Investment real estate ---------------------- Commercial $ 688,054 11% Residential development $ 3,045,303 51% ----------- --- $ 3,733,357 62% ----------- ---
Total investment real estate holdings represent approximately 1% of the total assets of the Company net of accumulated depreciation of $251,766 and $1,824,484 at year-end 2000 and 1999 respectively. The Company owns an office complex in Springfield, Illinois, which houses the primary insurance operations. The office buildings contain 57,000 square feet of office and warehouse space. The properties are carried at $2,108,105. In addition, an insurance subsidiary owns a home office building in Huntington, West Virginia. The building has 15,000 square feet and is carried at $134,017. The West Virginia property is currently listed for sale. The facilities occupied by the Company are adequate relative to the Company’s present operations.
CAUTIONARY STATEMENT REGARDING-FORWARD-LOOKING STATEMENTS Any forward-looking statement contained herein or in any other oral or written statement by the company or any of its officers, directors or employees is qualified by the fact that actual results of the company may differ materially from any such statement due to the following important factors, among other risks and uncertainties inherent in the company’s business:
3. Changes in the regulation of financial services, including bank sales and underwriting of insurance products, which may affect the competitive environment for the company's products.
4. Other factors affecting the performance of the company, including, but not limited to, market conduct claims, insurance industry insolvencies, stock market performance, and investment performance.
RESULTS OF OPERATIONS (a) Revenues Premiums and policy fee revenues, net of reinsurance premiums and policy fees, decreased 10% when comparing 2000 to 1999 and 18% from 1999 to 1998. 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 Generally Accepted Accounting Principles (“GAAP”) requires that premiums collected on these types of products be treated as deposit liabilities rather than revenue. Unless the Company acquires a block of in-force business or marketing significantly increases on traditional business, premium revenue will continue to decline at a rate consistent with prior experience. The Companies’ average persistency rate for all policies in force for 2000 and 1999 has been approximately 89.8% and 89.4%, respectively. Persistency is a measure of insurance in force retained in relation to the previous year.
During 1998, the Boards of UG and USA approved a permanent premium reduction on certain of its participating products in force commonly referred to as the initial contract and the presidents plan. The premium reduction was generally 20% with 35% used on initial contract plans of UG with original issue ages less than 56 years old. The dividends were also reduced, and the net effect to the policyholder was a slightly lower net premium. This change became effective with the 1999 policy anniversary. This action was taken by the Boards to ensure these policyholders will be protected in future periods from potential dividend reductions at least to the extent of the permanent premium reduction amount. By reducing the required premium payment, it makes replacement activity by other insurance companies more difficult as ongoing premium payments are compared from the current policy to a potential replacement policy. This premium reduction accounted for approximately 8% of the total premium revenue decline in 1999. A corresponding decline is reflected in the policy benefits line item dividends to policyholders.
New business production decreased significantly over the last several years. New business production decreased 33% or approximately $1,079,000 when comparing 1999 to 1998 and decreased 39% the previous year. In recent years, the insurance industry as a whole has experienced a decline in the total number of agents who sell insurance products, therefore competition has intensified for top producing sales agents. The relatively small size of the companies, and the resulting limitations, have made it challenging to compete in this area. With a continued decline in 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 of 1999, seven employees of the Company (approximately 8% of the total staff) were terminated due to lack of business activity. Existing agents were allowed to continue marketing Company products, but home office support was significantly reduced and leads to agents using existing inforce policies were eliminated.
At December 31, 2000, approximately 56% of the Company’s total reserve liability relates to products with adjustable crediting interest rates. Of this total, 32% of these reserves are currently crediting the guaranteed minimum rates as established in the policies, 61% are crediting .50% above the guaranteed minimum rates and 7% are crediting more than .50% above the guaranteed minimum rates. The guaranteed minimum crediting rates on these products range from 4% to 5.5%.
Realized investment losses, net of realized gains, were $260,078, $530,894 and $851,822 in 2000, 1999 and 1998, respectively. 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.
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 loss increasing the allowance to $240,000 maintained for potential mortgage loan losses. The current allowance represents approximately 50% of the total outstanding loan balances on certain loans identified by management. Although most of these loans are currently in good standing, due to economic depression in the region these loans are located, a significant potential for future losses exists. The allowance established represents the difference in the current loan balance and management’s estimate of realizable value in today’s circumstances should foreclosure occur.
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. Approximately $440,000 of realized losses in 1998 is due to the sale of real estate. The Company reduced its non-income producing investments approximately $1,610,000 during 1998, as a result of these actions. The Company incurred losses of approximately $339,000 on the foreclosure of three mortgage loans during the second quarter of 1998. The foreclosed properties were sold before the end of 1998. As a result of these foreclosures, management reassessed its remaining mortgage loan portfolio and determined an allowance of $70,000 was appropriate to cover potential future losses in the portfolio. The Company realized a loss of approximately $88,000 on the investment in John Alden Financial Corporation common stock. Under the terms of an acquisition agreement between Fortis, Inc. and John Alden, all outstanding common shares of John Alden were acquired. The Company had other gains and losses during the periods that comprised the remaining amounts reported but were immaterial on an individual basis.
(b) Expenses Benefits, claims and settlement expenses net of reinsurance benefits and claims, increased 2% in 2000 as compared to 1999 and decreased 16% in 1999 as compared to 1998. The decrease in premium revenues from normal policy terminations resulted in lower benefit reserve increases in each of the periods presented compared to the previous period. Fluctuations in death claim experience from year to year typically has a significant impact on variances in this line item. Death claims were $2,574,000 greater in 2000 than in 1999 and $202,000 greater in 1999 than 1998. There is no single event that caused the mortality variances. Policy claims vary from year to year and therefore, fluctuations in mortality are to be expected and are not considered unusual by management. Two events occurred in 1999, which differ from 1998 experience. Approximately 8% of the decrease from 1999 to 1998 is from the premium reduction on certain participating policies resulting in a lower dividend to policyholders expense than in the previous year. See discussion above in premiums and policy fee revenues for a more detailed explanation of this event. At the September 1998 Board of Directors meeting, the Boards of the insurance subsidiaries lowered crediting rates one half percent on all products crediting 5.5% or more. The change affected approximately $60,000,000 of policy reserves and will result in interest crediting reductions of $300,000 per year. At the March 1999 Board of Directors meeting, the Boards of the insurance subsidiaries again lowered crediting rates one half percent on all products that could be lowered. The change will result in interest crediting reductions of approximately $600,000 per year. These adjustments were in response to continued declines in interest rates in the marketplace. Policy interest crediting rate changes become effective on an individual policy basis on the next policy anniversary. Therefore, it will take a full year from the time the change is determined for the full impact of such change to be realized.
The following table summarizes the Company's fixed maturities distribution at December 31, 2000 and 1999 by ratings category as issued by Standard and Poor's, a leading ratings analyst.
Fixed Maturities ---------------- Rating % of Portfolio --------------- ------------------ 2000 1999 -------- -------- Investment Grade AAA 48% 38% AA 16% 19% A 27% 35% BBB 9% 7% Below investment grade 0% 1% -------- -------- 100% 100% ======== ========
Deferred policy acquisition costs decreased 20% in 2000 compared to 1999. Deferred policy acquisition costs, which vary with, and are primarily related to producing new business, are referred to as (“DAC”). DAC consists primarily of commissions and certain costs of policy issuance and underwriting, net of fees charged to the policy in excess of ultimate fees charged. To the extent these costs are recoverable from future profits, the Company defers these costs and amortizes them with interest in relation to the present value of expected gross profits from the contracts, discounted using the interest rate credited by the policy. The Company had $273,000 in policy acquisition costs deferred, $328,000 in interest accretion and $2,525,040 in amortization in 2000.
(c) Shareholders’ Equity Total shareholders’ equity decreased only slightly in 2000 compared to 1999. This decline was mainly attributable to the Company’s net loss of $1,846,840. In addition, the Company’s accumulated other comprehensive deficit, which includes unrealized holding losses on securities carried at market value, decreased by $1,827,297 in 2000. As a result, shareholder’s equity decreased $34,043 in 2000 compared to 1999.
Future policy benefits are primarily long-term in nature and therefore, the Company’s investments are predominantly in long-term fixed maturity investments such as bonds and mortgage loans which provide sufficient return to cover these obligations. The Company has the ability and intent to hold these investments to maturity; consequently, a significant portion of the Company’s investment in long-term fixed maturities is reported in the financial statements at their amortized cost.
Cash provided by (used in) investing activities was $(3,814,275), $(4,974,503) and $5,556,955, for 2000, 1999 and 1998, respectively. The most significant aspect of cash provided by (used in) investing activities are the fixed maturity transactions. Fixed maturities account for 43%, 68% and 84% of the total cost of investments acquired in 2000, 1999 and 1998, 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 $(347,279), $370,651 and $2,625,897 for 2000, 1999 and 1998, respectively. The Company continues to pay down on its outstanding debt. Such payments are included within this category.
At December 31, 2000, FCC had $12,839,193 in notes payable. During 2000, the Company repaid $2,025,000 of its debt. Included in this amount were principal payments of $ 2,000,000 on affiliated notes with UTG and a payment of $25,000 to retire the remaining principal on its nonaffiliated senior debt.
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, 2000, UG had a statutory gain from operations of $75,150. At December 31, 2000, UG’s statutory capital and surplus amounted to $14,288,015. Extraordinary dividends (amounts in excess of ordinary dividend limitations) require prior approval of the insurance commissioner and are not restricted to a specific calculation. UG paid ordinary dividends of $2,000,000 to FCC during 2000.
At December 31, 2000, each of the insurance subsidiaries has a Ratio that is in excess of 4, which is 400% of the authorized control level; accordingly, the insurance subsidiaries meet the RBC requirements.
The insurance regulatory framework continues to be scrutinized by various states, the federal government and the National Association of Insurance Commissioners (“NAIC”). The NAIC is an association whose membership consists of the insurance commissioners or their designees of the various states. The NAIC has no direct regulatory authority over insurance companies, however its primary purpose is to provide a more consistent method of regulation and reporting from state to state. This is accomplished through the issuance of model regulations, which can be adopted by individual states unmodified, modified to meet the state’s own needs or requirements, or dismissed entirely.
Congress recently passed legislation reducing or eliminating certain barriers, which existed between insurance companies, banks and brokerages. This new legislation opens markets for financial institutions to compete against one another and to acquire one another across previously established barriers. This creates a whole new arena in which the Company must compete. Exactly what this change will mean to the financial industries is yet to be seen, but the Company will continue to watch these changes and look for new opportunities within them.
A task force of the NAIC undertook a project to codify a comprehensive set of statutory insurance accounting rules and regulations. Project results were recently approved by the NAIC with an implementation date of January 1, 2001. Individual states in which the Company does business must implement these new rules for them to become effective. Specific recommendations have been set forth in papers issued by the NAIC. The NAIC continues to modify and amend these papers. The Company has monitored the process and has determined codification would not have a material financial impact on the Company’s financial position or results of operations. The Company will continue to monitor this issue as changes and new proposals are made.
Independent Auditors' Report for the Years ended December 31, 2000, 1999, 1998....................................36
We have audited the accompanying consolidated balance sheets of First Commonwealth Corporation (a Virginia corporation) and subsidiaries as of December 31, 2000 and 1999, and the related consolidated statements of operations, shareholders' equity, and cash flows for each of the three years in the period ended December 31, 2000. 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.
LIABILITIES AND SHAREHOLDERS' EQUITY Policy liabilities and accruals: Future policy benefits $ 248,089,964 $ 252,490,695 Policy claims and benefits payable 2,639,248 2,773,309 Other policyholder funds 1,445,857 1,627,341 Dividend and endowment accumulations 13,416,427 14,269,574 Notes payable 12,839,193 14,864,193 Other liabilities 5,357,543 4,204,410 ----------- ------------ Total liabilities 283,788,232 290,229,522 ----------- ------------ Minority interests in consolidated subsidiaries 1,326,992 1,485,165 ----------- ------------
Premiums and policy fees $ 23,045,858 $ 25,559,708 $ 30,938,609 Reinsurance premiums and policy fees (3,556,172) (3,978,565) (4,542,532) Net investment income 15,869,597 14,498,500 15,069,404 Realized investment losses, net (260,078) (530,894) (851,822) Other income 132,843 210,422 17,937 ----------- ------------ ------------ 35,232,048 35,759,171 40,631,596
Benefits, claims and settlement expenses: Life 23,798,002 23,301,541 23,947,110 Reinsurance benefits and claims (3,376,091) (3,610,459) (2,498,945) Annuity 1,210,783 1,390,592 1,463,002 Dividends to policyholders 1,003,954 1,170,710 3,431,238 Commissions and amortization of deferred policy acquisition costs 2,834,313 3,759,898 7,079,529 Amortization of cost of insurance acquired 1,185,307 1,072,773 1,026,137 Operating expenses 9,304,655 7,499,188 10,898,004 Interest expense 1,243,819 1,344,888 1,618,498 ----------- ------------ ------------ 37,204,742 35,929,131 46,964,573 ----------- ------------ ------------
Loss before income taxes and minority interest (1,972,694) (169,960) (6,332,977) Income tax credit (expense) 90,811 (170,957) 4,466,691 Minority interest in (income) loss of consolidated subsidiaries 35,043 (37,040) (83,539) ----------- ------------ ------------ Net loss $ (1,846,840) $ (377,957)$ (1,949,825) =========== ============ ============
Accumulated other comprehensive deficit Balance, beginning of year $ (1,915,335) $ (631,344) $ (198,630) Other comprehensive income (deficit) Unrealized holding gain (loss) on securities 1,874,584 1,874,584 (1,317,553) (1,317,553) (440,592) (440,592) Minority interest in unrealized holding (gain) loss on securities (47,287) (47,287) 33,562 33,562 7,878 7,878 ------------ ----------- ------------ ----------- ------------ ----------- Comprehensive deficit $ (19,543) $ (1,661,948) $ (2,382,539) =========== =========== =========== Balance, end of year $ (88,038) $ (1,915,335) $ (631,344) ============ ============ ============
Total shareholders' equity, end of year $ 29,126,293 $ 29,160,336 $ 30,822,384 ============ ============ ============
Cash flows from financing activities: Policyholder contract deposits 12,724,345 14,176,188 15,480,745 Policyholder contract withdrawals (10,962,425) (11,222,814) (12,402,530) Net cash transferred from coinsurance assumed 0 0 420,790 Proceeds from notes payable 0 0 9,408,099 Payments of principal on notes payable (2,025,000) (2,505,800) (10,279,707) Purchase of stock of affiliates (69,699) (76,823) 0 Purchase of treasury shares (14,500) (100) (1,500) ---------- ---------- ---------- Net cash provided by (used in) financing activities (347,279) 370,651 2,625,897 ---------- ---------- ----------
FIRST COMMONWEALTH CORPORATION>BR> NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES A. ORGANIZATION - At December 31, 2000, the parent, significant majority-owned subsidiaries and affiliates of First Commonwealth Corporation were as depicted on the following organizational chart.
The Company’s significant accounting policies, consistently applied in the preparation of the accompanying consolidated financial statements, are summarized as follows:
D. BASIS OF PRESENTATION - The financial statements of First Commonwealth Corporation’s life insurance subsidiaries have been prepared in accordance with generally accepted accounting principles which differ from statutory accounting practices permitted by insurance regulatory authorities.
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 $251,766 and $1,824,484 as of December 31, 2000 and 1999, respectively.
I. FUTURE POLICY BENEFITS AND EXPENSES - The liabilities for traditional life insurance and accident and health insurance policy benefits are computed using a net level method. These liabilities include assumptions as to investment yields, mortality, withdrawals, and other assumptions based on the life insurance subsidiaries’ experience adjusted to reflect anticipated trends and to include provisions for possible unfavorable deviations. The Company makes these assumptions at the time the contract is issued or, in the case of contracts acquired by purchase, at the purchase date. Future policy benefits for individual life insurance and annuity policies are computed using interest rates ranging from 2% to 6% for life insurance and 2.5% to 9.25% for annuities. Benefit reserves for traditional life insurance policies include certain deferred profits on limited-payment policies that are being recognized in income over the policy term. Policy benefit claims are charged to expense in the period that the claims are incurred. Current mortality rate assumptions are based on 1975-80 select and ultimate tables. Withdrawal rate assumptions are based upon Linton B or Linton C, which are industry standard actuarial tables for forecasting assumed policy lapse rates.
Benefit reserves for universal life insurance and interest sensitive life insurance products are computed under a retrospective deposit method and represent policy account balances before applicable surrender charges. Policy benefits and claims that are charged to expense include benefit claims in excess of related policy account balances. Interest crediting rates for universal life and interest sensitive products range from 4.5% to 5.5% for the years ended December 31, 2000, 1999 and 1998, respectively.
For universal life insurance and interest sensitive life insurance products, acquisition costs are being amortized generally in proportion to the present value of expected gross profits from surrender charges and investment, mortality, and expense margins. Under SFAS No. 97, “Accounting and Reporting by Insurance Enterprises for Certain Long-Duration Contracts and for Realized Gains and Losses from the Sale of Investments,” the Company makes certain assumptions regarding the mortality, persistency, expenses, and interest rates it expects to experience in future periods. These assumptions are to be best estimates and are to be periodically updated whenever actual experience and/or expectations for the future change from initial assumptions. The amortization is adjusted retrospectively when estimates of current or future gross profits to be realized from a group of products are revised.
2000 1999 1998 -------------- --------------- -------------- Deferred, beginning of year $ 9,777,536 $ 11,840,548 $ 16,745,720
2001 $ 277,000 $ 1,875,000 $ 1,598,000 2002 247,000 1,659,000 1,412,000 2003 220,000 1,466,000 1,246,000 2004 196,000 1,294,000 1,098,000 2005 175,000 1,140,000 965,000
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 $7,251,856 and $6,848,192 as of December 31, 2000 and 1999, respectively.
Q. TREASURY SHARES - The Company holds 1,092 and 947 shares of common stock as treasury shares with a cost basis of $3,478,600 and $3,464,100 at December 31, 2000 and 1999, respectively.
R. PARTICIPATING INSURANCE - Participating business represents 23% and 31% of the ordinary life insurance in force at December 31, 2000 and 1999, respectively. Premium income from participating business represents 27%, 29%, and 39% of total premiums for the years ended December 31, 2000, 1999 and 1998, respectively. The amount of dividends to be paid is determined annually by the respective insurance subsidiary’s Board of Directors. Earnings allocable to participating policyholders are based on legal requirements that vary by state.
U. USE OF ESTIMATES - In preparing financial statements in conformity with generally accepted accounting principles, 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.
Deferred tax expense (credit) (118,559) 170,016 (4,565,694) ------------- ------------- ------------- $ (90,811) $ 170,957 $ (4,466,691) ============= ============= =============
The Company has established a deferred tax asset of $1,071,156 for its operating loss carryforwards and has established an allowance of $354,981. UG must average approximately $110,000 of taxable income per year to fully realize the net operating loss carryforward for which no allowance is established. Management believes future earnings of UG will be sufficient to fully utilize this net operating loss carryforward.
The following table summarizes the major components, which comprise the deferred tax liability as reflected in the balance sheets:
2000 1999 ------------ ------------- Investments $ (403,535) $ (269,500) Deferred policy acquisition 2,748,724 3,422,138 costs Cost of insurance acquired 5,379,601 5,794,459 Agent balances (6,239) (20,381) Property and equipment (68,250) (75,250) Due premiums (864,195) (982,451) Future policy benefits (4,369,310) (4,840,859) Net operating loss carryforward (716,175) (1,354,382) Other liabilities (1,185,691) (839,045) Federal tax DAC (1,663,475) (1,864,715) ------------ ------------- Deferred tax liability (asset) $ (1,148,545) $ (1,029,986) ============ =============
December 31, ------------------------------------------------ 2000 1999 1998 ------------- ------------- ------------- Fixed maturities held to maturity and fixed Maturities held for sale $ 11,775,706 $ 11,886,968 $ 12,035,619 Equity securities 116,327 91,429 92,196 Mortgage loans 1,777,374 1,078,028 859,543 Real estate 311,027 389,181 842,724 Policy loans 997,381 991,812 984,761 Other long-term investments 655,418 63,528 62,477 Short-term investments 156,815 147,726 29,907 Cash 847,400 811,103 1,209,046 ------------- ------------- ------------- Total consolidated investment income 16,637,448 15,459,775 16,116,273 Investment expenses (767,851) (961,275) (1,046,869) ------------- ------------- ------------- Consolidated net investment income $ 15,869,597 $ 14,498,500 $ 15,069,404 ============= ============= =============
At December 31, 2000, the Company had a total of $1,278,000 of investments, comprised of $1,078,000 in equity securities and $200,000 in other long-term investments, which did not produce income during 2000.
Cost or Gross Gross Estimated Amortized Unrealized Unrealized Market 1999 Cost Gains Losses Value ------------------------------- ------------ ---------- ------------ ------------ Investments held for sale: U.S. Government and govt. Agencies and authorities $ 23,791,634 $ 0 $ (863,456) $ 22,928,178 States, municipalities and Political subdivisions 189,212 4,954 0 194,166 Collateralized mortgage Obligations 5,910,505 0 (331,652) 5,578,853 Public utilities 0 0 0 0 All other corporate bonds 1,523,675 0 (33,515) 1,490,160 ------------ ---------- ------------ ------------ 31,415,026 4,954 (1,228,623) 30,191,357 Equity securities 2,886,315 16,412 (737,171) 2,165,556 ------------ ---------- ------------ ------------ Total $ 34,301,341 $ 21,366 $ (1,965,794) $ 32,356,913 ============ ========== ============ ============
Fixed Maturities Held for Sale Estimated Amortized Market December 31, 2000 Cost Value ------------------------------------- ------------ ------------ Due in one year or less $ 6,710,854 $ 6,729,550 Due after one year through five years 27,159,052 27,344,469 Due after five years through ten years 2,969,134 2,924,188 Due after ten years 155,593 167,479 Collateralized mortgage obligations 5,919,553 5,962,594 ------------ ------------ Total $ 42,914,186 $ 43,128,280 ============ ============
An analysis of sales, maturities portfolio for the years ended December 31, 2000, 1999 and 1998, is as follows:
Cost or Gross Gross Proceeds Amortized Realized Realized From Year ended December 31, 2000 Cost Gains Losses Sale ------------------------------- ------------ ---------- ------------ ------------ Scheduled principal repayments, calls and tenders: Held for sale $ 5,611,476 $ 71 $ (3,847) $ 5,607,700 Held to maturity 27,047,819 59,463 (4,133) 27,103,149 Sales: Held for sale 0 0 0 0 Held to maturity 0 0 0 0 ------------ ---------- ------------ ------------ Total $ 32,659,295 $ 59,534 $ (7,980) $ 32,710,849 ============ ========== ============ ============
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 ============ ========== ============ ============
Cost or Gross Gross Proceeds Amortized Realized Realized From Year ended December 31, 1998 Cost Gains Losses Sale ------------------------------- ------------ ---------- ------------ ------------ Scheduled principal repayments, calls and tenders: Held for sale $ 164,161 $ 359 $ 0 $ 164,520 Held to maturity 54,556,915 315,965 (230,657) 54,642,223 Sales: Held for sale 0 0 0 0 Held to maturity 0 0 0 0 ------------ ---------- ------------ ------------ Total $ 54,721,076 $ 316,324 $ (230,657) $ 54,806,743 ============ ========== ============ ============
C. INVESTMENTS ON DEPOSIT - At December 31, 2000, investments carried at approximately $13,041,000 were on deposit with various state insurance departments.
The Company has invested $200,000 in a joint real estate venture.
6. STATUTORY EQUITY AND INCOME FROM OPERATIONS 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 generally accepted accounting principles. “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 $14,288,015 and $15,022,234 at December 31, 2000 and 1999, respectively. The Company’s life insurance subsidiaries reported combined statutory operating income before taxes (exclusive of intercompany dividends) of $2,901,000, $3,843,000 and $5,485,000 for 2000, 1999 and 1998, respectively.
The Company assumes risks from, and reinsures certain parts of its risks with other insurers under yearly renewable term and coinsurance agreements that are accounted for by passing a portion of the risk to the reinsurer. Generally, the reinsurer receives a proportionate part of the premiums less commissions and is liable for a corresponding part of all benefit payments. While the amount retained on an individual life will vary based upon age and mortality prospects of the risk, the Company will not carry more than $125,000 individual life insurance on a single risk.
The Company has reinsured approximately $735 million, $831 million and $924 million in face amount of life insurance risks with other insurers for 2000, 1999 and 1998, respectively. Reinsurance receivables for future policy benefits were $35,083,244 and $36,117,010 at December 31, 2000 and 1999, respectively, for estimated recoveries under reinsurance treaties. Should any reinsurer be unable to meet its obligation at the time of a claim, obligation to pay such claim would remain with the Company.
Currently, the Company is utilizing reinsurance agreements with Business Mens’ Assurance Company, (“BMA”) and Life Reassurance Corporation, (“LIFE RE”) for new business. BMA and LIFE RE currently 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 Company does not have any short-duration reinsurance contracts. The effect of the Company's long-duration reinsurance contracts on premiums earned in 2000, 1999 and 1998 was as follows:
Since the certification of the class action, Louis Black dropped out as a class representative. Due to David Morlan having filed bankruptcy prior to instituting the action, the Court has opined that he may not maintain the action. As a result, three new class representatives have been proposed. Discovery was recently begun to determine the adequacy of the three newly proposed class representatives. Although the proposed trial month is May 2001, it would appear same is premature since questions regarding the three newly proposed class representatives have not been resolved and notification to the class has not yet occurred. As a result, a request is pending to reestablish a trial date.
9. RELATED PARTY TRANSACTIONS Under the current structure, FCC pays a majority of the general operating expenses of the affiliated group. FCC then receives management, service fees and reimbursements from the various affiliates.
United Income, Inc. (“UII”) had a service agreement with United Security Assurance Company (“USA”). The agreement was originally established upon the formation of USA which was a 100% owned subsidiary of UII. Changes in the affiliate structure have resulted in USA no longer being a direct subsidiary of UII, though still a member of the same affiliated group. The original service agreement remained in place without modification. USA paid UII monthly fees equal to 22% of the amount of collected first year premiums, 20% in second year and 6% of the renewal premiums in years three and after. UII had a subcontract agreement with UTG to perform services and provide personnel and facilities. The services included in the agreement were claim processing, underwriting, processing and servicing of policies, accounting services, agency services, data processing and all other expenses necessary to carry on the business of a life insurance company. UII’s subcontract agreement with UTG states that UII pay UTG monthly fees equal to 60% of collected service fees from USA as stated above. The service fees received from UII were recorded in UTG’s financial statements as other income. With the merger of UII into UTG in July 1999, the sub-contract agreement ended and UTG assumed the direct contract with USA. This agreement was terminated upon the merger of USA into UG in December 1999.
Since the Company’s affiliation with FSF, UG has acquired mortgage loans through participation agreements with FSNB. FSNB services the loans covered by these participation agreements. UG pays a .25% servicing fee on these loans and a one-time fee at loan origination of .50% of the original loan amount to cover costs incurred by FSNB relating to the processing and establishment of the loan. UG paid $34,721, $11,578 and $0 in servicing fees and $91,392, $0 and $0 in origination fees to FSNB during 2000, 1999 and 1998, respectively.
On December 31, 1999, UTG and Jesse T. Correll entered a transaction whereby Mr. Correll, in combination with other individuals, made an equity investment in UTG. Under the terms of the Stock Acquisition Agreement, the Correll group contributed their 100% ownership of North Plaza of Somerset, Inc. to UTG in exchange for 681,818 authorized but unissued shares of UTG common stock. The Board of Directors of UTG approved the transaction at their regular quarterly board meeting held on December 7, 1999. North Plaza of Somerset, Inc. owns for investment purposes, a shopping center in Somerset, Kentucky, approximately 12,000 acres of timberland in Kentucky, and a 50% partnership interest in an additional 11,000 acres of Kentucky timberland. North Plaza has no debt. The net assets have been valued at $7,500,000, which equates to $11.00 per share for the new shares issued.
On 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 thus 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 its authorized but unissued common stock to former UII shareholders, net of any dissenter shareholders in the merger. Immediately following the merger, UTGL99, which was then 100% owned by UTG, was liquidated and UTG changed its name to United Trust Group, Inc. (“UTG”).
10. NOTES PAYABLE At December 31, 2000 and 1999, the Company has $12,839,193 and $14,864,193 in long term debt outstanding, respectively. The debt is comprised of the following components:
2000 1999 ----------- ----------- Nonaffiliated senior debt $ 0 $ 25,000 Affiliated subordinated 20 yr. Notes 3,431,094 3,431,094 Other affiliated notes payable 9,408,099 11,408,099 ----------- ----------- $ 12,839,193 $ 14,864,193 =========== ===========
The senior debt was through National City Bank (formerly First of America Bank - Illinois NA) and was subject to a credit agreement. The debt was bearing interest at a rate equal to the “base rate” plus nine-sixteenths of one percent. The Base rate was defined as the floating daily, variable rate of interest determined and announced by National City Bank from time to time as its “base lending rate.” The base rate at the beginning of fiscal year 2000 was 8.50% with interest to be paid quarterly. During second quarter of 2000, the remaining principal balance of $25,000 was retired.
The original 20-year note bears interest at the rate of 8 1/2% per annum on $3,431,094. During fiscal year 2000, no payments were made on this note.
At the beginning of fiscal year 2000, FCC had borrowings of $700,000 and $300,000. These notes were bearing interest at the rate of 1% above the variable per annum rate of interest most recently published by the Wall Street Journal as the prime rate and interest was payable quarterly. In the second quarter of 2000, the remaining principal balances of $700,000 and $300,000 were retired.
In December 1998, FCC borrowed $500,000 to facilitate an additional prepayment of principal on its subordinated 10-year debt. At the beginning of fiscal year 2000, the note was bearing interest at the rate of 7.50%, with interest payments due quarterly. During the second quarter of 2000, the Company retired the remaining principal balance of $500,000.
Year Amount -------------------- ----------------- 2001 $ 0 2002 0 2003 0 2004 0 2005 2,608,099
12. OTHER CASH FLOW DISCLOSURE On a cash basis, the Company paid $1,264,784, $1,353,653 and $1,655,297 in interest expense for the years 2000, 1999 and 1998, respectively. The Company paid $(200,000), $516,200 and $10,630 in federal income tax for the years 2000, 1999 and 1998, respectively.
13. CONCENTRATION OF CREDIT RISK 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 First Southern Funding, LLC, the largest shareholder of UTG. In aggregate at December 31, 2000, these accounts hold approximately $3,295,000 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.
16. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED) ----------------- ------------------ ------------------ ----------------- 1st 2nd 3rd 4th ------------- ------------- -------------- ------------- Premium and policy fees, net $ 5,337,148 5,201,585 4,470,307 4,480,646 Net investment income 4,224,386 3,939,681 3,867,571 3,837,959 Total revenues 9,818,600 9,186,532 8,349,765 7,877,151 Policy benefits including dividends 6,201,943 5,580,580 5,206,574 5,647,551 Commissions and amortization of DAC and COI 1,239,870 876,936 649,180 1,253,634 Operating expenses 2,685,721 1,614,768 2,026,587 2,977,579 Operating income (loss) (638,936) 797,831 167,537 (2,299,126) Net income (loss) (371,009) 561,121 (16,814) (2,020,138) Basic earnings (loss) per share (6.80) 10.29 (0.31) (37.08)
----------------- ------------------ ------------------ ----------------- 1st 2nd 3rd 4th ------------- ------------- -------------- ------------- Premium and policy fees, net $ 6,007,511 5,705,270 5,337,120 4,531,242 Net investment income 3,633,479 3,592,440 3,615,934 3,656,647 Total revenues 9,686,009 9,029,285 8,936,918 8,106,959 Policy benefits including dividends 6,193,473 5,970,833 5,107,765 4,980,313 Commissions and amortization of DAC and COI 1,376,551 1,064,328 1,063,435 1,328,357 Operating expenses 2,039,613 1,837,828 1,784,267 1,837,480 Operating income (loss) (280,350) (168,450) 652,209 (373,369) Net income (loss) (148,594) (355,116) 670,460 (544,707) Basic earnings (loss) per share (2.72) (6.51) 12.29 (9.99)