100 and 1,092 54,385 54,393 Additional paid-in capital 51,860,574 51,861,366 Accumulated deficit (20,515,821) (22,701,428) Accumulated other comprehensive income (deficit) 613,355 (88,038) -------------- --------------- Total shareholders' equity 32,012,493 29,126,293 -------------- --------------- Total liabilities and shareholders' equity $ 309,899,515 $ 314,241,517 ============== ===============
Income (loss) before income taxes and minority interest 3,290,521 (1,972,694) (169,960) Income tax credit (expense) (1,055,732) 90,811 (170,957) Minority interest in (income) loss of consolidated subsidiaries (49,182) 35,043 (37,040) -------------- --------------- -------------- Net income (loss) $ 2,185,607 $ (1,846,840) $ (377,957) ============== =============== ==============
Basic income (loss) per share from continuing operations and net income (loss) $ 40.19 $ (33.90) $ (6.93) ============== =============== ==============
Common stock Balance, beginning of year $ 54,393 $ 54,538 $ 54,539 Issued during year 0 0 0 Treasury shares acquired (8) (145) (1) -------------- -------------- -------------- Balance, end of year $ 54,385 $ 54,393 $ 54,538 ============== ============== ==============
Total shareholders' equity, end of year $ 32,012,493 $ 29,126,293 $ 29,160,336 ============== ============== ==============
2001 2000 1999 --------------- -------------- ------------- Increase (decrease) in cash and cash equivalents Cash flows from operating activities: Net income (loss) $ 2,185,607 $ (1,846,840) $ (377,957) Adjustments to reconcile net loss to net cash provided by (used in) operating activities net of changes in assets and liabilities resulting from the sales and purchases of subsidiaries: Amortization/accretion of fixed maturities 150,579 152,917 489,491 Realized investment (gains) losses, net (436,280) 260,078 530,894 Policy acquisition costs deferred (141,000) (273,000) (720,000) Amortization of deferred policy acquisition costs 1,640,577 2,197,040 2,783,012 Amortization of cost of insurance acquired 1,151,284 1,185,307 1,072,773 Amortization of costs in excess of net assets purchased 403,664 403,664 432,550 Depreciation 360,688 424,591 480,505 Minority interest 49,182 (35,043) 37,040 Charges for mortality and administration of universal life and annuity products (9,344,711) (10,151,024) (10,696,014) Interest credited to account balances 5,749,098 6,109,491 6,300,667 Change in accrued investment income 522,670 (42,900) 102,782 Change in reinsurance receivables 1,175,305 928,890 606,509 Change in policy liabilities and accruals (2,478,697) (3,289,810) (1,255,020) Change in income taxes 1,055,732 109,189 (351,803) Change in indebtedness (to) from affiliates, net 291,897 (137,316) (198,112) Change in other assets and liabilities, net (732,349) 1,358,864 (618,844) --------------- -------------- ------------- Net cash provided by (used in) operating activities 1,603,246 (2,645,902) (1,381,527) --------------- -------------- -------------
B. NATURE OF OPERATIONS - First Commonwealth Corporation is an insurance holding company, which sells insurance products through its insurance subsidiaries. The Company's principal market is the Midwestern United States. The Company's dominant business is individual life insurance which includes the servicing of existing insurance business in force, the solicitation of new individual life insurance and the acquisition of other companies in the insurance business.
E. PRINCIPLES OF CONSOLIDATION - The consolidated financial statements include the accounts of the Registrant and its majority-owned subsidiaries. Other investments in affiliates are carried at cost. All significant intercompany accounts and transactions have been eliminated.
Fixedmaturities -- at cost, adjusted for amortization of premium or discount and other-than-temporary market value declines. The amortized cost of such investments differs from their market values; however, the Company has the ability and intent to hold these investments to maturity, at which time the full face value is expected to be realized.
Real estate - Investment real estate at cost less allowance for depreciation and, as appropriate, provisions for possible losses. Foreclosed real estate is adjusted for any impairment at the foreclosure date. Accumulated depreciation on investment real estate was $58,225 and $251,766 as of December 31, 2001 and 2000, respectively.
Amounts paid or deemed to have been paid for reinsurance contracts are recorded as reinsurance receivables. Reinsurance receivables are recognized in a manner consistent with the liabilities relating to the underlying reinsured contracts. The cost of reinsurance related to long-duration contracts is accounted for over the life of the underlying reinsured policies using assumptions consistent with those used to account for the underlying policies.
K. COST OF INSURANCE ACQUIRED - When an insurance company is acquired, the Company assigns a portion of its cost to the right to receive future cash flows from insurance contracts existing at the date of the acquisition. The cost of policies purchased represents the actuarially determined present value of the projected future cash flows from the acquired policies. The Company utilized 9% discount rate on approximately 75% of the business and 15% discount rate on approximately 25% of the business. 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 75% of the balance and 15% on the remaining balance. The interest rates vary due to differences in the blocks of business. The amortization is adjusted retrospectively when estimates of current or future gross profits to be realized from a group of products are revised.
2001 2000 1999 ----------------- ----------------- ----------------- Deferred, beginning of year $ 7,853,496 $ 9,777,536 $ 11,840,548
Deferred, end of year $ 6,353,919 $ 7,853,496 $ 9,777,536 ================= ================= =================
The following table reflects the components of the income statement for the line item commissions and amortization of deferred policy acquisition costs.
Interest Net Accretion Amortization Amortization ---------- ------------ ------------ 2002 $ 217,000 $ 1,372,000 $ 1,155,000 2003 193,000 1,053,000 860,000 2004 172,000 1,025,000 853,000 2005 154,000 878,000 724,000 2006 137,000 744,000 607,000
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 $7,655,520 and $7,251,856 as of December 31, 2001 and 2000, respectively.
N. PROPERTY AND EQUIPMENT - Company-occupied property, data processing equipment and furniture and office equipment are stated at cost less accumulated depreciation of $5,480,294 and $5,871,464 at December 31, 2001 and 2000, respectively. Depreciation is computed on a straight-line basis for financial reporting purposes using estimated useful lives of three to 30 years. Depreciation expense was $296,900, $355,328 and $352,449 for the years ended December 31, 2001, 2000 and 1999 respectively.
T. RECLASSIFICATIONS - Certain prior year amounts have been reclassified to conform to the 2001 presentation. Such reclassifications had no effect on previously reported net loss, total assets, or shareholders' equity.
U. USE OF ESTIMATES - In preparing financial statements in conformity with accounting principles generally accepted in the United States of America management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
At December 31, 2001, substantially all of consolidated shareholders' equity represents net assets of FCC's subsidiaries. The payment of cash dividends to shareholders by 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 $ 20,175 $ 27,748 $ 941 Deferred tax expense (credit) 1,035,557 (118,559) 170,016 ---------------- ----------------- ---------------- $ 1,055,732 $ (90,811) $ 170,957 ================ ================= ================
2001 2000 1999 ---------------- ---------------- ---------------- Tax computed at statutory rate $ 1,151,682 $ (690,443) $ (59,486) Changes in taxes due to: Cost in excess of net assets purchased 141,282 141,282 151,393 Current year loss for which no benefit realized 0 546,231 0 Benefit of prior losses (159,456) (139,061) (6,309) Other (77,776) 51,180 85,359 ---------------- ---------------- ---------------- Income tax expense (credit) $ 1,055,732 $ (90,811) $ 170,957 ================ ================ ================
December 31, ---------------------------------------------------------- 2001 2000 1999 --------------- ---------------- ---------------- Fixed maturities held to maturity 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 1,078,028 Real estate 198,314 311,027 389,181 Policy loans 970,142 997,381 991,812 Other long-term investments 0 655,418 63,528 Short-term investments 114,538 156,815 147,726 Cash 562,905 847,400 811,103 --------------- ---------------- ---------------- Total consolidated investment income 15,524,158 16,637,448 15,459,775 Investment expenses (581,256) (767,851) (961,275) Consolidated net investment income $ 14,942,902 $ 15,869,597 $ 14,498,500 =============== ================ ================
Carrying Value ----------------------------------------- 2001 2000 --------------- --------------- Investments held for sale: Fixed maturities U.S. Government, government agencies and authorities $ 6,904,757 $ 35,444,312 State, municipalities and political subdivisions 11,788,567 206,006 Collateralized mortgage obligations 128,471 5,962,594 Public utilities 22,219,127 0 All other corporate bonds 33,964,473 1,515,368 --------------- --------------- $ 75,005,395 $ 43,128,280 =============== ===============
Equity securities Banks, trust and insurance companies $ 1,100,000 $ 3,139,020 Industrial and miscellaneous 2,752,716 1,987,251 --------------- --------------- $ 3,852,716 $ 5,126,271 =============== ===============
Fixed maturities held to maturity: U.S. Government, government agencies and authorities $ 36,182,839 $ 31,350,799 State, municipalities and political subdivisions 202,256 15,318,605 Collateralized mortgage obligations 54,003,623 3,178,210 Public utilities 0 27,287,454 All other corporate bonds 8,239,722 44,787,895 --------------- --------------- $ 98,628,440 $ 121,922,963 =============== ===============
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 ============== ============ ============
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 5,410,207 637,191 (921,127) 5,126,271 -------------- -------------- -------------- --------------- Total $ 48,324,393 $ 955,902 $ (1,025,744) $ 48,254,551 ============== ============== ============== ===============
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, 2001 Cost Gains Losses Sale ------------------------------------- --------------- ------------- --------------- --------------- Scheduled principal repayments, calls and tenders: Held for sale $ 20,479,560 $ 10,440 $ 0 $ 20,490,000 Held to maturity 51,025,358 34,690 (107,234) 50,952,814 Sales: Held for sale 6,518,181 197,044 0 6,715,225 Held to maturity 0 0 0 0 --------------- ------------- --------------- --------------- Total $ 78,023,099 $ 242,174 $ (107,234) $ 78,158,039 =============== ============= =============== ===============
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 =============== ============= =============== ===============
C. INVESTMENTS ON DEPOSIT - At December 31, 2001, investments carried at approximately $12,657,000 were on deposit with various state insurance departments.
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 currently is in the process of codifying statutory accounting practices, the result of which is expected to constitute the only source of "prescribed" statutory accounting practices. The new rules promulgated by the codifying of statutory accounting practices become effective January 1, 2001. Accordingly, these uniform rules will change prescribed statutory accounting practices and will result in changes to the accounting practices that insurance enterprises use to prepare their statutory financial statements. Implementation of the codification rules will 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 $2,913,000, $2,901,000 and $3,843,000 for 2001, 2000 and 1999, respectively.
Currently, the Company is utilizing reinsurance agreements with Business Mens' Assurance Company, ("BMA") and Life Reassurance Corporation of America, ("LIFE RE"). Recently, Swiss Re Life and Health America Incorporated merged into LIFE RE and the merged entity was renamed Swiss Re Life and Health America Incorporated ("SWISS RE"). BMA and SWISS RE currenty hold an "A" (Excellent), and "A++" (Superior) rating, respectively, from A.M. Best, an industry rating company. The reinsurance agreements were effective December 1, 1993, and cover all new business of the Company. The agreements are a yearly renewable term ("YRT") treaty where the Company cedes amounts above its retention limit of $100,000 with a minimum cession of $25,000.
The State of Florida began an investigation of industrial life insurance policies in the fall of 1999 regarding policies with race-based premiums. This investigation has quickly spread to other states and to other types of small face amount policies and was expanded to consider the fairness of premiums for all small policies including policies which did not have race-based premiums. The NAIC historically has defined a "small face amount policy" as one with a face amount of $15,000 or less. Under current reviews, some states have increased this amount to policies of $25,000 or less. These states are attempting to force insurers to refund "excess premiums" to insureds or beneficiaries of insureds based on the recent American General settlement. The Company's insurance subsidiaries have no race-based premium products, but do have policies with face amounts under the above-scrutinized limitations. The outcome of this issue could be dramatic on the insurance industry as a whole as well as the Company itself. The Company will continue to monitor developments regarding this matter to determine to what extent, if any, the Company may be exposed.
Mr. Correll is Chairman of the Board of Directors of UTG and currently UTG's largest shareholder through his ownership control of FSF, FSBI and affiliates. Mr. Correll is the majority shareholder of FSF and FSBI, a bank holding company that operates out of 14 locations in central Kentucky. At December 31, 2001, Mr. Correll owns or controls directly and indirectly approximately 60% of UTG.
On July 26, 1999, the shareholders of UTG and UII approved a merger transaction of the two companies. Prior to the merger, UTG owned 53% of UTGL99 (refers to the former United Trust Group, Inc., which was formed in February of 1992 and liquidated in July of 1999) an insurance holding company, and UII owned 47% of UTGL99. Additionally, UTG held an equity investment in UII. At the time the decision to merge was made, neither UTG nor UII had any other significant holdings or business dealings. The Board of Directors of each company concluded a merger of the two companies would be in the best interests of the shareholders by creating a larger more viable life insurance holding group with lower administrative costs, a simplified corporate structure, and more readily marketable securities. Following the merger approval, UTG issued 817,517 shares of authorized but unissued common stock to former UII shareholders, net of any dissenter shareholders in the merger. Following the merger, UTGL99, which was then 100% owned by UTG, was liquidated and UTG changed its name to United Trust Group, Inc.
The Company reimbursed expenses incurred by Mr. Correll and Mr. Attkisson relating to travel and other costs incurred on behalf of or relating to the Company. The Company paid $145,407, $96,599 and $39,336 in 2001, 2000 and 1999,respectively to First Southern Bancorp, Inc. in reimbursement of such costs. In addition, beginning in 2001, the Company began reimbursing FSBI a portion of salaries for Mr. Correll and Mr. Attkisson. The reimbursement was approved by the UTG board of directors and totaled $128,411 in 2001 which included salaries and other benefits.
At December 31, 2001 and 2000, the Company has $11,536,698 and $12,839,193 in long term debt outstanding, respectively. The debt is comprised of the following components:
2001 2000 ------------- ------------- Affiliated subordinated 20 yr. Notes $ 2,128,599 $ 3,431,094 Other affiliated notes payable 9,408,099 9,408,099 ------------- ------------- $ 11,536,698 $ 12,839,193 ============= ============= A. Affiliated subordinated debt
The affiliated subordinated debt is owed to UTG and was incurred June 16, 1992 as a part of the acquisition of the now dissolved Commonwealth Industries Corporation, (CIC). On October 22, 2001, FCC made a $1,302,495 principal payment on this debt which bears an interest rate of 8 1/2% per annum, with interest payable semiannually. A lump sum principal payment on the balance of the notes remains due June 16, 2012.
The Company maintains cash balances in financial institutions that at times may exceed federally insured limits. The Company maintains its primary operating cash accounts with First Southern National Bank, an affiliate of the largest shareholder of UTG. In aggregate at December 31, 2001 these accounts hold approximately $4,550,000 for which there are no pledges or guarantees outside FDIC insurance limits. The Company has not experienced any losses in such accounts and believes it is not exposed to any significant credit risk on cash and cash equivalents.
The Financial Accounting Standards Board ("FASB") has issued Statement No. 141, Business Combinations, Statement No. 142, Goodwill and Other Intangible Assets, Statement No. 143, Accounting for Asset Retirement Obligations, and Statement No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets.
Statement 144 requires that one accounting model be used for long-lived assets to be disposed of by sale, whether previously held and used or newly acquired, and broadens the presentation of discontinued operations to include more disposal transactions. In addition, this statement requires entities to recognize an impairment loss if the carrying amount of a long-lived asset is not recoverable from its undiscounted cash flows, and to measure an impairment loss as the difference between the carrying amount and fair value of the asset. This statement removes any previous requirements to allocate goodwill to long-lived assets to be tested for impairment, and it further prescribes a probability-weighted cash flow estimation approach to deal with situations in which alternative courses of action to recover the carrying amount of a long-lived asset are under consideration. The provisions of this Statement are effective for financial statements issued for fiscal years beginning after December 15, 2001. The adoption of Statement 144 will not affect the Company's financial position or results of operations, since the Company has no such disposals or impairments to long-lived assets.
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.
The reverse stock split was effected on October 26, 2001. At that time, APPL became a wholly owned subsidiary of UG, a wholly owned subsidiary of FCC.
Tax Before-Tax (Expense) Net of Tax 2001 Amount or Benefit Amount ---------------------------------------------- ----------------- ------------------ ----------------
Tax Before-Tax (Expense) Net of Tax 2000 Amount or Benefit Amount ---------------------------------------------- ----------------- ------------------ ----------------
Unrealized holding gains during Period $ 1,866,783 $ 0 $ 1,866,783 Less: reclassification adjustment for gains realized in net income (39,486) 0 (39,486) ----------------- ------------------ ---------------- Net unrealized gains 1,827,297 0 1,827,297 ----------------- ------------------ ---------------- Other comprehensive income $ 1,827,297 $ 0 $ 1,827,297 ================= ================== ================
Unrealized holding losses during Period $ (1,283,991) $ 0 $ (1,283,991)