Property owned Amount % of Total -------------- ---------- ------------ Home Office $ 2,242,122 38%
In the third quarter of 2000, the Company sold remaining real estate properties identified for disposal in prior years at a net realized gain of $728,000. In the 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.
FINANCIAL HIGHLIGHTS (000's omitted, except per share data) 2000 1999 1998 1997 1996 ------------ ------------ ------------- ------------- ------------ Premium income net of reinsurance $ 19,490 $ 21,581 $ 26,396 $ 28,639 $ 30,944 Total revenues $ 35,232 $ 35,759 $ 40,632 $ 43,354 $ 46,538 Net loss $ (1,847) $ (378) $ (1,950) $ (1,845) $ (3,032) Net loss per share $ (33.90) $ (6.93) $ (35.74) $ (32.65) $ (50.60) Total assets $ 314,242 $ 320,875 $ 328,737 $ 332,572 $ 336,639 Total long term debt $ 12,839 $ 14,864 $ 17,370 $ 18,242 $ 19,000 Dividends paid per NONE NONE NONE NONE NONE share
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 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, 2000.
Net investment income increased 9% when comparing 2000 to 1999 and decreased 4% when comparing 1999 to 1998. During 2000, the Company received $632,000 in investment earnings from a joint venture real estate development project that is in its latter stages. The Company expects to receive a small amount of income from this property’s final disposition. The earnings from this activity represent approximately 4% of the increase in investment income from the previous period.
The overall investment yields for 2000, 1999 and 1998, are 7.03%, 6.46% and 6.72%, respectively.
Commissions and amortization of deferred policy acquisition costs decreased 25% in 2000 compared to 1999 and decreased 47% in 1999 compared to 1998. At year-end 1998, the Company recorded an impairment write off of deferred policy acquisition costs of $2,983,000. 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. The impairment in 1998 was the result of declines in interest rates in the marketplace combined with lower than expected new policy writings which left the Company with greater per policy costs as a result of fixed costs being spread over fewer policies. No impairments were recorded in 2000 or 1999.
Amortization of cost of insurance acquired increased 10% in 2000 compared to 1999 and increased 5% in 1999 compared to 1998. 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 2000, 1999 and 1998 has been approximately 89.8%, 89.4% and 89.9%, respectively.
Operating expenses increased 24% in 2000 compared to 1999 and decreased 31% in 1999 compared to 1998. During the fourth quarter of 2000, Mr. Jesse T. Correll as Board Chairman requested the resignation of James E. Melville as President of UTG and its subsidiaries. A special joint meeting of the Boards of Directors of United Trust Group, Inc. and its subsidiaries was held January 8, 2001, at which the termination of the employment agreement between First Commonwealth Corporation and James E. Melville, and the termination of James E. Melville as an officer or agent of United Trust Group, Inc. and all of its subsidiaries were approved by the Boards of Directors of each of the companies. An accrual of $562,000 was established through a charge to general expenses at year end 2000 for the remaining payments required pursuant to the terms of Mr. Melville’s employment contract and other settlement costs. A $500,000 accrual was also established at year-end 2000 for estimated legal costs associated with the defense of a legal matter. See Item 3 legal proceedings for a more complete analysis of this matter. During the third quarter 2000, the Company settled a legal matter for $550,000 and incurred an additional $150,000 in legal fees. At the March 27, 2000 Board of Directors meeting, United Trust Group, Inc. and each of its affiliates accepted the resignation of Larry E. Ryherd as Chairman of the Board of Directors and Chief Executive Officer. Mr. Ryherd had 28 months remaining on an employment contract with the Company at the end of March 2000. As such, a charge of $933,000 was incurred in first quarter 2000 for the remainder of this contract. Exclusive of the above accruals, operating expenses declined 12% from the prior year, primarily as the result of lower salary and related employee costs.
Included in operating expenses in 1998 is $2,367,474 from the release of discounts associated with the Company’s notes payable. The Company’s subordinated debt was issued at rates considered favorable to the Company at time of issue, therefore the notes were discounted to reflect an effective interest rate of 15%. With the payment of part of this debt in November 1998, the unamortized discount was written off. Management’s plan to repay the remaining debt in a much shorter period of time from required repayment resulted in the determination to write off the entire remaining note discount. The decrease in operating expenses in 1999 is due in part, to a decrease in salaries from staff reduction. In most instances, the workload was absorbed into the remaining workforce. First year sales production has shown a declining trend in the last several years. The Company had tried a variety of solutions to bolster new sales production including additional training, home office assistance in providing leads on prospective clients and a review of current product offerings. First year production in the first quarter of 1999 resulted in cash received from new sales of only 54% of that received in first quarter 1998, or $560,000 less. With continued declining new business, costs associated with supporting new business, primarily salary costs, as a percentage of new business received continued to grow. In March of 1999, the Company determined it could no longer continue to support these fixed costs in light of the new business trend and no indication it would reverse any time soon. As such, in March 1999 seven employees of the Company (approximately 8% of the total staff) were terminated due to lack of business activity. This action resulted in expense savings of approximately $275,000 per year. Existing agents were allowed to continue marketing Company products, but home office support was significantly reduced and existing policy leads to agents were eliminated.
Interest expense declined 8% comparing 2000 to 1999 and declined 17% comparing 1999 to 1998. In November 1998, the Company’s ultimate parent, UTG, received approximately $11,000,000 from the issuance of common stock to First Southern Funding and its affiliates. These funds were used to retire outside debt. On November 23, 1998, the Company paid a $6,300,000 principal payment on its senior debt, and paid a $2,608,099 principal payment on its 10 year subordinated debt through intercompany borrowings from UTG. On December 16, 1998 the Company paid an additional $500,000 principal payment on its 10 year subordinated debt through an intercompany borrowing from UII. In total these transactions retired $9,408,099 of outside debt and replaced it with intercompany debt, which provides the Company with increased flexibility when it comes to repayment options. At December 31, 2000, FCC had $12,839,193 in notes payable, and no debt is owed to outside parties. During 2000 FCC repaid $2,025,000 of its debt through dividends received from its insurance subsidiary, UG.
Deferred taxes are established to recognize future tax effects attributable to temporary differences between the financial statements and the tax return. As these differences are realized in the financial statement or tax return, the deferred income tax established on the difference is recognized in the financial statements as an income tax expense or credit. In 1998, the insurance company subsidiaries incurred taxable income for federal income tax purposes, which was offset through utilization of federal tax loss carryforwards. Since these carryforwards had an allowance established against them for deferred tax purposes, no corresponding expense was incurred in the financial statements. Additionally, the Company incurred deferred tax credits of $1,872,666 in 1998 from the deferred policy acquisition costs impairment and the notes payable discounts write-offs.
(c) Net income (loss) The Company had a net loss of $1,846,840, $377,957 and $1,949,825 in 2000, 1999 and 1998 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 2000 to 1999 results. The 1998 results included one time charges for a deferred policy acquisition costs impairment write down and the write off of the remaining discounts associated with notes payable. The Company continues to monitor and adjust those items within its control.
FINANCIAL CONDITION (a) Assets Investments are the largest asset group of the Company. The Company’s insurance subsidiaries are regulated by insurance statutes and regulations as to the type of investments that they are permitted to make and the amount of funds that may be used for any one type of investment. In light of these statutes and regulations, and the Company’s business and investment strategy, the Company generally seeks to invest in United States government and government agency securities and other high quality low risk investments.
Investment real estate and real estate acquired in satisfaction of debt decreased 52% in 2000 compared to 1999. During late 1998 and 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 to. By third quarter of 2000, the Company had sold the remaining real estate properties identified for disposal in prior years. 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. Investment real estate holdings represent approximately 1% of the total assets of the Company. Total investment real estate is separated into two categories: Commercial 18% and Residential Development 82%. In early 2000, the Company sold the parcel of real estate representing foreclosed properties realizing a small gain.
Cost of insurance acquired decreased 7% in 2000 compared to 1999. At December 31, 2000, cost of insurance acquired was $15,370,289 and net amortization totaled $1,185,307 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.
(b) Liabilities Total liabilities decreased 2% in 2000 compared to 1999. Policy liabilities and accruals, which represents approximately 94% of total liabilities decreased slightly from the prior year. The total decline is attributable to a shrinking policy base and declining new business production.
LIQUIDITY AND CAPITAL RESOURCES The Company has three principal needs for cash - the insurance companies’ contractual obligations to policyholders, the payment of operating expenses and the servicing of its long-term debt. Cash and cash equivalents as a percentage of total assets were 4% and 6% as of December 31, 2000 and 1999, respectively. Fixed maturities as a percentage of total invested assets were 74% and 80% as of December 31, 2000 and 1999, respectively.
Cash provided by (used in) operating activities was $(2,645,902), $(1,381,527) and $1,865,417 in 2000, 1999 and 1998, 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 $(883,982) in 2000, $1,571,847 in 1999 and $4,943,632 in 1998. Management utilizes this measurement of cash flows as an indicator of the performance of the Company’s insurance operations.
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, 2000, 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.
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.
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 subsidiaries are subject to such legislation and 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 subsidiaries 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 (see Note 9 in the Notes to the Consolidated Financial Statements), and payment of dividends (see Note 2 in the Notes to the Consolidated Financial Statements) in excess of specified amounts by the insurance subsidiary, within the holding company system, are required.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of First Commonwealth Corporation and subsidiaries as of December 31, 2000 and 1999, and the consolidated results of their operations and their consolidated cash flows for each of the three years in the period ended December 31, 2000, in conformity with generally accepted accounting principles.
We have also audited Schedule I as of December 31, 2000, and Schedules II, IV and V as of December 31, 2000 and 1999, of First Commonwealth Corporation 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.
ASSETS 2000 1999 ----------- ------------ Investments: Fixed maturities held to maturity, at amortized cost (market $122,623,563 and $142,675,019) $ 121,922,963 $ 144,751,111 Investments held for sale: Fixed maturities, at market (cost $42,914,186 and $31,415,026) 43,128,280 30,191,357 Equity securities, at market (cost $5,410,207 and $2,886,315) 5,126,271 2,165,556 Mortgage loans on real estate at amortized cost 32,896,671 15,483,772 Investment real estate, at cost, net of accumulated depreciation 3,733,357 6,255,569 Real estate acquired in satisfaction of debt 0 1,550,000 Policy loans 14,090,900 14,151,113 Other long-term investments 200,000 906,278 Short-term investments 1,654,567 2,200,000 ----------- ------------ 222,753,009 217,654,756
Cash and cash equivalents 12,960,007 19,767,463 Investment in parent 350,000 350,000 Receivable from affiliate 291,934 154,618 Accrued investment income 3,461,199 3,418,299 Reinsurance receivables: Future policy benefits 35,083,244 36,117,010 Policy claims and other benefits 3,911,258 3,806,382 Cost of insurance acquired 15,370,289 16,555,596 Deferred policy acquisition costs 7,853,496 9,777,536 Cost in excess of net assets purchased, net of accumulated amortization 7,647,847 8,152,229 Income taxes receivable: Current 195,068 422,816 Deferred 1,148,545 1,029,986 Property and equipment, net of accumulated depreciation 2,567,619 2,814,601 Other assets 648,002 853,731 ----------- ------------ Total assets $ 314,241,517 $ 320,875,023 =========== ============
Shareholders' equity: Common stock - $1 par value per share. Authorized 62,500 shares - 54,393 and 54,538 shares issued and outstanding after deducting treasury shares of 1,092 and 947 54,393 54,538 Additional paid-in capital 51,861,366 51,875,721 Accumulated deficit (22,701,428) (20,854,588) Accumulated other comprehensive deficit (88,038) (1,915,335) ----------- ------------ Total shareholders' equity 29,126,293 29,160,336 ----------- ------------ Total liabilities and shareholders' equity $ 314,241,517 $ 320,875,023 =========== ============
Basic loss per share from continuing operations and net loss $ (33.90) $ (6.93)$ (35.74) =========== ============ ============
Basic weighted average shares outstanding 54,485 54,539 54,550 =========== ============ ============
Common stock Balance, beginning of year $ 54,538 $ 54,539 $ 54,616 Issued during year 0 0 (61) Treasury shares acquired (145) (1) (16) ------------ ------------ ------------ Balance, end of year $ 54,393 $ 54,538 $ 54,539 ============ ============ ============
Additional paid-in capital Balance, beginning of year $ 51,875,721 $ 51,875,820 $ 51,877,243 Issued during year 0 0 61 Treasury shares acquired (14,355) (99) (1,484) ------------ ------------ ------------ Balance, end of year $ 51,861,366 $ 51,875,721 $ 51,875,820 ============ ============ ============
Accumulated deficit Balance, beginning of year $ (20,854,588) $ (20,476,631) $ (18,526,806) Net loss (1,846,840)$ (1,846,840) (377,957)$ (377,957) (1,949,825)$ (1,949,825) ------------ ------------ ------------ Balance, end of year $ (22,701,428) $ (20,854,588) $ (20,476,631) ============ ============ ============
2000 1999 1998 ---------- ---------- ---------- Increase (decrease) in cash and cash equivalents Cash flows from operating activities: Net loss $ (1,846,840) $ (377,957) $(1,949,825) 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 152,917 489,491 603,904 Realized investment (gains) losses, net 260,078 530,894 851,822 Policy acquisition costs deferred (273,000) (720,000) (892,000) Amortization of deferred policy acquisition costs 2,197,040 2,783,012 5,797,172 Amortization of cost of insurance acquired 1,185,307 1,072,773 1,026,137 Amortization of costs in excess of net assets purchased 403,664 432,550 443,664 Depreciation 424,591 480,505 480,532 Minority interest (35,043) 37,040 83,539 Charges for mortality and administration of universal life and annuity products (10,151,024) (10,696,014) (10,771,795) Interest credited to account balances 6,109,491 6,300,667 7,014,683 Change in accrued investment income (42,900) 102,782 109,692 Change in reinsurance receivables 928,890 606,509 813,283 Change in policy liabilities and accruals (3,289,810) (1,255,020) 945,118 Change in income taxes 109,189 (351,803) (4,477,246) Change in indebtedness (to) from affiliates, net (137,316) (198,112) 16,344 Change in other assets and liabilities, net 1,358,864 (618,844) 1,770,393 ---------- ---------- ---------- Net cash provided by (used in) operating activities (2,645,902) (1,381,527) 1,865,417 ---------- ---------- ----------
Cash flows from investing activities: Proceeds from investments sold and matured: Fixed maturities held for sale matured 5,607,700 1,430,000 164,520 Fixed maturities sold 0 0 0 Fixed maturities matured 27,103,149 31,032,290 54,642,223 Equity securities 189,270 0 450,000 Mortgage loans 4,279,622 4,715,678 1,785,859 Real estate 4,470,385 2,705,093 1,716,124 Policy loans 2,918,627 3,169,753 3,661,834 Other long-term investments 906,278 0 0 Short-term 1,042,826 1,336,251 1,593,749 ---------- ---------- ---------- Total proceeds from investments sold and matured 46,517,857 44,389,065 64,014,309 Cost of investments acquired: Fixed maturities held for sale (19,996,972) (31,366,755) 0 Fixed maturities (1,486,255) (2,020,803) (48,745,594) Equity securities (2,669,899) (161,255) (79,053) Mortgage loans (21,862,521) (9,257,836) (3,667,061) Real estate (652,331) (635,303) (1,346,299) Policy loans (2,858,415) (3,186,825) (3,588,686) Other long-term investments (200,000) 0 (66,212) Short-term (497,393) (2,500,000) (850,000) ---------- ---------- ---------- Total cost of investments acquired (50,223,786) (49,128,777) (58,342,905) Purchase of property and equipment (108,346) (234,791) (114,449) ---------- ---------- ---------- Net cash provided by (used in) investing activities (3,814,275) (4,974,503) 5,556,955 ---------- ---------- ----------
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.
Policy loans -- at unpaid balances including accumulated interest but not in excess of the cash surrender value.
Realized gains and losses on sales of investments are recognized in net income on the specific identification basis.
G. CASH EQUIVALENTS - The Company considers certificates of deposit and other short-term instruments with an original purchased maturity of three months or less cash equivalents.
H. REINSURANCE - In the normal course of business, the Company seeks to limit its exposure to loss on any single insured and to recover a portion of benefits paid by ceding reinsurance to other insurance enterprises or reinsurers under excess coverage and coinsurance contracts. The Company retains a maximum of $125,000 of coverage per individual life. Amounts paid or deemed to have been paid for reinsurance contracts are recorded as reinsurance receivables. Reinsurance 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.
2000 1999 1998 ------------- ------------- ------------- Cost of insurance acquired, Beginning of year $ 16,555,596 $ 17,628,369 $ 18,654,506 Interest accretion 1,423,266 1,495,074 1,555,706 Amortization (2,608,573) (2,567,847) (2,581,843) ------------- ------------- ------------- Net amortization (1,185,307) (1,072,773) (1,026,137) ------------- ------------- ------------- Cost of insurance acquired, end of year $ 15,370,289 $ 16,555,596 $ 17,628,369 ============= ============= =============
2001 $ 1,334,000 $ 2,450,000 $ 1,116,000 1,116,000 2002 1,243,000 2,202,000 959,000 2003 1,162,000 1,976,000 814,000 2004 1,092,000 1,774,000 682,000 2005 1,033,000 1,622,000 589,000
Acquisition costs deferred: Commissions 184,000 566,000 690,000 Other expenses 89,000 154,000 202,000 -------------- --------------- -------------- Total 273,000 720,000 892,000
Interest accretion 328,000 436,000 758,000 Amortization charged to income (2,525,040) (3,219,012) (3,572,172) -------------- --------------- -------------- Net amortization (2,197,040) (2,783,012) (2,814,172) Amortization due to impairment 0 0 (2,983,000)
-------------- --------------- -------------- Change for the year (1,924,040) (2,063,012) (4,905,172) -------------- --------------- --------------
Deferred, end of year $ 7,853,496 $ 9,777,536 $ 11,840,548 ============== =============== ==============
Net amortization of deferred policy acquisition costs $ 2,197,040 $ 2,783,012 $ 5,797,172 Commissions 637,273 976,886 1,282,357 ----------- -------- ---------- Total $ 2,834,313 $ 3,759,898 $ 7,079,529 ========== ========== ==========
N. PROPERTY AND EQUIPMENT - Company- occupied property, data processing equipment and furniture and office equipment are stated at cost less accumulated depreciation of $5,044,143 and $4,688,815 at December 31, 2000 and 1999, 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 $355,328, $352,449 and $334,372 for the years ended December 31, 2000, 1999 and 1998 respectively.
P. EARNINGS PER SHARE - Earnings per share are based on the weighted average number of common shares outstanding during each year, retroactively adjusted to give effect to all stock splits, in accordance with Statement of Financial Accounting Standards No. 128. The computation of diluted earnings per share is the same as basic earnings per share since the Company has no dilutive instruments outstanding.
S. RECOGNITION OF REVENUES AND RELATED EXPENSES - Premiums for traditional life insurance products, which include those products with fixed and guaranteed premiums and benefits, consist principally of whole life insurance policies, and certain annuities with life contingencies are recognized as revenues when due. Limited payment life insurance policies defer gross premiums received in excess of net premiums, which is then recognized in income in a constant relationship with insurance in force. Accident and health insurance premiums are recognized as revenue pro rata over the terms of the policies. Benefits and related expenses associated with the premiums earned are charged to expense proportionately over the lives of the policies through a provision for future policy benefit liabilities and through deferral and amortization of deferred policy acquisition costs. For universal life and investment products, generally there is no requirement for payment of premium other than to maintain account values at a level sufficient to pay mortality and expense charges. Consequently, premiums for universal life policies and investment products are not reported as revenue, but as deposits. Policy fee revenue for universal life policies and investment products consists of charges for the cost of insurance and policy administration fees assessed during the period. Expenses include interest credited to policy account balances and benefit claims incurred in excess of policy account balances.
T. RECLASSIFICATIONS - Certain prior year amounts have been reclassified to conform to the 2000 presentation. Such reclassifications had no effect on previously reported net loss, total assets, or shareholders’ equity.
2. SHAREHOLDER DIVIDEND RESTRICTION At December 31, 2000, 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.
2000 1999 1998 ------------- ------------- ------------- Current tax expense $ 27,748 $ 941 $ 99,003
UG FCC ----------- ------------ 2007 $ 0 $ 190,401 2008 0 4,595 2009 0 168,800 2010 0 19,112 2019 2,046,214 0 2020 0 631,324 ----------- ------------ TOTAL $ 2,046,214 $ 1,014,232 =========== ============
The Company has established a deferred tax asset of $24,445 for its total unrealized losses on investments of $69,842, and has established an allowance of $24,445. The total allowances established on deferred tax assets decreased $561,899 in 2000.
2000 1999 1998 -------------- ------------- ------------- Tax computed at statutory rate $ (690,443) $ (59,486) $ (2,216,542) Changes in taxes due to: Cost in excess of net assets purchased 141,282 151,393 155,282 Current year loss for which no benefit realized 546,231 0 0 Benefit of prior losses (139,061) (6,309) (2,587,353) Other 51,180 85,359 181,922 -------------- ------------- ------------- Income tax expense (credit) $ (90,811) $ 170,957 $ (4,466,691) ============== ============= =============
4. ANALYSIS OF INVESTMENTS, INVESTMENT INCOME AND INVESTMENT GAIN A. NET INVESTMENT INCOME - The following table reflects net investment income by type of investment:
Equity securities Banks, trust and insurance companies $ 3,139,020 $ 1,308,453 Industrial and miscellaneous 1,987,251 857,103 ------------- ------------ $ 5,126,271 $ 2,165,556 ============= ============
Below Investment Grade Investments 2000 1999 1998 ------------------------- ----------- ---------- ---------- Public Utilities $ 0 $ 251,878 $ 970,311 CMO 239,165 0 0 Corporate 23,000 276,649 47,281 ----------- ---------- ---------- Total $ 262,165 $ 528,527 $ 1,017,592 =========== ========== ==========
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 to maturity: U.S. Government and govt. Agencies and authorities $ 30,556,303 $ 105,814 $ (1,490,965) $ 29,171,152 States, municipalities and Political subdivisions 17,440,381 85,098 (442,417) 17,083,062 Collateralized mortgage Obligations 4,892,693 78,972 (47,329) 4,924,336 Public utilities 35,812,281 268,532 (251,317) 35,829,496 All other corporate bonds 56,049,453 228,223 (610,703) 55,666,973 ------------ ---------- ------------ ------------ Total $ 144,751,111 $ 766,639 $ (2,842,731) $ 142,675,019 ============ ========== ============ ============
Estimated Fixed Maturities Held to Maturity Amortized Market December 31, 2000 Cost Value ------------------------------------- ------------ ------------ Due in one year or less $ 11,991,559 $ 11,996,447 Due after one year through five years 76,936,086 77,594,176 Due after five years through ten years 25,499,449 25,469,233 Due after ten years 4,317,659 4,353,192 Collateralized mortgage obligations 3,178,210 3,210,515 ------------ ------------ Total $ 121,922,963 $ 122,623,563 ============ ============
The estimated fair values of the Company’s financial instruments required to be valued by SFAS 107 are as follows as of December 31:
2000 1999 --------------------------------------------------------- Estimated Estimated Carrying Fair Carrying Fair Assets Amount Value Amount Value ------ ------------ ------------ ------------ ------------ Fixed maturities $ 121,922,963 $ 122,623,563 $ 144,751,111 $ 142,675,019 Fixed maturities held for sale 43,128,280 43,128,280 30,191,357 30,191,357 Equity securities 5,126,271 5,126,271 2,165,556 2,165,556 Mortgage loans on real estate 32,896,671 32,841,254 15,483,772 14,633,879 Investment in real estate 3,733,357 3,733,357 6,255,569 6,255,569 Real estate acquired in Satisfaction of debt 0 0 1,550,000 1,550,000 Policy loans 14,090,900 14,090,900 14,151,113 14,151,113 Other long-term investments 200,000 200,000 906,278 873,089 Short-term investments 1,654,567 1,654,567 2,200,000 2,200,000
One of the Company’s insurance subsidiaries, UG, entered a coinsurance agreement with First International Life Insurance Company (“FILIC”) as of September 30, 1996. Under the terms of the agreement, UG ceded to FILIC substantially all of its paid-up life insurance policies. Paid-up life insurance generally refers to non-premium paying life insurance policies. During 1997, FILIC changed its name to Park Avenue Life Insurance Company (“PALIC”). 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 65% of the reinsurance receivables, as of December 31, 2000.
On June 1, 2000, UG assumed an already existing coinsurance agreement, dated January 1, 1992, between Lancaster Life Reinsurance Company, an Arizona corporation (“LLRC”) and Investors Heritage Life Insurance Company, a corporation organized under the laws of the Commonwealth of Kentucky (“IHL”). Under the terms of the agreement, LLRC agreed to assume from IHL a 90% quota share of new issues of credit life and accident and health policies that have been written on or after January 1, 1992 through various branches of the First Southern National Banks. The maximum amount of credit life insurance that can be assumed on any one individual’s life is $15,000. UG assumed all the rights and obligations formerly held by LLRC as the reinsurer in the agreement. LLRC liquidated its charter immediately following the transfer. At December 31, 2000, IHL has insurance inforce of approximately $4,107,000.
8. COMMITMENTS AND CONTINGENCIES The insurance industry has experienced a number of civil jury verdicts which have been returned against life and health insurers in the jurisdictions in which the Company does business involving the insurers’ sales practices, alleged agent misconduct, failure to properly supervise agents, and other matters. Some of the lawsuits have resulted in the award of substantial judgments against the insurer, including material amounts of punitive damages. In some states, juries have substantial discretion in awarding punitive damages in these circumstances.
David A. Morlan and Louis Black vs. Universal Guaranty Life Insurance Company and United Trust Insurance Company, (U.S. District Court, Southern District of Illinois, No. 99-274-PER)
USA paid $677,807 and $835,345 under their agreement with UII for 1999 and 1998, respectively. UII paid $223,753 and $501,207 under their agreement with UTG for 1999 and 1998, respectively. Additionally, UII paid FCC $30,000 and $0 in 1999 and 1998, respectively for reimbursement of costs attributed to UII. These reimbursements are reflected as a credit to general expenses.
APPL has a management fee agreement with FCC whereby FCC provides certain administrative duties, primarily data processing and investment advice. APPL paid fees of $444,000, $300,000 and $300,000 in 2000, 1999 and 1998, under this agreement.
Respective domiciliary insurance departments have approved the agreements of the insurance companies and it is Management’s opinion that where applicable, costs have been allocated fairly and such allocations are based upon generally accepted accounting principles.
In November 1997, FCC borrowed $1,000,000 to facilitate the prepayment of a May 1998 principal payment due on the senior debt. The note bears interest at the rate of 1% over the prime rate of interest as published in the Wall Street Journal, with interest payments due quarterly and principal due upon maturity of the note on November 8, 2006. During the fourth quarter of 2000, the Company retired $500,000 of principal on this note.
In November 1998, FCC borrowed $2,608,099 to facilitate the prepayment of principal on its subordinated 10-year debt. The note bears interest at the rate of 7.50%, with interest payments due quarterly and principal due upon maturity of the note on December 31, 2005. In addition, FCC borrowed $6,300,000 to facilitate the prepayment of principal on the senior debt. This note bears interest at the rate of 9/16% over the prime rate of interest as published in the Wall Street Journal, with interest payments due quarterly and principal due upon maturity of the note on December 31, 2006. During fiscal year 2000, no payments were made on these two notes.
Scheduled principal reductions on the Company’s debt for the next five years is as follows:
14. NEW ACCOUNTING STANDARDS The FASB has issued SFAS 138 entitled, Accounting for Derivative Instruments and Hedging Activities, as an amendment to SFAS 133 of the same title, SFAS 139 entitled, Rescission of FASB Statement No. 53 (Financial Reporting by Producers and Distributors of Motion Picture Films) and amendments to FASB Statements No. 63, 89, and 121, and SFAS 140 entitled, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities, which is a replacement of SFAS 125 of the same title. The adoption of Statements of Financial Accounting Standards No. 138, 139 and 140, did not affect the Company’s financial position or results of operations, since the Company has no derivative or hedging type investments, and has not had any transactions relating to the above mentioned pronouncements.
15. WRITE-DOWN OF INVESTMENT REAL ESTATE In the third quarter of 2000, the Company sold remaining real estate properties identified for disposal in prior years at a net realized gain of $728,000. In the 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.