PROPERTIES The following table shows a breakout of property, net of accumulated depreciation, owned and occupied by the Company and the distribution of real estate by type.
Property owned Amount % of Total -------------- ---------- ------------ Home Office $ 2,437,122 16%
Total investment real estate holdings represent approximately 4% of the total assets of the Company net of accumulated depreciation of $307,294 and $813,582 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 $2,303,105. 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.
Residential development property is primarily located in Springfield, Illinois, and entails several developments, each targeted for a different segment of the population. These targets include a development primarily for the first time home buyer, an upscale development for existing homeowners looking for a larger home, and duplex condominiums for those who desire maintenance free exteriors and surroundings. The Company’s primary focus has been on the development and sale of lots, with an occasional home construction to help stimulate interest.
In the third quarter of 2000, the Company sold remaining real estate properties identified for disposal in prior years at a net realized gain of $728,000. In the fourth quarter 2000, remaining real estate consisted of the North Plaza holdings and 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.
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:
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.
The decrease in net investment income in 1999 is due to the decline of the national prime rate during September and October of 1998. During September and October of 1998, the national prime rate declined three quarters of one percent (.75%). This decline reduced the yields on investments available in the marketplace in which the Company invests primarily fixed maturities. The interest rate environment improved later in 1999. The national prime rate rose a total of three-quarters of one percent (.75%) in the second half of 1999.
The overall investment yields for 2000, 1999 and 1998, are 7.01%, 6.45% and 6.69%, respectively.
The Company’s investments are generally managed to match related insurance and policyholder liabilities. The comparison of investment return with insurance or investment product crediting rates establishes an interest spread. The Company monitors investment yields, and when necessary adjusts credited interest rates on its insurance products to preserve targeted interest spreads, ranging from 1% to 2%. It is expected that monitoring of the interest spreads by management will provide the necessary margin to adequately provide for associated costs on the insurance policies the Company currently has in force and will write in the future. 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.
Amortization of cost of insurance acquired decreased 14% in 2000 compared to 1999 and decreased 17% in 1999 compared to 1998. Cost of insurance acquired is established when an insurance company is acquired. The Company assigns a portion of its cost to the right to receive future cash flows from insurance contracts existing at the date of the acquisition. The cost of policies purchased represents the actuarially determined present value of the projected future cash flows from the acquired policies. Cost of insurance acquired is comprised of individual life insurance products including whole life, interest sensitive whole life and universal life insurance products. Cost of insurance acquired is amortized with interest in relation to expected future profits, including direct charge-offs for any excess of the unamortized asset over the projected future profits. The interest rates utilized in the amortization calculation are 9% on approximately 25% of the balance and 15% on the remaining balance. The interest rates vary due to risk analysis performed at the time of acquisition on the business acquired. The amortization is adjusted retrospectively when estimates of current or future gross profits to be realized from a group of products are revised. The Company did not have any charge-offs during the periods covered by this report. Amortization of cost of insurance acquired is particularly sensitive to changes in persistency of certain blocks of insurance in-force. Persistency is a measure of insurance in force retained in relation to the previous year. The Company’s average persistency rate for all policies in force for 2000, 1999 and 1998 has been approximately 89.8%, 89.4% and 89.9%, respectively.
Operating expenses increased 34% in 2000 compared to 1999 and decreased 29% in 1999 compared to 1998. During the fourth quarter of 2000, Mr. Jesse 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 expected 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 2% from the prior year, primarily as the result of lower salary and related employee costs.
Included in operating expenses in 1998 is $2,534,317 from the release of discounts associated with the Company’s notes payable. The Company’s subordinated debt was issued at rates considered favorable to the Company at time of issue, therefore the notes were discounted to reflect an effective interest rate of 15%. With the payment of part of this debt in November 1998, the unamortized discount was written off. Management’s plan to repay the remaining debt in a much shorter period of time from required repayment resulted in the determination to write off the entire remaining note discount. The decrease in operating expenses in 1999 is due in part, to a decrease in salaries from staff reduction. In most instances, the workload was absorbed into the remaining workforce. First year sales production has shown a declining trend in the last several years. The Company had tried a variety of solutions to bolster new sales production including additional training, home office assistance in providing leads on prospective clients and a review of current product offerings. First year production in the first quarter of 1999 resulted in cash received from new sales of only 54% of that received in first quarter 1998, or $560,000 less. With continued declining new business, costs associated with supporting new business, primarily salary costs, as a percentage of new business received continued to grow. In March of 1999, the Company determined it could no longer continue to support these fixed costs in light of the new business trend and no indication it would reverse any time soon. As such, in March 1999 seven employees of the Company (approximately 8% of the total staff), were terminated due to lack of business activity. This action resulted in expense savings of approximately $275,000 per year. Existing agents were allowed to continue marketing Company products, but home office support was significantly reduced and existing policy leads to agents were eliminated.
Interest expense declined 41% comparing 2000 to 1999 and declined 71% comparing 1999 to 1998. In November 1998, UTG, received approximately $11,000,000 from the issuance of common stock to First Southern Funding and its affiliates. These funds were used to retire outside debt. On November 23, 1998, the Company paid a $6,300,000 principal payment on its senior debt, paid a $2,608,099 principal payment on its 10 year subordinated debt and retired $1,917,952 of other outside debt. With the early retirement of this debt, the Company realized a write-off of $341,852 in interest expense in 1998 from unamortized discounts associated with the debt. As of December 31, 1998, there were no unamortized note discounts remaining on the balance sheet. During 1999 and 2000, the Company continued to reduce its outside debt through operating cashflows and dividends from UG to FCC. On July 31, 2000, $2,560,000 in convertible debt of UTG held by First Southern was converted to equity. At December 31, 2000, UTG had $1,817,169 in notes payable. The remaining debt bears interest at a fixed rate of 8.5% 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.
In 1999, the Company began investing more of its funds in mortgage loans. This is the result of its affiliation with First Southern Funding and its affiliates (“FSF”), which includes a bank, First Southern National Bank (“FSNB”). FSNB has been able to provide the Company with additional expertise and experience in underwriting commercial and residential mortgage loans, which provide more attractive yields than the traditional bond market. During 2000, the Company issued approximately $21,863,000 in new mortgage loans. All but $80,000 of these new loans were generated through FSNB and its personnel and funded by the Company through participation agreements with FSNB. FSNB services the loans covered by these participation agreements. The Company pays FSNB 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. The loans issued in 2000 had an average yield of approximately 9%. The Company anticipates continuing to primarily invest in mortgage loans and government agency bonds for the short period. All mortgage loans held by the Company are first position loans. The Company has no loans that are in default and in the process of foreclosure at December 31, 2000.
Investment real estate and real estate acquired in satisfaction of debt decreased 23% in 2000 compared to 1999. During late 1998 and early 1999, the Company re-evaluated its real estate holdings, especially those properties acquired through acquisitions of other companies and mortgage loan foreclosures, and determined it would be in the long term interest of the Company to dispose of certain of these parcels. Parcels targeted for sale were generally non-income or low income producing and located in parts of the country where management has little other reason to travel to. By third quarter of 2000, the Company had sold the remaining real estate properties identified for disposal in prior years. By fourth quarter 2000, remaining real estate consisted of the North Plaza holdings and 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. Investment real estate holdings represent approximately 4% of the total assets of the Company. Total investment real estate is separated into two categories: Commercial 77% and Residential Development 23%.
(c) Shareholders’ Equity Total shareholders’ equity increased 8% in 2000 compared to 1999. In July 2000, equity increased $2,560,000 from the issuance of 204,800 shares of common stock through the conversion of notes. Losses during the year of $(696,426), unrealized gains on investments held for sale of $1,474,187 also influenced total shareholders’ equity.
Cash provided by (used in) operating activities was $(2,155,491), $(627,939) and $2,166,173 in 2000, 1999 and 1998, respectively. Reporting regulations require cash inflows and outflows from universal life insurance products to be shown as financing activities when reporting on cash flows. The net cash provided by (used in) operating activities plus policyholder contract deposits less policyholder contract withdrawals equaled $(393,571) in 2000, $2,325,455 in 1999 and $5,244,388 in 1998. Management utilizes this measurement of cash flows as an indicator of the performance of the Company’s insurance operations.
Net cash provided by financing activities was $133,721, $205,505 and $2,550,600 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, the Company had a total of $1,817,169 in long-term debt outstanding. The remaining debt bears interest at a fixed rate of 8.5% 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.
Currently, the Company’s insurance subsidiaries are subject to government regulation in each of the states in which they conduct business. Such regulation is vested in state agencies having broad administrative power dealing with all aspects of the insurance business, including the power to: (i) grant and revoke licenses to transact business; (ii) regulate and supervise trade practices and market conduct; (iii) establish guaranty associations; (iv) license agents; (v) approve policy forms; (vi) approve premium rates for some lines of business; (vii) establish reserve requirements; (viii) prescribe the form and content of required financial statements and reports; (ix) determine the reasonableness and adequacy of statutory capital and surplus; and (x) regulate the type and amount of permitted investments. Insurance regulation is concerned primarily with the protection of policyholders. The Company cannot predict the impact of any future proposals, regulations or market conduct investigations. The Company’s insurance subsidiaries, UG, APPL and ABE are domiciled in the states of Ohio, West Virginia and Illinois, respectively.
The NAIC, in conjunction with state regulators, has been reviewing existing insurance laws and regulations. A committee of the NAIC proposed changes in the regulations governing insurance company investments and holding company investments in subsidiaries and affiliates which were adopted by the NAIC as model laws in 1996. The Company does not presently anticipate any material adverse change in its business because of these changes.
The State of Florida began an investigation of industrial life insurance policies in the fall of 1999 regarding policies with race-based premiums. This investigation has quickly spread to other states and to other types of small face amount policies and was expanded to consider the fairness of premiums for all small policies including policies which did not have race-based premiums. The NAIC historically has defined a “small face amount policy” as one with a face amount of $15,000 or less. Under current reviews, some states have increased this amount to policies of $25,000 or less. These states are attempting to force insurers to refund “excess premiums” to insureds or beneficiaries of insureds based on the recent American General settlement. This issue has become very complex and may become a political “hot potato”. The Company’s insurance subsidiaries have no race-based premium products, but do have policies with face amounts under the above-scrutinized limitations. The outcome of this issue could be dramatic on the insurance industry as a whole as well as the Company itself. The Company will continue to monitor developments regarding this matter to determine to what extent, if any, the Company may be exposed.
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 will 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.
SUBSEQUENT EVENT Pursuant to the terms of a common stock purchase agreement dated February 13, 2001, First Southern Bancorp, Inc. agreed to purchase 563,215 shares of United Trust Group, Inc. common stock from Larry E. Ryherd and family at a price of $8.00 per share. The purchase price will be payable in the form of $978,226 in cash and a five-year promissory note.
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Listed below are the financial statements included in this Part of the Annual Report on SEC Form 10-K:
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, 2000 and 1999, and the consolidated results of their operations and their consolidated cash flows for each of the three years in the period ended December 31, 2000, in conformity with generally accepted accounting principles.
We have also audited Schedule I as of December 31, 2000, and Schedules II, IV and V as of December 31, 2000 and 1999, of UNITED TRUST GROUP, INC. and subsidiaries and Schedules II, IV and V for each of the three years in the period then ended. In our opinion, these schedules present fairly, in all material respects, the information required to be set forth therein.
ASSETS 2000 1999 ------------ ------------ Investments: Fixed maturities held to maturity, at amortized cost (market $122,623,563 and $142,675,019) $ 121,922,963 $ 144,751,111 Investments held for sale: Fixed maturities, at market (cost $42,914,186 and $31,415,026) 43,128,280 30,191,357 Equity securities, at market (cost $5,413,507 and $2,886,315) 5,129,571 2,165,556 Mortgage loans on real estate at amortized cost 32,896,671 15,483,772 Investment real estate, at cost, net of accumulated depreciation 13,096,245 15,552,165 Real estate acquired in satisfaction of debt 0 1,550,000 Policy loans 14,090,900 14,151,113 Other long-term investments 200,000 906,278 Short-term investments 1,686,397 2,230,267 ------------ ------------ 232,151,027 226,981,619
Benefits, claims and settlement expenses: Life 23,440,711 22,338,042 23,078,145 Reinsurance benefits and claims (3,376,091) (3,610,459) (2,499,394) Annuity 1,210,783 1,390,592 1,462,385 Dividends to policyholders 1,003,954 1,170,710 3,431,238 Commissions and amortization of deferred policy acquisition costs 2,089,313 2,893,898 6,450,529 Amortization of cost of insurance acquired 1,592,812 1,847,754 2,214,928 Operating expenses 10,115,786 7,533,374 10,665,976 Interest expense 376,924 637,647 2,198,773 ------------- ------------- ------------- 36,454,192 34,201,558 47,002,580 ------------- ------------- -------------
Net income (loss) $ (696,426)$ 1,075,909 $ (679,492) ============= ============= =============
Basic income (loss) per share from continuing operations and net income (loss) $ (0.17)$ 0.38 $ (0.39) ============= ============= =============
Basic weighted average shares outstanding 4,056,439 2,839,703 1,726,843 ============= ============= ============= Diluted weighted average shares outstanding 4,056,439 2,839,934 1,726,843 ============= ============= =============
Common stock Balance, beginning of year $ 79,405 $ 49,809 $ 32,696 Issued during year 4,096 29,986 17,264 Treasury shares acquired 0 (390) (151) ----------- ----------- ----------- Balance, end of year $ 83,501 $ 79,405 $ 49,809 =========== =========== ===========
Additional paid-in capital Balance, beginning of year $ 45,175,076 $ 27,403,172 $ 16,488,375 Issued during year 2,555,904 17,921,469 10,982,731 Treasury shares acquired 0 (149,565) (67,934) ----------- ----------- ----------- Balance, end of year $ 47,730,980 $ 45,175,076 $ 27,403,172 =========== =========== ===========
Accumulated other comprehensive income (deficit) Balance, beginning of year $ (1,138,900) $ (276,852) $ (29,127) Other comprehensive income (deficit) Unrealized holding gain (loss) on securities 1,874,584 1,874,584 (1,166,008) (1,166,008) (440,592) (440,592) Minority interest in unrealized holding (gain) loss on securities (400,397) (400,397) 303,960 303,960 192,867 192,867 ----------- ----------- ----------- ----------- ----------- ------------ Comprehensive income (deficit) $ 777,761 $ 213,861 $ (927,217) =========== =========== ============ Balance, end of year $ 335,287 $ (1,138,900) $ (276,852) =========== =========== ===========
Cash flows from investing activities: Proceeds from investments sold and matured: Fixed maturities held for sale 5,607,700 1,430,000 164,520 Fixed maturities sold 0 0 0 Fixed maturities matured 27,103,149 31,032,290 54,642,223 Equity securities 189,270 0 450,000 Mortgage loans 4,279,622 4,765,678 1,785,859 Real estate 4,743,146 2,705,093 1,716,124 Policy loans 2,918,627 3,169,753 3,661,834 Other long-term investments 906,278 0 0 Short-term 1,042,826 1,336,251 1,593,749 ---------- ----------- ----------- Total proceeds from investments sold and matured 46,790,618 44,439,065 64,014,309 Cost of investments acquired: Fixed maturities held for sale (19,996,972) (31,366,755) 0 Fixed maturities (1,486,255) (2,020,803) (48,745,594) Equity securities (2,673,199) (161,255) (79,053) Mortgage loans (21,862,521) (9,257,836) (3,667,061) Real estate (1,046,912) (635,303) (1,346,299) Policy loans (2,858,415) (3,186,825) (3,588,686) Other long-term investments (200,000) 0 (66,212) Short-term (498,956) (2,503,722) (851,198) ---------- ----------- ----------- Total cost of investments acquired (50,623,230) (49,132,499) (58,344,103) Purchase of property and equipment (108,346) (234,791) (114,449) ---------- ----------- ----------- Net cash provided by (used in) investing activities (3,940,958) (4,928,225) 5,555,757 ---------- ----------- -----------
Net increase (decrease) in cash and cash equivalents (5,962,728) (5,350,659) 10,272,530 Cash and cash equivalents at beginning of year 21,027,804 26,378,463 16,105,933 ---------- ----------- ----------- Cash and cash equivalents at end of year $ 15,065,076 $ 21,027,804 $ 26,378,463 ========== =========== =========== See accompanying notes.
B. NATURE OF OPERATIONS - United Trust Group, Inc., is an insurance holding company, which sells individual life insurance products through its subsidiaries. The Company’s principal market is the Midwestern United States. The Company’s dominant business is individual life insurance which includes the servicing of existing insurance business in force, the solicitation of new individual life insurance and the acquisition of other companies in the insurance business.
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.
Investments held for sale -- at current market value, unrealized appreciation or depreciation is charged directly to shareholders’ equity.
2000 1999 1998 ------------- ------------- ------------- Cost of insurance acquired, Beginning of year $ 36,832,068 $ 38,679,822 $ 40,894,750 Interest accretion 5,032,790 5,319,462 5,624,883 Amortization (6,625,602) (7,167,216) (7,839,811) ------------- ------------- ------------- Net amortization (1,592,812) (1,847,754) (2,214,928)
------------- ------------- ------------- Cost of insurance acquired, End of year $ 35,239,256 $ 36,832,068 $ 38,679,822 ============= ============= =============
2000 1999 1998 ------------- ------------- ------------- Deferred, beginning of year $ 5,127,536 $ 6,324,548 $ 10,600,720
Interest accretion 100,000 142,000 397,000 Amortization charged to income (1,552,040) (2,059,012) (2,582,172) ------------- ------------- ------------- Net amortization (1,452,040) (1,917,012) (2,185,172)
Deferred, end of year $ 3,948,496 $ 5,127,536 $ 6,324,548 ============= ============= =============
2001 $ 66,000 $ 1,300,000 $ 1,234,000 2002 59,000 1,142,000 1,083,000 2003 52,000 1,008,000 956,000 2004 46,000 889,000 843,000 2005 41,000 782,000 741,000
N. PROPERTY AND EQUIPMENT - Company-occupied property, data processing equipment and furniture and office equipment are stated at cost less accumulated depreciation of $2,691,529 and $2,319,216 at December 31, 2000 and 1999, respectively. Depreciation is computed on a straight-line basis for financial reporting purposes using estimated useful lives of three to 30 years. Depreciation expense was $372,313 and $379,715, and $372,861 for the years ended December 31, 2000, 1999, and 1998, respectively.
P. EARNINGS PER SHARE - Earnings per share (“EPS”) are reported under Statement of Financial Accounting Standards Number 128. The objective of both basic EPS and diluted EPS is to measure the performance of an entity over the reporting period. Basic EPS is computed by dividing income available to common stockholders (the numerator) by the weighted-average number of common shares outstanding (the denominator) during the period. Diluted EPS is similar to the computation of basic EPS except that the denominator is increased to include the number of additional common shares that would have been outstanding if the dilutive potential common shares had been issued. In addition, the numerator also is adjusted for any changes in income or loss that would result from the assumed conversion of those potential common shares.
S. 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.
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.
2000 1999 1998 ------------- ------------- ------------- Current tax expense $ 85,440 $ 12,654 $ 111,470 Deferred tax expense (credit) 143,343 677,800 (4,735,502) ------------- ------------- ------------- $ 228,783 $ 690,454 $ (4,624,032) ============= ============= =============
UTG UG FCC ----------- ----------- ------------ 2006 $ 103,654 $ 0 $ 0 2007 179,894 0 190,401 2008 0 0 4,595 2009 0 0 168,800 2010 0 0 19,112 2019 0 2,046,214 0 2020 0 0 631,324 ----------- ----------- ------------ TOTAL $ 283,548 $ 2,046,214 $ 1,014,232 =========== =========== ============
2000 1999 1998 ------------ ------------ ------------- Net income (loss) $ (696,426) $ 1,075,909 $ (679,492) Federal income tax provision 60,550 192,247 (121,495) (credit) Loss (gain) of subsidiaries 762,656 (615,995) 421,738 Loss (gain) of investees 0 (53,555) 21,525 Write off of note discounts 0 0 586,462 ------------ ------------ ------------- Taxable income $ 126,780 $ 598,606 $ 228,738 ============ ============ =============
UTG has a net operating loss carryforward of $283,548 at December 31, 2000. UTG has averaged approximately $318,041 in taxable income over the past three years and must average taxable income of approximately $50,000 per year to fully realize its net operating loss carryforwards. UTG’s operating loss carryforwards do not begin to expire until the year 2006. UG must average approximately $110,000 of taxable income per year to fully realize its net operating loss carryforward for which no allowance is established. FCC must average approximately $80,000 of taxable income per year to fully realize its net operating loss carryforward for which no allowance is established. Management believes future earnings of UTG and UG will be sufficient to fully utilize these net operating loss carryforwards.
2000 1999 1998 ------------ ------------ ------------- Tax computed at statutory rate $ (247,474) $ 649,444 $ (2,141,013) Changes in taxes due to: Cost in excess of net assets purchased 31,500 31,500 31,500 Current year loss for which no benefit realized 546,231 0 0 Benefit of prior losses (139,061) (6,309) (2,587,353) Other 37,587 15,819 72,834 ------------ ------------ ------------- Income tax expense (credit) $ 228,783 $ 690,454 $ (4,624,032) ============ ============ =============
Equity securities Banks, trust and insurance companies $ 3,142,320 $ 1,308,453 Industrial and miscellaneous 1,987,251 857,103 ------------- ------------ $ 5,129,571 $ 2,165,556 ============= ============
Below investment grade debt securities generally provide higher yields and involve greater risks than investment grade debt securities because their issuers typically are more highly leveraged and more vulnerable to adverse economic conditions than investment grade issuers. In addition, the trading market for these securities is usually more limited than for investment grade debt securities. Debt securities classified as below-investment grade are those that receive a Standard & Poor’s rating of BB or below.
B. INVESTMENT SECURITIES The amortized cost and estimated market values of investments in securities including investments held for sale are as follows:
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 ============ =========== ============ ============
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 ============ =========== ============ ============
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 54,824,249 126,285 (308,311) 54,642,223 Sales: Held for sale 0 0 0 0 Held to maturity 0 0 0 0 ------------ ---------- ------------ ------------ Total $ 54,988,410 $ 126,644 $ (308,311) $ 54,806,743 ============ ========== ============ ============
5. DISCLOSURES ABOUT FAIR VALUES OF FINANCIAL INSTRUMENTS The financial statements include various estimated fair value information at December 31, 2000 and 1999, as required by Statement of Financial Accounting Standards 107, Disclosure about Fair Value of Financial Instruments (“SFAS 107”). Such information, which pertains to the Company’s financial instruments, is based on the requirements set forth in that Statement and does not purport to represent the aggregate net fair value of the Company.
An estimate of fair value is based on management’s review of the individual real estate holdings. Management utilizes sales of surrounding properties, current market conditions and geographic considerations. Management conservatively estimates the fair value of the portfolio is equal to the carrying value.
2000 1999 ------------------------------------------------------------ Estimated Estimated Carrying Fair Carrying Fair Assets Amount Value Amount Value ------ ------------ ------------ ------------ ------------ Fixed maturities $ 121,922,963 $ 122,623,563 $ 144,751,111 $ 142,675,019 Fixed maturities held for sale 43,128,280 43,128,280 30,191,357 30,191,357 Equity securities 5,129,571 5,129,571 2,165,556 2,165,556 Mortgage loans on real estate 32,896,671 32,841,254 15,483,772 14,633,879 Investment in real estate 13,096,245 13,096,245 15,552,165 15,552,165 Real estate acquired in Satisfaction of debt 0 0 1,550,000 1,550,000 Policy loans 14,090,900 14,090,900 14,151,113 14,151,113 Other long-term investments 200,000 200,000 906,278 873,089 Short-term investments 1,686,397 1,686,397 2,230,267 2,230,267
One of the Company’s insurance subsidiaries, UG, entered a coinsurance agreement with First International Life Insurance Company (“FILIC”) as of September 30, 1996. Under the terms of the agreement, UG ceded to FILIC substantially all of its paid-up life insurance policies. Paid-up life insurance generally refers to non-premium paying life insurance policies. During 1997, FILIC changed its name to Park Avenue Life Insurance Company (“PALIC”).
PALIC and its ultimate parent The Guardian Life Insurance Company of America (“Guardian”), currently hold an “A” (Excellent), and “A+” (Superior) rating, respectively, from A.M. Best, an industry rating company. The agreement with PALIC accounts for approximately 65% of the reinsurance receivables, as of December 31, 2000.
On June 1, 2000, UG assumed an already existing coinsurance agreement, dated January 1, 1992, between Lancaster Life Reinsurance Company, an Arizona corporation (“LLRC”) and Investors Heritage Life Insurance Company, a corporation organized under the laws of the Commonwealth of Kentucky (“IHL”). Under the terms of the agreement, LLRC agreed to assume from IHL a 90% quota share of new issues of credit life and accident and health policies that have been written on or after January 1, 1992 through various branches of the First Southern National 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, 2000, IHL has insurance inforce of approximately $4,107,000.
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.
Mr. Correll is Chairman of the Board of Directors of UTG and currently UTG's largest shareholder through his ownership control of FSF and its affiliates. Mr. Correll is the majority shareholder of FSF, which is an affiliate of First Southern Bancorp, Inc., a bank holding company that operates out of 14 locations in central Kentucky. Following the above transaction, as of December 31, 1999, Mr. Correll owned or controlled directly and indirectly approximately 46% of UTG. At December 31, 2000, Mr. Correll owned or controlled directly and indirectly approximately 51% of UTG.
On January 15, 1991 UII adopted an additional nonqualified stock option plan, assumed by UTG through the UII merger, under which certain employees and sales personnel may be granted options. The plan provided for the granting of up to 42,000 options at an exercise price of $.47 per share. The options generally expire five years from the date of grant. A total of 11,620 option shares have been exercised through December 31, 1999. At the September 21, 1999 board meeting, the Directors of UTG voted to discontinue this stock option plan, leaving options for 30,149 shares ungranted and therefore ultimately forfeited. At March 31, 2000, all previously granted options have expired, ending this stock option plan. No stock options were granted, exercised or exercisable through the years ended December 31, 2000, 1999, and 1998, respectively.
Included in the stock acquisition agreement is an earnings covenant whereby UTG warrants UTG and its subsidiaries and affiliates will have future earnings of at least $30,000,000 for a five-year period beginning January 1, 1998. Such earnings are computed based on statutory results excluding inter-company activities such as inter-company dividends plus realized and unrealized gains and losses on real estate, mortgage loans and unaffiliated common stocks. At the end of the covenant period, an adjustment is to be made equal to the difference between the then market value and statutory carrying value of real estate still owned that existed at the beginning of the covenant period. Should UTG not meet the covenant requirements, any shortfall will first be reduced by the actual average tax rate for UTG for the period, then will be further reduced by one-half of the percentage, if any, representing UTG’s ownership percentage of the insurance company subsidiaries. This result will then be reduced by $250,000. The remaining amount will be paid by UTG in the form of UTG common stock valued at $15.00 per share with a maximum number of shares to be issued of 500,000. However, there shall be no limit to the number of shares transferred to the extent that there are legal fees, settlements, damage payments or other losses as a result of certain legal action taken. The price and number of shares shall be adjusted for any applicable stock splits, stock dividends or other recapitalizations. At December 31, 2000, the Company had total earnings of $9,881,084 applicable to this covenant.
At the time of the stock acquisition above, UTG also granted, for nominal consideration, an irrevocable, exclusive option to FSF to purchase up to 1,450,000 shares of UTG common stock for a purchase price in cash equal to $15.00 per share, with such option to expire on July 1, 2001. UTG had a market price per share of $9.50 at the date of grant of the option. The option shares under this option are to be reduced by two shares for each share of UTG common stock that FSF or its affiliates purchases from UTG shareholders in private or public transactions after the execution of the option agreement. The option is additionally limited to a maximum when combined with shares owned by FSF of 51% of the issued and outstanding shares of UTG after giving effect to any shares subject to the option.
2000 1999 1998 ------------------------- ------------------------- ------------------------- EXERCISE EXERCISE EXERCISE SHARES PRICE SHARES PRICE SHARES PRICE ---------- ------------- ----------- ------------ ----------- ------------- Outstanding at beginning of Period 166,104 $15.00 1,450,000 $15.00 0 $0.00 Granted 0 0.00 0 0.00 1,450,000 15.00 Exercised 0 0.00 0 0.00 0 0.00 Forfeited 146,996 15.00 1,283,896 15.00 0 0.00 ---------- ------------- ----------- ------------ ----------- ------------- Outstanding at end of period 19,108 $15.00 166,104 $15.00 1,450,000 $15.00 ========== ============= =========== ============ =========== =============
Number outstanding 19,108 Exercise price $ 15.00 Remaining contractual life 1/2 year
For the year ended December 31, 2000 ------------------------------------------------------- Income Shares Per-Share (Numerator) (Denominator) Amount ------------- --------------- ------------- Basic EPS Income available to common shareholders $ (696,426) 4,056,439 $ (0.17) =============
Income Shares Per-Share (Numerator) (Denominator) Amount ------------- --------------- ------------- Basic EPS Income available to common shareholders $ 1,075,909 2,839,703 $ 0.38 =============
Effect of Dilutive Securities Convertible notes 0 0 Options 0 231 ------------- ---------------
Diluted EPS Income available to common shareholders and assumed conversions $ (679,492) 1,726,843 $ (0.39) ============= =============== =============
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 years ending December 31, 2000 and 1998, since the Company had a loss from continuing operations in each of these periods 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.
On July 31, 1997, UTG issued convertible notes for cash in the amount of $2,560,000 to seven individuals, all officers or employees of UTG. During the first three years the notes could be converted into 204,800 shares of common stock at $12.50 per share. The potential conversion of the notes was not included in the computation of diluted EPS for the years ended December 31, 1998 and 1997, respectively, because the exercise price was greater than the average market price of the common shares. In 1999, First Southern Bancorp, Inc., an affiliate of First Southern Funding, LLC, acquired all the outstanding UTG convertible notes from the original holders. Pursuant to an agreement, First Southern Bancorp, Inc. converted the notes to 204,800 shares of UTG common stock on July 31, 2000.
2000 1999 ----------- ----------- Senior debt $ 0 $ 25,000 Subordinated 10 yr. Notes 0 840,000 Subordinated 20 yr. Notes 1,817,169 1,817,169 Convertible notes 0 2,560,000 Convertible debentures 0 675,800 ----------- ----------- $ 1,817,169 $ 5,917,969 =========== ===========
A. SENIOR DEBT 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 is 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 of $25,000 was retired.
B. SUBORDINATED DEBT The subordinated debt was incurred June 16, 1992 as a part of the acquisition of the now dissolved Commonwealth Industries Corporation, (CIC). The 10-year notes bear interest at the rate of 7 1/2% per annum, payable semi-annually beginning December 16, 1992. In the second quarter of 2000, the remaining principal balance of $840,000 was retired.
There are no scheduled principal reductions on the Company’s debt for the next five years.
On July 26, 1999, UII was merged into UTG. UTG issued 817,517 shares of its authorized but unissued common stock to former UII shareholders in the merger. The shares issued were valued at $10,451,455. At the date of the merger, UII had cash balances of $607,508 that were transferred to UTG.
15. WRITE-DOWN OF INVESTMENT REAL ESTATE In the third quarter of 2000, the Company sold remaining real estate properties identified for disposal in prior years at a net realized gain of $728,000. In the fourth quarter 2000, remaining real estate consisted of the North Plaza holdings and 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.
16. MERGER OF UNITED TRUST GROUP, INC. AND UNITED INCOME, INC. On March 25, 1997, the Board of Directors of UTG and UII voted to recommend to the shareholders a merger of the two companies. Under the Plan of Merger, UTG would be the surviving entity with UTG issuing one share of its stock for each share held by UII shareholders.
The merger of UII was accounted for as a purchase of UII and was valued at $12.74 per share. This value was determined using the average price of UTG shares issued on November 20, 1998 in a separate transaction with First Southern Funding LLC, an outside third party.
Investments $ 62,279,460 Cash and cash equivalents 4,830,171 Accrued investment income 1,029,741 Reinsurance receivables 11,291,237 Cost of insurance acquired 13,265,699 Costs in excess of net assets purchased 868,750 Property and equipment 868,652 Other assets 672,427 --------------- Total assets 95,106,137
December 31, December 31, 1999 1998 ---------------- ---------------- Total revenues $ 35,834,693 $ 40,250,810 Total benefits and other expenses $ 33,841,679 $ 46,206,060 Operating income $ 1,993,014 $ (5,955,250) Net Income $ 1,202,759 $ (829,784) Basic earnings per share $ 0.36 $ (0.33) Diluted earnings per share $ 0.36 $ (0.33)
Premiums and policy fees, net $ 5,337,148 $ 5,201,585 $ 4,470,307 $ 4,480,646 Net investment income 4,252,494 4,009,489 3,927,944 3,895,906 Total revenues 9,933,932 9,348,373 8,471,566 7,993,252 Policy benefits including Dividends 6,119,515 5,502,941 5,128,773 5,528,128 Commissions and amortization of DAC and 1,097,759 804,071 775,825 1,004,470 COI Operating expenses 2,827,918 1,732,641 2,095,530 3,459,697 Operating income (loss) (244,223) 1,166,057 408,328 (2,037,231) Net income (loss) (47,394) 686,907 163,169 (1,499,108) Basic earnings (loss) per share (0.01) 0.17 0.04 (0.39) Diluted earnings (loss) per Share (0.01) 0.17 0.04 (0.39)
---------------- ----------------- ----------------- ----------------- 1st 2nd 3rd 4th ------------ ------------ ------------ ------------
Premiums and policy fees, net $ 7,231,481 $ 7,111,079 $ 6,243,869 $ 5,809,648 Net investment income 3,727,002 3,786,410 3,791,774 3,737,101 Total revenues 11,226,760 10,557,065 9,767,526 9,334,049 Policy benefits including Dividends 6,827,040 6,287,460 6,217,272 6,140,602 Commissions and amortization of DAC and COI 1,654,560 1,386,119 1,322,442 4,302,336 Operating expenses 2,237,840 2,237,899 1,953,061 4,237,176 Operating income (loss) 19,707 163,392 (204,429) (6,095,850) Net income (loss) 114,441 228,704 458,002 (1,480,639) Basic earnings (loss) per share 0.07 0.14 0.28 (0.88) Diluted earnings (loss) per Share 0.08 0.15 0.27 (0.88)