Property owned Amount % of Total Home Office $ 2,167,317 10%
Total investment real estate holdings represent approximately 6% of the total assets of the Company net of accumulated depreciation of $169,281 and $307,294 at year-end 2001 and 2000 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 $2,167,317. Currently, the facilities occupied by the Company are adequate relative to the Company's present operations.
Commercial property mainly consists of North Plaza, which 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. The timberland is harvested and in various stages of maturity. The property is carried at $9,350,153.
During the fourth quarter of 2001, UG purchased real estate from an outside third party through the formation of an LLC in which UG is a two-thirds owner. The other one-third partner is Millard V. Oakley, who is a Director of both UTG and FCC. Hampshire Plaza, LLC consists of a twenty story, 254,000 square foot office tower, an attached 72,000 square foot retail plaza, and an attached parking garage with approximately 350 parking spaces located in Manchester, New Hampshire for $6,333,336. The Company plans to invest an additional $2,000,000 over the next few years in order to renovate and improve existing office space within the building. The intent of these improvements would be made in order to lease the office space in the near future. A significant portion of existing office leases expires in early to mid 2002. At December 31, 2001, the property was carried at $6,491,734.
FINANCIAL HIGHLIGHTS (000's omitted, except per share data) 2001 2000 1999 1998 1997 ---------- --------- --------- --------- ---------- Premium income net of reinsurance $ 17,272 $ 19,490 $ 21,581 $ 26,396 $ 28,639 Total revenues $ 33,365 $ 35,747 $ 36,057 $ 40,885 $ 43,992 Net income (loss)* $ 2,440 $ (696) $ 1,076 $ (679) $ (559) Basic income (loss) per share $ 0.65 $ (0.17) $ 0.38 $ (0.39) $ (0.32) Total assets $ 329,524 $ 333,620 $ 339,161 $ 343,196 $ 349,300 Total long-term debt $ 4,401 $ 1,817 $ 5,918 $ 9,529 $ 21,460 Dividends paid per share NONE NONE NONE NONE NONE
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, regulatory initiatives or changes, insurance industry insolvencies, stock market performance, and investment performance.
During 2001, the Company implemented a conservation effort in an attempt to improve the persistency rate of Company policies. Several of the customer service representatives of the Company have become licensed insurance agents, allowing them to offer other products within the Company's portfolio to existing customers. Additionally, stronger efforts have been made in policy retention through more personal contact with the customer including telephone calls to discuss alternatives and reasons for a customer's request to surrender their policy. Previously, the Company's agency force was primarily responsible for conservation efforts. With the decline in the number of agents, their ability to reach these customers diminished, making conservation efforts difficult. The conservation efforts described above are relatively new, but early results are generally positive. Management will continue to monitor these efforts and make adjustments as seen appropriate to enhance the future success of the program. The Company is currently exploring the introduction of a new product to be specifically used by the licensed customer service representatives as an alternative to the customer in the conservation efforts. The new product is in the very preliminary design stage. Introduction of the new product will depend on the product competitiveness and profitability.
The national prime rate has declined from 9.5% at December 31, 2000 to 4.75% at December 31, 2001. This has resulted in lower earnings on short-term funds as well as on longer-term investments acquired.
Realized investment gains, net of realized losses, were $436,840, $(260,078) and $(530,894) in 2001, 2000 and 1999, respectively.
During 2001, the Company sold the West Virginia properties including the former home office building of APPL, realizing a gain of $217,574. The Company also sold certain common stocks it had acquired in 2000 and 2001 realizing gains of $132,760.
Benefits, claims and settlement expenses net of reinsurance benefits and claims, decreased 12% in 2001 as compared to 2000 and increased 5% in 2000 as compared to 1999. 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 $1,636,000 less in 2001 than in 2000 and $2,574,000 greater in 2000 than in 1999. 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. At the March 1999 Board of Directors meeting, the Boards of the insurance subsidiaries lowered crediting rates one half percent on all products that could be lowered. The change resulted in interest crediting reductions of approximately $600,000 per year. In March 2001, the Boards of the insurance subsidiaries lowered crediting rates one-half percent on all rate-adjustable products that could be lowered. With this latest reduction the vast majority of the Company's rate-adjustable products have been lowered to their guaranteed minimum rates, and as such, cannot be lowered any further. The decrease is expected to result in approximately $500,000 in interest crediting savings annually, when fully implemented. 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.
Commissions and amortization of deferred policy acquisition costs decreased 40% in 2001 compared to 2000 and decreased 28% in 2000 compared to 1999. The Company performs actuarial analysis of the recoverability of the asset based on current trends and known events compared to assumptions used in the establishment of the original asset. No impairments were recorded in 2001 or 2000.
Operating expenses decreased 36% in 2001 compared to 2000 and increased 34% in 2000 compared to 1999. During the fourth quarter of 2000, Mr. Jess 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 13% in 2001 compared to 2000 and declined 2% in 2000 compared to 1999, primarily as the result of lower salary and related employee costs.
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.
Fixed Maturities Rating % of Portfolio ------------------ 2001 2000 -------- -------- Investment Grade AAA 61% 48% AA 6% 16% A 24% 27% BBB 8% 9% Below investment grade 1% 0% -------- -------- 100% 100% ======== ========
Investment real estate holdings represent approximately 5.5% of the total assets of the Company. Total investment real estate is separated into two categories: Commercial 87% and Residential Development 13%. During 2001, UG acquired a two-thirds interest in a parcel of commercial real estate located in New Hampshire. The property is a 20 story office building including a parking garage and a connected enclosed retail mall all totaling 326,610 square feet. The property was acquired for investment purposes and had a carrying value at December 31, 2001 of $6,491,734.
Deferred policy acquisition costs decreased 21% in 2001 compared to 2000. 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 $167,000 in policy acquisition costs deferred, $76,000 in interest accretion and $1,083,577 in amortization in 2000.
Total liabilities decreased 1% in 2001 compared to 2000. Policy liabilities and accruals, which represents approximately 92% of total liabilities, decreased slightly from the prior year. The decline is attributable to a shrinking policy base and declining new business production.
Net cash provided by (used in) financing activities was $(1,091,769), $133,721 and $205,505 for 2001, 2000 and 1999, respectively. The Company continues to pay down on its outstanding debt. Such payments are included within this category. In addition, during 2001 the board of directors of the Company authorized a repurchase program of UTG's common stock. Such transactions are included in this category as well.
Policyholder contract deposits decreased 11% in 2001 compared to 2000, and decreased 10% in 2000 when compared to 1999. The decrease in policyholder contract deposits relates to the decline in new business production experienced in the last few years by the Company. Policyholder contract withdrawals have decreased 15% in 2001 compared to 2000, and decreased 2% in 2000 compared to 1999. The change in policyholder contract withdrawals is not attributable to any one significant event. Factors that influence policyholder contract withdrawals are fluctuation of interest rates, competition and other economic factors.
At December 31, 2001, the Company had a total of $4,400,670 in long-term debt outstanding. In April 2001, the Company issued $3,885,996 in new debt in exchange for the acquisition of UTG and FCC common stock. This debt bears interest at a rate of 7% per annum with payments of principal to be made in five equal installments due until maturity in 2006. The remaining debt of $514,674 bears interest at a floating rate of 1% below prime with no principal payments due until its maturity in 2012. Management believes overall sources available are more than adequate to service this debt. These sources include current cash balances of UTG, expected future operating cashflows and repayment of affiliate receivables held by UTG. The proposed merger of UTG and FCC will result in the addition of approximately $2.5 million in additional debt through draws on a line of credit. Interest on this debt will accrue at a floating rate equal to prime.
Contractual obligations on the Company's long-term debt require total payments of $2,331,598 due in 1-3 years, $1,554,399 due in 4-5 years and $514,674 due after 5 years. In November 2001, the Company established a one-year $3,300,000 line of credit with the First National Bank of the Cumberlands (see note 11c. to the financial statements). To date, the Company has no borrowings or obligations attributable to this line of credit. Should the Company draw on this line-of-credit, interest would accrue at a floating rate equal to prime and any principal balance owed would be payable on November 15, 2002.
UTG is a holding company that has no day to day operations of its own. Funds required to meet its expenses, generally costs associated with maintaining the company in good standing with states in which it does business, are primarily provided by its subsidiaries. On a parent only basis, UTG's cash flow is dependent on its earnings received on invested assets (primarily notes receivable from FCC) and cash balances. At December 31, 2001, substantially all of the consolidated shareholders equity represents net assets of its subsidiaries and receivables from its subsidiaries. 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, the state insurance department regulates insurance company dividend payments where the company is domiciled. UTG is the ultimate parent of UG through ownership of FCC. UG can not pay a dividend directly to UTG due to the ownership structure. However, if UG paid a dividend to its direct parent, FCC, and FCC paid a dividend equal to the amount it received, UTG would receive 82% of the original dividend paid by UG. Please refer to Note 1 of the Notes to the Consolidated Financial Statements. UG's dividend limitations are described below without effect of the ownership structure.
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, 2001, UG had a statutory gain from operations of $2,212,215. At December 31, 2001, UG's statutory capital and surplus amounted to $16,105,265. 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 $1,400,000 to FCC during 2001.
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.
Independent Auditors' Report for the Years ended December 31, 2001, 2000, 1999.................................32
We have audited the accompanying consolidated balance sheets of UNITED TRUST GROUP, INC. (an Illinois corporation) and subsidiaries as of December 31, 2001 and 2000, and the related consolidated statements of operations, shareholders' equity, and cash flows for each of the three years in the period ended December 31, 2001. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of UNITED TRUST GROUP, INC. and subsidiaries as of December 31, 2001 and 2000, and the consolidated results of their operations and their consolidated cash flows for each of the three years in the period ended December 31, 2001, in conformity with accounting principles generally accepted in the United States of America.
Cash and cash equivalents 15,477,348 15,065,076 Accrued investment income 3,002,860 3,482,036 Reinsurance receivables: Future policy benefits 33,776,688 35,083,244 Policy claims and other benefits 4,042,779 3,911,258 Cost of insurance acquired 33,666,336 35,239,256 Deferred policy acquisition costs 3,107,919 3,948,496 Cost in excess of net assets purchased, net of accumulated amortization 345,779 1,118,525 Property and equipment, net of accumulated depreciation 2,459,117 2,762,619 Income taxes receivable, current 215,865 178,335 Other assets 139,245 680,239 ------------ ------------ Total assets $ 329,523,671 $ 333,620,111 ============ ============
Benefits, claims and settlement expenses: Life 19,614,470 23,440,711 22,338,042 Reinsurance benefits and claims (2,349,102) (3,376,091) (3,610,459) Annuity 1,244,663 1,210,783 1,390,592 Dividends to policyholders 1,015,055 1,003,954 1,170,710 Commissions and amortization of deferred policy acquisition costs 1,262,974 2,089,313 2,893,898 Amortization of cost of insurance acquired 1,572,920 1,592,812 1,847,754 Operating expenses 6,485,691 10,115,786 7,533,374 Interest expense 326,499 376,924 637,647 ------------- ------------- ------------- 29,173,170 36,454,192 34,201,558 ------------- ------------- -------------
Net income (loss) $ 2,439,573 $ (696,426)$ 1,075,909 ============= ============= =============
Basic income (loss) per share from continuing operations and net income (loss) $ 0.65 $ (0.17)$ 0.38 ============= ============= =============
Diluted weighted average shares outstanding 3,733,432 4,056,439 2,839,934 ============= ============= =============
UNITED TRUST GROUP, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS Three Years Ended December 31, 2001
2001 2000 1999 ------------ ------------ ----------- Increase (decrease) in cash and cash equivalents Cash flows from operating activities: Net income (loss) $ 2,439,573 $ (696,426) $ 1,075,909 Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities net of changes in assets and liabilities resulting from the sales and purchases of subsidiaries: Amortization/accretion of fixed maturities 150,579 152,917 489,491 Realized investment (gains) losses, net (436,840) 260,078 530,894 Amortization of deferred policy acquisition costs 1,007,577 1,452,040 1,917,012 Amortization of cost of insurance acquired 1,572,920 1,592,812 1,847,754 Amortization of costs in excess of net assets purchased 90,000 90,000 90,000 Depreciation 436,216 505,221 507,771 Minority interest 571,456 (239,426) 142,745 Charges for mortality and administration of universal life and annuity products (9,344,711) (10,151,024) (10,696,014) Interest credited to account balances 5,749,098 6,109,491 6,300,667 Equity in income of investees 0 0 (53,555) Policy acquisition costs deferred (141,000) (273,000) (720,000) Change in accrued investment income 479,176 (22,275) 123,747 Change in reinsurance receivables 1,175,305 928,890 606,509 Change in policy liabilities and accruals (2,721,245) (3,647,101) (2,218,519) Change in income taxes payable 1,090,064 399,435 127,588 Change in indebtedness to affiliates, net 0 0 (1,287) Change in other assets and liabilities, net (753,121) 1,382,877 (698,651) ------------ ------------ ----------- Net cash provided by (used in) operating activities 1,365,047 (2,155,491) (627,939) ------------ ------------ -----------
Cash flows from investing activities: Proceeds from investments sold and matured: Fixed maturities held for sale 27,205,225 5,607,700 1,430,000 Fixed maturities matured 50,952,814 27,103,149 31,032,290 Equity securities 6,312,727 189,270 0 Mortgage loans 14,738,313 4,279,622 4,765,678 Real estate 2,135,472 4,743,146 2,705,093 Policy loans 2,912,296 2,918,627 3,169,753 Other long-term investments 0 906,278 0 Short-term 2,229,528 1,042,826 1,336,251 ------------ ------------ ----------- Total proceeds from investments sold and matured 106,486,375 46,790,618 44,439,065 Cost of investments acquired: Fixed maturities held for sale (84,801,095) (19,996,972) (31,366,755) Fixed maturities (1,124,925) (1,486,255) (2,020,803) Equity securities (4,608,649) (2,673,199) (161,255) Mortgage loans (5,325,569) (21,862,521) (9,257,836) Real estate (6,995,455) (1,246,912) (635,303) Policy loans (2,429,852) (2,858,415) (3,186,825) Short-term (1,124,512) (498,956) (2,503,722) ------------ ------------ ----------- Total cost of investments acquired (106,410,057) (50,623,230) (49,132,499) Purchase of property and equipment (138,388) (108,346) (234,791) Sale of property and equipment 201,064 0 0 ------------ ------------ ----------- Net cash provided by (used in) investing activities 138,994 (3,940,958) (4,928,225) ------------ ------------ -----------
A. ORGANIZATION - At December 31, 2001, the significant majority-owned subsidiaries of UNITED TRUST GROUP, INC., were as depicted on the following organizational chart.
E. PRINCIPLES OF CONSOLIDATION - The consolidated financial statements include the accounts of the Registrant and its majority-owned subsidiaries. Investments in 20% to 50% owned affiliates in which management has the ability to exercise significant influence are included based on the equity method of accounting and the Company's share of such affiliates' operating results is reflected in Equity in loss of investees. Other investments in affiliates are carried at cost. All significant intercompany accounts and transactions have been eliminated.
J. POLICY AND CONTRACT CLAIMS - Policy and contract claims include provisions for reported claims in process of settlement, valued in accordance with the terms of the policies and contracts, as well as provisions for claims incurred and unreported based on prior experience of the Company. Incurred but not reported claims were $900,894 and $900,114 as of December 31, 2001 and 2000, respectively.
2001 2000 1999 ------------- ------------- ------------- Cost of insurance acquired, Beginning of year $ 35,239,256 $ 36,832,068 $ 38,679,822 Interest accretion 4,777,576 5,032,790 5,319,462 Amortization (6,350,496) (6,625,602) (7,167,216) ------------- ------------- ------------- Net amortization (1,572,920) (1,592,812) (1,847,754)
L. DEFERRED POLICY ACQUISITION COSTS - Commissions and other costs (salaries of certain employees involved in the underwriting and policy issue functions, and medical and inspection fees) of acquiring life insurance products that vary with and are primarily related to the production of new business have been deferred. Traditional life insurance acquisition costs are being amortized over the premium-paying period of the related policies using assumptions consistent with those used in computing policy benefit reserves.
2001 2000 1999 ------------- ------------- ------------- Deferred, beginning of year $ 3,948,496 $ 5,127,536 $ 6,324,548
Interest accretion 76,000 100,000 142,000 Amortization charged to income (1,083,577) (1,552,040) (2,059,012) ------------- ------------- ------------- Net amortization (1,007,577) (1,452,040) (1,917,012)
2002 $ 41,000 $ 891,000 $ 850,000 2003 36,000 763,000 727,000 2004 32,000 648,000 616,000 2005 28,000 546,000 518,000 2006 25,000 450,000 425,000
Q. TREASURY SHARES - The Company holds 75,236 and 47,507 shares of common stock as treasury shares with a cost basis of $673,437 and $499,955 at December 31, 2001 and 2000, respectively.
S. PARTICIPATING INSURANCE - Participating business represents 22% and 23% of the ordinary life insurance in force at December 31, 2001 and 2000, respectively. Premium income from participating business represents 26%, 27%, and 29% of total premiums for the years ended December 31, 2001, 2000 and 1999, 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.
Shareholders' Untaxed Company Surplus Balance ------------------- -------------- ----------- ABE $ 5,457,880 $ 1,149,693 APPL 7,098,824 1,525,367 UG 28,897,113 4,363,821
The payment of taxes on this income is not anticipated; and, accordingly, no deferred taxes have been established.
2001 2000 ------------ ------------- Investments $ 1,820,177 $ 1,402,431 Cost of insurance acquired 12,835,481 13,427,963 Other assets 0 (72,468) Deferred policy acquisition costs 1,087,772 1,381,974 Agent balances 0 (6,239) Management/consulting fees (508,101) (810,717) Future policy benefits (1,531,687) (2,485,664) Gain on sale of subsidiary 2,312,483 2,312,483 Net operating loss carryforward (564,303) (815,417) Other liabilities (372,303) (614,374) Federal tax DAC (1,509,996) (1,663,475) ------------ ------------- Deferred tax liability $ 13,569,523 $ 12,056,497 ============ =============
Carrying Value --------------------------------- 2001 2000 ------------- ----------- Investments held for sale: Fixed maturities U.S. Government, government agencies and authorities $ 36,182,839 $ 35,444,312 State, municipalities and political subdivisions 202,256 206,006 Collateralized mortgage obligations 54,003,623 5,962,594 All other corporate bonds 8,239,722 1,515,368 ------------- ----------- $ 98,628,440 $ 43,128,280 ============= ===========
Equity securities Banks, trust and insurance companies $ 1,100,000 $ 3,142,320 Industrial and miscellaneous 2,752,716 1,987,251 ------------- ----------- $ 3,852,716 $ 5,129,571 ============= ===========
Fixed maturities held to maturity: U.S. Government, government agencies and authorities $ 6,904,757 $ 31,350,799 State, municipalities and political subdivisions 11,788,567 15,318,605 Collateralized mortgage obligations 128,471 3,178,210 Public utilities 22,219,127 27,287,454 All other corporate bonds 33,964,473 44,787,895 ------------- ----------- $ 75,005,395 $ 121,922,963 ============= ===========
Fixed maturities held to maturity: U.S. Government and govt. Agencies and authorities $ 31,350,799 $ 148,229 $ (282,088) $ 31,216,940 States, municipalities and Political subdivisions 15,318,605 299,028 (45,335) 15,572,298 Collateralized mortgage Obligations 3,178,210 35,628 (3,323) 3,210,515 Public utilities 27,287,454 460,241 (220,316) 27,527,379 All other corporate bonds 44,787,895 505,860 (197,324) 45,096,431 ------------ ----------- ------------ ------------ Total $ 121,922,963 $ 1,448,986 $ (748,386) $ 122,623,563 ============ =========== ============ ============
The amortized cost and estimated market value of debt securities at December 31, 2001, by contractual maturity, is shown below. Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.
Estimated Fixed Maturities Held to Maturity Amortized Market December 31, 2001 Cost Value ------------------------------------- ------------ ------------ Due in one year or less $ 15,196,020 $ 15,398,291 Due after one year through five years 52,768,493 55,169,490 Due after five years through ten years 3,315,143 3,509,525 Due after ten years 3,597,268 3,514,813 Collateralized mortgage obligations 128,471 133,291 ------------ ------------ Total $ 75,005,395 $ 77,725,410 ============ ============
Cost or Gross Gross Proceeds Amortized Realized Realized From Year ended December 31, 2001 Cost Gains Losses Sale ------------------------------- ------------ ---------- ------------ ------------ Scheduled principal repayments, Calls and tenders: Held for sale $ 20,479,560 $ 10,440 $ 0 $ 20,490,000 Held to maturity 51,025,358 34,690 (107,234) 50,952,814 Sales: Held for sale 6,518,181 197,044 0 6,715,225 Held to maturity 0 0 0 0 ------------ ---------- ------------ ------------ Total $ 78,023,099 $ 242,174 $ (107,234) $ 78,158,039 ============ ========== ============ ============
Cost or Gross Gross Proceeds Amortized Realized Realized From Year ended December 31, 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 ============ ========== ============ ============
For short-term instruments, the carrying amount is a reasonable estimate of fair value. Short-term instruments represent collateral loans and certificates of deposit with various banks that are protected under FDIC.
For borrowings subject to floating rates of interest, carrying value is a reasonable estimate of fair value. For fixed rate borrowings fair value was determined based on the borrowing rates currently available to the Company for loans with similar terms and average maturities.
As is customary in the insurance industry, the insurance affiliates cede insurance to, and assume insurance from, other insurance companies under reinsurance agreements. Reinsurance agreements are intended to limit a life insurer's maximum loss on a large or unusually hazardous risk or to obtain a greater diversification of risk. The ceding insurance company remains primarily liable with respect to ceded insurance should any reinsurer be unable to meet the obligations assumed by it. However, it is the practice of insurers to reduce their exposure to loss to the extent that they have been reinsured with other insurance companies. The Company sets a limit on the amount of insurance retained on the life of any one person. The Company will not retain more than $125,000, including accidental death benefits, on any one life. At December 31, 2001, the Company had gross insurance in force of $2.630 billion of which approximately $654 million was ceded to reinsurers.
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 Bank. 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, 2001, IHL has insurance inforce of approximately $4,148,000.
Shown in thousands ----------------------------------------------- 2001 2000 1999 Premiums Premiums Premiums Earned Earned Earned -------------- ------------- ------------- Direct $ 20,333 $ 22,970 $ 25,539 Assumed 111 76 20 Ceded (3,172) (3,556) (3,978) -------------- ------------- ------------- Net premiums $ 17,272 $ 19,490 $ 21,581 ============== ============= =============
On November 15, 2001, UTG was extended a $3,300,000 line of credit from the First National Bank of the Cumberlands located in Livingston, Tennessee. The First National Bank of the Cumberlands is owned by Millard V. Oakley, who is a Director of both UTG and FCC. The line of credit will expire one year from the date of issue, and all funds advanced under this line of credit are to be used for the repurchase of stock. The interest rate provided for in the agreement is variable and indexed to be the lowest of the U.S. prime rates as published in the money section of the Wall Street Journal, with any interest rate adjustments to be made monthly. To date, the Company has no borrowings or obligations attributable to this line of credit.
On October 26, 2001, APPL effected a reverse stock split, as a result of which (i) it became a wholly-owned subsidiary of UG, and an indirect wholly-owned subsidiary of FCC and UTG, and (ii) its minority shareholders received an aggregate of $1,055,294.50 in respect of their shares. Prior to the reverse stock split, UG owned 88% of the outstanding shares of APPL.
On April 12, 2001, UTG also completed the purchase of 559,440 shares of UTG common stock from Larry E. Ryherd and family pursuant to the Ryherd Purchase Agreement for cash payments totaling $948,026 and a five year promissory note of UTG in the principal amount of $3,527,494. The purchase by UTG of the remaining 3,775 shares of UTG common stock to be purchased for cash at $8.00 per share pursuant to the Ryherd Purchase Agreement along with an additional 570 shares from certain parties to the Ryherd Purchase Agreement was completed on June 20, 2001. The promissory notes of UTG received by certain of the sellers pursuant to the Melville Purchase Agreement and the Ryherd Purchase Agreement bear interest at a rate of 7% per annum (paid quarterly) with payments of principal to made in five equal annual installments, the first such payment of principal to be due on the first anniversary of the closing.
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 were valued at $7,500,000, which equates to $11.00 per share for the new shares of UTG that were issued in the transaction.
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").
UTG paid FCC $550,000, $750,000 and $600,000 in 2001, 2000 and 1999, respectively for reimbursement of costs attributed to UTG.
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, $444,000 and $300,000 in 2001, 2000 and 1999, respectively under this agreement.
In April 2001, UTG also purchased in a separate transaction 10,891 shares of UTG common stock from Robert E. Cook, a former director, for cash and a five-year promissory note of UTG in the principal amount of $69,702.
On November 20, 1998, First Southern Funding LLC, a Kentucky corporation, ("FSF") and affiliates acquired 929,904 shares of common stock of UTG from UTG and certain UTG shareholders. As consideration for the shares, FSF paid UTG $10,999,995 and certain shareholders of UTG $999,990 in cash.
As of December 31, 2001, no options were exercised and all options have been forfeited.
2001 2000 1999 ------------------------- ------------------------- ------------------------- EXERCISE EXERCISE EXERCISE SHARES PRICE SHARES PRICE SHARES PRICE ---------- ------------- ----------- ------------ ----------- ------------- Outstanding at beginning of Period 19,108 $15.00 166,104 $15.00 1,450,000 $15.00 Granted 0 0.00 0 0.00 0 0.00 Exercised 0 0.00 0 0.00 0 0.00 Forfeited 19,108 15.00 146,996 15.00 1,283,896 15.00 ---------- ------------- ----------- ------------ ----------- ------------- Outstanding at end of period 0 $15.00 19,108 $15.00 166,104 $15.00 ========== ============= =========== ============ =========== =============
Diluted EPS Income available to common shareholders $ and assumed conversions 2,439,573 3,733,432 $ 0.65 ============= =============== =============
Diluted EPS Income available to common shareholders $ and assumed conversions (696,426) 4,056,439 $ (0.17) ============= =============== =============
Diluted EPS Income available to common shareholders $ and assumed conversions 1,075,909 2,839,934 $ 0.38 ============= =============== =============
UTG had no stock options outstanding for the year ending December 31, 2001. As such, the computation of diluted earnings per share is the same as basic earnings per share for the year ending December 31, 2001. 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 for the year ending December 31, 2000, since the Company had a loss from continuing operation for the year presented, and any assumed conversion, exercise, or contingent issuance of securities would have an antidilutive effect on earnings per share. There were no outstanding dilutive instruments during the aforementioned periods.
2002 $ 777,199 2003 777,199 2004 777,199 2005 777,199 2006 777,200
On July 31, 2000, First Southern Bancorp, Inc., pursuant to the terms of a previous agreement, converted the $2,560,000 of convertible debt it held of United Trust Group, Inc. into 204,800 shares of common stock of UTG.
Pursuant to the merger agreement, UTG will pay $250 in cash for each share of FCC common stock not held by United Trust Group. The transaction is subject to various conditions precedent set forth in the merger agreement, including the approval of the transaction by the shareholders of FCC. FCC plans to submit the transaction to the vote of the FCC shareholders to be held at a special meeting to be called for that purpose. Shareholders of FCC are urged to read the Proxy Statement when it becomes available.
Tax Before-Tax (Expense) Net of Tax 2001 Amount or Benefit Amount ------------------------------------- -------------- -------------- -------------
Unrealized holding gains during Period $ 1,222,583 $ (427,904)$ 794,679 Less: reclassification adjustment For gains realized in net income (340,341) 119,119 (221,222) -------------- -------------- ------------- Net unrealized gains 882,242 (308,785) 573,457 -------------- -------------- ------------- Other comprehensive income $ 882,242 $ (308,785) $ 573,457 ============== ============== =============
Tax Before-Tax (Expense) Net of Tax 2000 Amount or Benefit Amount ------------------------------------- -------------- -------------- -------------
Unrealized holding losses during Period $ (862,048) $ 0 $ (862,048) Less: reclassification adjustment for losses realized in net income 0 0 0 -------------- -------------- ------------- Net unrealized losses (862,048) 0 (862,048) -------------- -------------- ------------- Other comprehensive deficit $ (862,048) $ 0 $ (862,048) ============== ============== =============
Premiums and policy fees, net $ 4,554,451 $ 4,768,808 $ 4,137,361 $ 3,811,796 Net investment income 4,014,425 3,931,677 3,557,702 3,563,255 Total revenues 8,428,235 9,005,351 7,963,274 7,968,472 Policy benefits including Dividends 4,937,725 5,193,310 4,586,257 4,807,794 Commissions and amortization of DAC and COI 929,415 621,810 511,470 773,199 Operating expenses 1,514,115 1,768,758 1,573,817 1,629,001 Operating income (loss) 1,008,366 1,323,667 1,183,712 676,417 Net income (loss) 343,858 975,292 645,873 474,550 Basic earnings (loss) per share 0.08 0.27 0.18 0.13 Diluted earnings (loss) per share 0.08 0.27 0.18 0.13