Real estate holdings, net of accumulated depreciation of $3,254,000 and $3,007,000 at December 31, 1995 and 1994, respectively, represent approximately 5% of the total assets. 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. During 1991, the Company completed construction on a new 20,000 square foot office building adjacent to its existing buildings to house part of the Company's operations.
16, 1994. All of the suits allege that the plaintiff was libeled by statements made in a letter sent by UG. The letter was sent to persons who had been issued life insurance policies by UG as the result of policy applications submitted by the five agents. Mr. Melville is a defendant in some of the suits because he signed the letter as president of UG.
Jeffrey Ploskonka, Keith Bohn and Paul Phinney v. Universal Guaranty Life Insurance Company (Circuit Court of the Seventh Judicial Circuit Sangamon County, Illinois Case No.: 95-L-0213)
Premium income net of reinsurance $ 29,998 $ 32,284 $ 30,727 $ 21,614 $ 18,628
The Company holds approximately $425,000 in short term investments with other investments maturing at varying times including bonds and mortgage loans of $10,753,000 and $523,000, respectively, maturing in one year and $89,405,000 and $2,420,000, respectively, maturing in two to five years, which in the opinion of management is sufficient to meet the Company's cash requirements.
Consolidated operating activities of the Company produced negative cash flows of ($5,957,000), ($4,593,000) and ($6,517,000) in 1995, 1994 and 1993, respectively. The net cash provided by operating activities plus interest credited to account balances and net policyholder contract deposits after the payment of policyholder withdrawals, equalled $9,701,000 in 1995, $9,555,000 in 1994, and $10,810,000 in 1993. Management believes this measurement of cash flows more accurately indicates the performance of the Company's insurance operations, since reporting regulations require cash inflows and outflows from universal life insurance products to be shown as financing activities.
Net cash provided by financing activities was $14,752,000, $12,142,000 and $14,621,000 for 1995, 1994 and 1993, respectively. Policyholder contract deposits increased 8% in 1995 compared to 1994, and decreased 4% in 1994 when compared to 1993. The increase between 1995 and 1994 is due to the change in marketing focus of the Company. All of the Company's agency forces is marketing universal life insurance products. The change between 1994 and 1993 is a normal fluctuation in marketing of the Company's universal life products. Policyholder contract withdrawals has increased 7% in 1995 compared to 1994, and increased 10% in 1994 compared to 1993. The increase in 1995 and 1994 is not attributable to any one significant event. Factors that may be causing the increase are the fluctuation of interest rates, competition and other economic factors. The Company's current marketing strategy and portfolio is directly structured to conserve the existing customer base and at the same time increase the customer base through new policy production.
The payment of cash dividends to shareholders is not legally restricted. At December 31, 1995, substantially all of the consolidated shareholders equity represents net assets of its subsidiaries. FCC'S primary needs for cash are for payments related to its servicing of its long-term debt. FCC is able to meet these cash needs through monies received from its life insurance subsidiaries from management and cost sharing arrangements and through dividends. Insurance company dividend payments are regulated by the state insurance department where the company is domiciled. UG's dividend limitations are described below.
The Company's investments are generally managed to match related insurance and policy holder liabilities. The Company in conjunction with the decrease in average yield of the Company's fixed maturity portfolio has decreased the average crediting rate for the Company's insurance and investment products. The comparison of investment return with insurance or investment product crediting rates establishes an interest spread. The minimum interest spread between earned and credited rates is 1% on the "Century 2000" universal life insurance product, the Company's primary product. The Company monitors investment yields, and when necessary takes action to adjust credited interest rates on its insurance products to preserve targeted spreads. Over 60% of the insurance and investment product reserves are crediting 5% or less in interest and 39% of the insurance and investment product reserves are crediting 5.25% to 6% in interest. It is expected that the monitoring of the interest spreads by management will provide the necessary margin to adequately provide for associated costs on insurance policies that the Company has in force and will write in the future.
Realized investment losses were $349,000 and $146,000 in 1995 and 1994, respectively. Fixed maturities and equity securities realized net investment losses of $169,000 and real estate realized net investment losses 180,000 in 1995. The net realized investment losses for fixed maturities in 1995 is not attributable to any one specific transaction. The Company experienced moderate turnover in its fixed maturities portfolio during 1995. This was the result of many companies taking advantage of lower interest rates and refinancing higher coupon rate bonds with new securities at current lower rates. This was accomplished through early calls and accelerated pay downs that generated the net investment losses of fixed maturities. The realized investment losses for real estate is primarily attributable to one property. The property was re-evaluated during the year in relation to property values in the surrounding area of the property owned by the Company. In 1994, the Company realized net investment losses from equity securities and real estate of $119,000 and $513,000, respectively and realized an investment gain of $467,000 due to the sale of an insignificant subsidiary. The realized investment losses from real estate in 1994, was due to permanent impairment of the value of property located in Louisiana. The permanent impairment was due
to recent appraisals and marketing analysis. The Company had other gains and losses during the period that compromised the remaining amount reported but were routine or immaterial in nature to disclose on an individual basis.
Commissions and amortization of deferred policy acquisition costs increased 10% in 1995 compared to 1994. The increase is directly attributed to the amortization of a larger asset. The increase is also caused by the reduction in first year premium production. To a lesser extent the increase in amortization of deferred policy acquisition costs is directly related to the change in products that is currently marketed. The Company revised its portfolio of products as previously discussed in premium income. These new products pay lower first year commissions than the products sold in prior periods. The asset increased due to first year premium production by the agency force. The Company did benefit from improved persistency.
The Company had a net loss of $1,452,000 in 1995 compared to a net loss of $1,775,000 in 1994. The moderate improvement in 1995 is primarily attributable to the increase in net investment income and the decrease in life benefits.
Net investment income increased slightly when comparing 1994 to 1993. The Company's average yield on its investments declined slightly in 1994 compared to 1993. The Company has been able to increase its investment portfolio through financing cash flows and reducing its cash and short term positions. Although the Company sold no fixed maturities during 1994 or 1993, it did experience a significant turnover in the portfolio. Many companies with bond issues outstanding took advantage of the lower interest rates in the market during 1993 and early 1994 and retired older debt which carried higher rates. This was accomplished through early calls and accelerated pay-downs of fixed maturity investments. In late 1994 and early 1995, there has been a slight upward movement in general interest rates.
The Company's investments are generally managed to match related insurance and policyholder liabilities. The overall investment yields for 1994, 1993 and 1992, are 7.19%, 7.40% and 7.69%, respectively. The Company in conjunction with the decrease in average yield of the Company's fixed maturity portfolio has decreased the average crediting rate for the Company's insurance and investment products. The comparison of investment return with insurance or investment product crediting rates establishes an interest spread. Minimum interest spreads between earned and credited rates are 1% to 1.5%. The Company continually assesses investment yields, and when necessary takes action to reduce credited interest rates on its insurance products to preserve targeted spreads. Credited rates are established by the Board of Directors. Over 60% of the insurance and investment product reserves are crediting 5% or less in interest and 39% of the insurance and investment product reserves are crediting 5.25% to 6% in interest. It is expected that the monitoring of the interest spreads by management will provide the necessary margin to adequately provide for associated costs on insurance policies that the Company has in force and will write in the future.
Life benefits and reinsurance benefits and claims increased 17% compared to 1993. Reinsurance benefits and claims changed significantly due to the termination of the coinsurance treaty with Republic Vanguard. Coinsurance agreements provide a sharing or 50/50 relationship between the direct company and the reinsurer of the premiums, benefits and the profitability of the underlying product. Management believes that terminating the agreement was the best alternative for the long term benefit of the Company.
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 less than 1/2 of 1% of the insurance in force of the Company. Management's analysis of the business in force 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 attempt to acquire as many of the policies as possible.
Commissions and amortization of deferred policy acquisition costs and amortization of agency force decreased 22% in 1994 compared to 1993. Two factors contributed to the decrease. The Company's persistency improved and commissions paid to agents was reduced. Persistency is the measurement of policies that the Company was able to retain in a given period of time. The Company's average persistency rate for all policies in force for 1994 and 1993 has been approximately 86% and 85%, respectively. The overall improvement appears small but has a significant impact on the amortization of deferred policy acquisition costs. There was significant improvement in persistency on certain blocks of insurance that are sensitive to fluctuations in persistency and directly affect the amortization of deferred policy acquisition costs. The Company revised its portfolio of products as previously discussed in premium income. These new products pay lower commissions than the previous products sold in prior periods.
Operating expenses decreased 15% in 1994 compared to 1993. The decrease is not attributable to one particular event but to the overall savings produced from the recent streamlining efforts. A reduction of operating expenses is being realized from operating fewer insurance subsidiaries. In 1992, the Company was operating eleven insurance companies, but through mergers and the sale of one insignificant subsidiary, the Company is now operating four insurance companies. The Company also completed conversion of an insurance subsidiary's computer system to its Life 70 system. The Company had a 11% reduction in staff in 1994 compared to 1993. This was achieved mostly by attrition. The Company feels that this reduction was necessary and could be achieved through continued improvement in efficiency and automation. The Company expects that further savings will be realized in the future.
Interest expense increased 3% in 1994 compared to 1993. The increase was due to an increase in the interest rate on the Company's senior debt, which is tied to the prime rate of the lead bank. The Company was able to minimize the effect of the increase in interest rate by early payments of principal. The Company paid $2,000,000 in principal payments in 1994. The Company believes that interest rates will not change dramatically in 1995, and therefore will not significantly impact interest expense.
Policy loans increased 4% in 1995 compared to 1994. There is no single event that caused policy loans to increase. Industry experience for policy loans indicates that very few policy loans are repaid by the policy holder other than through termination of the policy. Policy loans are systematically reviewed to verify that no individual policy loan exceeds the underlying cash value of the policy. Policy loans will generally increase due to new loans and interest compounding on existing policy loans.
Deferred policy acquisition costs increased 8% in 1995 compared to 1994. The Company had $2,370,000 in policy acquisition costs deferred, $338,000 in interest accretion and $1,905,000 in amortization. The Company anticipates similar activity in the future due to continued marketing efforts by the Company's agency force. The Company did not recognize any impairments during the period.
Dividend and endowment accumulations increased 15% in 1995 compared to 1994. The increase is attributed to the significant amount of participating business the Company has in force. There are generally four options a policyholder can select to pay policy dividends. Over 47% of all dividends paid were put on deposit to accumulate with interest. Accordingly, management expects this liability to increase in the future.
Notes payable decreased $906,000 in 1995 compared to 1994. On January 31, 1996, the Company, prepaid $1,500,000 of the $3,900,000 principal payment due on June 1, 1996. The Company's long term debt is discussed in more detail in Note 9 of the Notes to the Financial Statements.
Total shareholders' equity decreased 11% in 1995 compared to 1994. The decrease in shareholders' equity is primarily due to the net loss of $1,452,000 in 1995. The Company experienced $293,000 in unrealized appreciation of equity securities and investments held for sale in 1995.
The Company is highly regulated by state insurance authorities in the states its affiliates are domiciled. Such regulations, among other things, limit the amount of dividends, tax sharing payments, other payments that can be made by affiliates without prior regulatory approval and impose restrictions on the amount and type of investments the Company may own. The Company also is regulated in various states as an insurance holding company system. Because the Company is an insurance holding company, an investment in the Company which could result in a change in control must be passed on by certain state departments of insurance.
There is currently increased scrutiny placed upon the insurance regulatory framework. As a result, certain state legislatures have considered or enacted laws that alter, and in many cases increase, state authority to regulate insurance companies and insurance holding company systems. In light of recent legislative developments, the National Association of Insurance Commissioners ("NAIC") and state insurance regulators have begun examining existing laws and regulations, specifically focusing on insurance company investments, solvency issues, risk-adjusted capital guidelines, interpretations of existing laws, the development of new laws, the implementation of nonstatutory guidelines, and the circumstances under which dividends may be paid. The Company cannot predict with certainty the effect that any NAIC recommendations, proposed or future legislation, may have on the financial condition or operations.
The Financial Accounting Standards Board (FASB) has issued Statement of Financial Accounting Standards No. 114 entitled "Accounting by Creditors for Impairment of a Loan" and Statement of Financial Accounting Standards No. 118, an amendment of Statement No. 114. The Statement amends FASB Statement No. 5 "Accounting for Contingencies" and FASB Statement No. 15 "Accounting by Debtors and Creditors for Troubled Debt Restructuring". This Statement, which became effective for financial statements for fiscal years beginning after December 15, 1994, applies to all troubled debt restructuring involving a modification of terms.
A loan is impaired when, based on current information and events, it is probable that a creditor will be unable to collect all amounts due according to the contractual terms of the loan agreement. As used in this Statement and in Statement 5, as amended, all amounts due according to the contractual terms means that both the contractual interest payments and the contractual principal payments of a loan will be collected as scheduled in the loan agreement. This Statement does not specify how a creditor should determine that it is probable that it will be unable to collect all amounts due according to the contractual terms
This statement was adopted for the 1995 Financial Statements. The adoption did not have any impact on the Company's financial statement.
An entity shall review long-lived assets and certain identifiable intangibles for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. If certain events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable, the entity shall estimate the future cash flows expected to result from the use of the asset and its eventual disposition. Future cash flows are the future cash inflows expected to be generated by an asset less the future cash outflows expected to be necessary to obtain those inflows. If the sum of the expected future cash flows (undiscounted and without interest charges) is less than the carrying amount of the asset, the entity shall recognize an impairment loss in accordance with this Statement. Otherwise, an impairment loss shall not be recognized; however, a review of depreciation policies may be appropriate.
This statement was adopted for the 1995 financial statements. The adoption did not have any impact on the Company's financial statements.
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