The Company leases approximately 1,951 square feet of office space at 2500 Corporate Exchange Drive, Suite 345, Columbus, Ohio 43231. The lease expires June 30, 1999 with annual lease rent of $23,000 unadjusted for additional rent for the Company's pro rata share of building taxes, operating expenses and management expenses. Under the current lease agreement, the Company will pay a minimum of $59,000 through the remaining term of the lease. The rent expense will be approximately $35,000 for 1997. The lease contains no renewal or purchase option clause. The leased space cannot be sublet without written approval of lessor. Rent expense for 1996, 1995 and 1994 was approximately $61,000, $69,000 and $68,000, respectively.
FINANCIAL HIGHLIGHTS (000's omitted, except per share data) 1996 1995 1994 1993 1992 Net Operating Revenues $ 1,791 $ 2,234 $ 1,667 $ 1,459 $ 4,255 Operating Costs and Expenses $ 1,414 $ 1,976 $ 1,627 $ 1,384 $ 4,092 Income taxes $ 0 $ 0 $ 0 $ 0 $ 40 Equity in loss of investees $ (696) $ (2,406) $ (384) $ (580) $ (346) Net Income (loss) $ (319) $ (2,148) $ (344) $ (505) $ (223) Net Income (loss) per common share (1) $ (0.02) $ (0.11) $ (0.02) $ (0.03) $ (0.01) Cash Dividend Declared per common share $ 0 $ 0 $ 0 $ 0 $ 0 Total Assets $ 12,881 $ 13,386 $ 15,414 $ 14,919 $ 15,038 Long Term Obligations $ 902 $ 0 $ 0 $ 0 $ 0
(1) The comparability of the selected financial data for the year 1992 is materially affected by the formation of United Trust Group, Inc. ("UTG") and the sale of UII's subsidiary, United Security Assurance Company ("USA").
Ohio domiciled insurance companies require five days prior notification to the insurance commissioner for the payment of an ordinary dividend. Ordinary dividends are defined as the greater of: a) prior year statutory earnings or b) 10% of statutory capital and surplus. For the year ended December 31, 1996, UG had a statutory gain from operations of $8,006,000. At December 31, 1996, UG statutory capital and surplus amounted to $10,227,000. Extraordinary dividends (amounts in excess of ordinary dividend limitations) require prior approval of the insurance commissioner and are not restricted to a specific calculation.
The Company currently has $440,000 in cash and cash equivalents. The Company holds one mortgage loan. Operating activities of the Company produced cash flows of $256,000, $ 327,000 and $27,000 in 1996, 1995 and 1994, respectively. The Company had uses of cash from investing activities of $180,000, $193,000 and $811,000 in 1996, 1995 and 1994, respectively. Cash flows from financing activities were $0, $0 and $905,000 in 1996, 1995 and 1994, respectively.
Interest expense of $84,000, $89,000 and $59,000 was incurred in 1996, 1995 and 1994, respectively. The interest expense is directly attributable to the convertible debentures. The Debentures bear interest at a variable rate equal to one percentage point above the prime rate published in the Wall Street Journal from time to time.
Life benefits, net of reinsurance benefits and claims, increased 2% compared to 1995. The increase in life benefits is due primarily to settlement expenses discussed in the following paragraph:
In 1994, UG became aware that certain new insurance business was being solicited by certain agents and issued to individuals considered to be not insurable by Company standards. These non-standard policies had a face amount of $22,700,000 and represented 1/2 of 1% of the insurance in-force in 1994. Management's initial analysis indicated that expected death claims on the business in-force was adequate in relation to mortality assumptions inherent in the calculation of statutory reserves. Nevertheless, management determined it was in the best interest of the Company to repurchase as many of the non-standard policies as possible. Through December 31, 1996, the Company spent approximately $7,099,000 for the settlement of non-standard policies and for the legal defense of related litigation. In relation to settlement of non-standard policies the Company incurred life benefits of $3,307,000, $720,000 and $1,250,000 in 1996, 1995 and 1994, respectively. The Company incurred legal costs of $906,000, $687,000 and $229,000 in 1996, 1995 and 1994, respectively. All the policies associated with this issue have been settled as of December 31, 1996. The Company has approximately $3,742,000 of insurance in-force and $1,871,000 of reserves from the issuance of paid-up life insurance policies for settlement of matters related to the original non-standard policies. Management believes the reserves are adequate in relation to expected mortality on this block of in-force.
Interest expense decreased 12% in 1996 compared to 1995. Since December 31, 1995, notes payable decreased approximately $1,623,000 which has directly attributed to the decrease in interest expense during 1996. Interest expense was also reduced as a result of the refinancing of the senior debt under which the new interest rate is more favorable. Please refer to Note 10 "Notes Payable" of the Consolidated Notes to the Financial Statements for more information on this matter.
UTG had a net loss of $1,661,000 in 1996 compared to a net loss of $5,321,000 in 1995. The net loss in 1996 is attributed to the increase in life benefits net of reinsurance and operating expenses primarily associated with settlement and other related costs of the non-standard life insurance policies.
The Company's source of revenues is derived from service fee income which is provided via a service agreement with USA. The service agreement between UII and USA is to provide USA with certain administrative services. The fees are based on a percentage of premium revenue of USA. The percentages are applied to both first year and renewal premiums at different rates.
The Company holds $714,100 of notes receivable from affiliates. $700,000 of these notes represent a participation interest in the senior debt of FCC. The notes carry interest at a rate of 1% above prime, with interest received quarterly. The remaining $14,100 are 20 year notes of UTG with interest at 8.5% payable semi-annually. At current interest levels, the notes will generate approximately $66,000 annually.
The Company has a sub-contract service agreement with United Trust, Inc. ("UTI") for certain administrative services. Through its facilities and personnel, UTI performs such services as may be mutually agreed upon between the parties. The fees are based on a percentage of the fees paid to UII by USA. The Company has incurred $1,809,000, $1,210,000, and $921,000 in service fee expense in 1995, 1994, and 1993 respectively.
The Company realized a gain of $467,000 from the sale of an insignificant subsidiary in 1994. The Company had other gains and losses during the period that comprised the remaining amount reported but were routine or immaterial in nature to disclose on an individual basis.
Life benefits, net of reinsurance benefits and claims, decreased 4% compared to 1994. The decrease is related to the decrease in first year premium production. Another factor that has caused life benefits to decrease is that during 1994, the Company lowered its crediting rates on interest sensitive products in response to financial market conditions. This action will facilitate the appropriate spreads between investment returns and credited interest rates. It takes approximately one year to fully realize a change in credited rates since a change becomes effective on each policy's next anniversary. Please refer to discussion of net investment income for analysis of interest spreads.
During the third quarter of 1994, UG became aware that certain new insurance business was being solicited by certain agents and issued to individuals considered to be not insurable by Company standards. These policies had a face amount of $22,700,000 and represent 1/2 of 1% of the insurance in force. Management's analysis indicates that the expected death claims on the business in force to be adequately covered by the mortality assumptions inherent in the calculation of statutory reserves. Nevertheless, management has determined it is in the best interest of the Company to repurchase as many of the policies as possible. As of December 31, 1995, there remained approximately $5,738,000 of the original face amount which have not been settled. The Company will continue its efforts to repurchase as many of the policies as possible and
regularly apprise the Ohio Department of Insurance regarding the status of this situation. Through December 31, 1995, the Company spent a total of $2,886,000 for the repurchase of these policies and for the legal defense of related litigation. In relation to the repurchase of insurance policies the Company incurred life benefits of $720,000 and $1,250,000 in 1995 and 1994, respectively. The Company incurred legal costs of $687,000 and $229,000 in 1995 and 1994, respectively.
During 1995, the Company reported a non-recurring write down of value of agency force of $8,297,000. The write down is directly related to the Company's change in distribution systems. The Company has changed its focus from primarily a broker agency distribution system to a captive agent system. Business produced by the broker agency force in recent years did not meet Company expectations. With the change in focus of distribution systems, most of the broker agents were terminated. The termination of most of the agents involved in the broker agency force caused management to re-evaluate the value of the agency force carried on the balance sheet. As of December 31, 1995, the remaining value of the agency force on the balance sheet represents the active agency forces that continue to originate premium production.
regularly apprise the Ohio Department of Insurance regarding the status of this situation. The Company incurred legal costs of $687,000 and $229,000 in 1995 and 1994, respectively, for the legal defense of related litigation.
UTG had a net loss of $5,321,000 in 1995 compared to a net loss of $1,116,000 in 1994. The decline in 1995 is attributed to the non-recurring write down of the value of agency force and the increase in operating expenses.
The Company recorded a net loss of $2,148,000 for 1995 compared to a net loss of $344,000 for the same period one year ago. The increase in net loss is from the equity share of UTG's operating results for the year.
Most states also have insurance holding company statutes which require registration and periodic reporting by insurance companies controlled by other corporations licensed to transact business within their respective jurisdictions. The insurance affiliates are subject to such legislation and are registered as controlled insurers in those jurisdictions in which such registration is required. Statutes vary from state to state but typically require periodic disclosure concerning the corporation that controls the registered insurers and all affiliates of such corporation. In addition, prior notice to, or approval by, the state insurance commission of material intercorporate transfers of assets, reinsurance agreements, management agreements, and payment of dividends in excess of specified amounts by the insurance affiliate within the holding company system are required.
The NAIC has adopted Risk-Based Capital ("RBC") requirements for life/health insurance companies to evaluate the adequacy of statutory capital and urplus in relation to investment and insurance risks such as asset quality, mortality and morbidity, asset and liability matching and other business factors. The RBC formula will be used by state insurance regulators as an early warning tool to identify, for the purpose of initiating regulatory action, insurance companies that potentially are inadequately capitalized. In addition, the formula defines new minimum capital standards that will supplement the current system of low fixed minimum capital and surplus requirements on a state-by-state basis. Regulatory compliance is determined by a ratio of the insurance company's regulatory total adjusted capital, as defined by the NAIC, to its authorized control level RBC, as defined by the NAIC. Insurance companies below specific trigger points or ratios are classified within certain levels, each of which requires specific corrective action. The levels and ratios are as follows:
At December 31, 1996, each of the Company's insurance affiliates has a Ratio that is in excess of 300% of the authorized control level; accordingly the Company's affiliates meet the RBC requirements.
Independent Auditor's Report for the Years ended December 31, 1996, 1995, 1994 . . . . . . . . 23
Balance Sheets . . . . . . . . . . . . . . . . . . . . . . 24
Statements of Shareholders' Equity . . . . . . . . . . . . 26
Statements of Cash Flows . . . . . . . . . . . . . . . . . 27