-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, NvJnOEJhY1o5kw39Vyr8p6bsbIbBC1nn7oiKlNOj+JmEwd+Lopj7EP9pUIb+CUvw XumxBNkxjKh8B5xttlzYOA== 0000101115-96-000002.txt : 19960401 0000101115-96-000002.hdr.sgml : 19960401 ACCESSION NUMBER: 0000101115-96-000002 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19951231 FILED AS OF DATE: 19960329 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: UNITED COMPANIES LIFE INSURANCE CO CENTRAL INDEX KEY: 0000101115 STANDARD INDUSTRIAL CLASSIFICATION: [] IRS NUMBER: 720475131 STATE OF INCORPORATION: LA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 033-91358 FILM NUMBER: 96541572 BUSINESS ADDRESS: STREET 1: ONE UNITED PLAZA STREET 2: 4041 ESSEN LANE CITY: BATON ROUGE STATE: LA ZIP: 70809 BUSINESS PHONE: 8008257568 MAIL ADDRESS: STREET 2: PO BOX 3257 CITY: BATON ROUGE STATE: LA ZIP: 708213257 10-K 1 UC ANNUAL REPORT UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K (Mark One) [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the year ended December 31, 1995 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the period from ........ to ......... Commission file number 33-91358, 33-95968, 33-91362, and 33-95778 UNITED COMPANIES LIFE INSURANCE COMPANY (Exact name of registrant as specified in its charter) Louisiana 72-0475131 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 8545 United Plaza Boulevard Baton Rouge, Louisiana 70809 (Address of principal executive office) (Zip Code) Registrant's telephone number, including area code (504) 924-6007 Securities registered pursuant to Section 12(b) of the Act: Name of each exchange on Title of each class which registered ------------------- ------------------------ NONE Securities registered Pursuant to Section 12(g) of the Act: NONE ------------------------- Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes: X No: Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] The aggregate market value of voting stock held by non-affiliates of the registrant, as of March 15, 1996 was $-0-. The number of shares of $2.00 par value common stock issued and outstanding as of March 15, 1996 was 4,200,528. PART I ITEM 1. BUSINESS GENERAL. United Companies Life Insurance Company ("the Company"), domiciled in Louisiana and organized in 1955, is currently authorized to conduct business in 47 states, the District of Columbia and Puerto Rico. The Company is a wholly-owned subsidiary of United Companies Financial Corporation ("UCFC" or "Parent"), a financial services holding company with mortgage and insurance operations. The primary products of the Company are deferred annuities marketed on a commission basis principally through financial institutions and independent general agents and generally sold to middle income customers seeking tax deferred insurance products, primarily to provide savings for retirement. The Company added variable annuity products to its annuity line of business during 1995 and began sales during the fourth quarter of 1995. The Company produced $136 million, $250 million and $208 million in sales of annuity products during the years ended December 31, 1995, 1994 and 1993, respectively. At December 31, 1995, total annuity reserves were $1.4 billion. At December 31, 1995, the invested assets of the Company consisted of $1.1 billion in investment grade fixed maturity securities (at amortized cost), $168.9 million of home equity mortgage loans (which were primarily originated by its affiliate, United Companies Lending Corporation ("UC Lending"), and $167.4 million of commercial mortgage loans (also primarily originated by UC Lending). At December 31, 1995, the weighted average rating of its publicly traded bond portfolio was "AA," the assets allocated to investments in mortgage-backed securities were $777.7 million and the amount of non-investment grade publicly traded bonds in the portfolio was $22 million or 1.9% of the portfolio. During the year ended December 31, 1995, the net interest spread on the Company's annuity business was 2.37% compared to 2.73% for the same period in 1994. Reserves for annuity policies constitute the Company's primary liabilities. The duration of these liabilities is affected by a number of factors, including interest rates, surrender penalties, ratings, public confidence in the insurance industry generally and in the Company specifically, governmental regulations and tax laws. Since insurance commissions incurred at the origination of annuity policies are generally deferred and recognized over the estimated life of the policies, any unexpected increase in surrenders of annuity contracts would require more rapid recognition of these expenses, thereby adversely impacting profitability. In the second quarter of 1995, A.M. Best Company ("Best"), an independent rating organization, reaffirmed its "A-" (Excellent) rating of the Company. The Company's claims paying ability, which has been rated "A+" (Single-A-Plus) by Duff & Phelps Credit Rating Company ("Duff & Phelps"), has been put on its "Rating Watch-Uncertain" list as a result of the Parent's announcement that it was considering strategic alternatives regarding the Company, including a possible sale thereof. Duff & Phelps reported that the Company's claims paying ability would remain on "Rating Watch-Uncertain" until more information becomes known about the Companys ultimate position within the organization or another organization. See "Recent Developments" and "Insurance Ratings." During 1995, Standard & Poor's, a division of The McGraw-Hill Companies, Inc.("Standard & Poor's"), revised the rating scale used in assigning its qualified solvency ratings of insurance companies and, as a result, revised its rating assigned to the Company from "BBq" to "Aq." RECENT DEVELOPMENTS. On February 2, 1996, UCFC signed a stock purchase agreement dated as of January 30, 1996, for the sale of all of the outstanding capital stock of the Company to UC Life Holding Corp, a new Delaware corporation formed by Knightsbridge Capital Fund I, L.P., for $164 million plus earnings of the Company from January 1, 1996, to closing of the transaction. Knightsbridge, which is a private investment partnership with institutional partners, was formed in 1995 to make equity investments in companies engaged primarily in the life insurance industry. Under the terms of the agreement, the sales price is comprised of cash, currently estimated to be $109 million, and real estate and other assets owned by the Company to be distributed to UCFC prior to the closing. The real estate to be distributed includes portions of the United Plaza office park, including UCFCs home office. In addition, UCFC will purchase a convertible promissory note from an affiliate of the purchaser for $15 million in cash. The purchaser also agreed that the Company would continue to be an investor in first lien home equity loans originated by UCFCs lending operations and that the Companys home office operations would be maintained in its present location in Baton Rouge, Louisiana following the closing for at least two years. The agreement is subject to approval by UCFCs shareholders and regulatory authorities and the satisfaction of other conditions, and provides that the closing will occur on or before July 31, 1996. PRINCIPAL PRODUCTS. The principal products marketed by the Company since 1978 have been deferred annuities. During the year of 1995, the average premium received on the sale of these policies was approximately $21,000. The annuities typically guarantee an interest crediting rate for the first policy year. Thereafter, the interest crediting rate generally may be adjusted by the Company at any time (subject to certain minimum crediting rates stated in the policy). A policyholder is permitted at any time to withdraw all or part of the accumulated premium plus the amount of interest credited on the policy, less a surrender charge if applicable. The initial surrender charge typically ranges from 9% - 10% of the initial premium and decreases to zero during a penalty period of from five to ten years. Approximately 78% of the Company's annuity policies at December 31, 1995, were subject to a surrender penalty. The Company produced $136 million and $250 million in sales of annuity products during the years ended December 31, 1995 and 1994, respectively. The Company believes that the decrease in annuity sales in 1995 is due in part to the interest rate environment, particularly the relative relationship between short term and intermediate term interest rates, and to the focus of the Companys resources on development of the variable annuity product. In addition, a financial institution which produced approximately 10% of UCLICs annuity sales in 1994 discontinued the sale of annuities for UCLIC in 1995 subsequent to the merger of such financial institution. The interest earned on the annuity policy accumulates on a tax-deferred basis until withdrawal by the policyholder. The deferred annuity policies written by the Company generally provide a death benefit equal to the amount of the initial premium plus accumulated interest earned less the amount of any prior withdrawals. The following table presents the Company's annuity sales by state by percent of total premiums for the periods indicated:
Year Ended Year Ended December 31, December 31, 1995 1994 ------------- ------------- State - --------------- Florida 21.8% 28.9% Missouri 20.9 10.3 Louisiana 9.8 13.7 Illinois 9.8 8.6 Texas 7.3 5.8 All Others 30.4 32.7 ------------- ------------- Total 100.0% 100.0% ============= =============
No other state individually accounted for more than 7% of premium income during 1995 or 1994. DISTRIBUTION. The Company's strategy of marketing through financial institutions and independent general agents allows it to avoid substantial sales management office expense and to expand its sales efforts without significant development expense. Because financial institutions and independent general agents usually offer the products of several insurance companies, the Company must continue to provide products with competitive terms, interest crediting rates, commissions and service to both policyholders and the selling institutions and independent general agents. During 1995 and 1994, the Company focused on expanding the independent general agent share of its distribution network. Of the annuity policies sold during 1995 and 1994, approximately 55% and 46%, respectively, of the total dollar amount were attributable to sales by independent general agents. REINSURANCE. The Company generally limits the amount of insurance risk that it assumes with respect to any one insured to $100,000 and for larger policies follows industry practice of reinsuring that portion of the risk in excess of established retention limits. The Company, however, remains contingently liable for insurance ceded to reinsurers and remains liable to the policyholder in the event the reinsurer is unable to meet the obligations assumed under the reinsurance agreement. Reinsurance is currently ceded primarily to the following companies: First Capital Life Insurance Company of Louisiana ("First Capital")(not affiliated with First Capital Holding Company of California), Aetna Life Insurance Company ("Aetna"), Continental Assurance Company ("Continental"), American United Life Insurance Company ("American United") and Transamerica Occidental Life Insurance Company ("Transamerica"). American United and Transamerica are rated "A+" (Superior) by Best at December 31, 1995. Aetna and Continental are rated "A" (Excellent). First Capital is rated "B" (Adequate). In the case of First Capital, the dollar amount of reserve credit taken by the Company is held in trust for the benefit of the Company. LIFE INSURANCE AND ANNUITY RESERVES. In accordance with applicable insurance regulations, the Company records as liabilities in its statutory financial statements actuarially determined reserves that are calculated to meet future obligations under outstanding insurance. The reserves are based on statutorily recognized methods using prescribed morbidity and mortality tables and interest rates. Reserves include unearned premiums, premium deposits, claims that have been reported but are not yet paid, claims that have been incurred but have not been reported, and claims in the process of settlement. The Company's reserves satisfy minimum statutory requirements. The annuity reserves reflected in the Consolidated financial statements are calculated based on generally accepted accounting principles ("GAAP"). As of December 31, 1995, annuity reserves were $1.4 billion, policy benefit reserves were $111.2 million, and unearned premium reserves related to credit insurance were $1.8 million. These reserves are based upon the Company's best estimates of mortality, persistency, expenses and investment income, with appropriate provisions for adverse statistical deviation and the use of the net level premium method for all non-interest sensitive products and the retrospective deposit method for interest-sensitive products. GAAP reserves differ from statutory reserves due to the use of different assumptions regarding mortality and interest rates and the introduction of lapse assumptions into the GAAP reserve calculation. See Note 1 of Notes to Consolidated financial statements for additional information regarding reserve assumptions under GAAP. INVESTMENTS. The investment function of the Company is overseen by an investment committee comprised of senior management, with the assistance of outside investment advisors in the management of certain assets. The Company's investment policy seeks to achieve attractive returns on a low to moderate risk portfolio of investments. These investments, primarily bonds and mortgage loans, must be within regulatory constraints to qualify as permitted assets, and within the yield, risk and maturity limitations established by the Company as necessary for meeting its objectives. The investment strategy continues to focus on maintaining the percentage of the Company's invested assets committed to commercial and residential mortgages and to investment grade corporate bonds and mortgage-backed securities. The following table sets forth, at December 31, 1995, certain information regarding the Company's invested assets:
Amortized Percent of Cost Total ------------- ----------- (dollars in thousands) Fixed Maturity Securities(1) U.S. Government, government agencies & authorities $ 11,504 0.7% Foreign governments & other 20,819 1.3 Corporate bonds 335,238 21.2 Mortgage-backed 777,744 49.0 ------------- ----------- Total 1,145,305 72.2 ------------- ----------- Mortgage loans on real estate 336,269 21.2 Investment real estate 32,423 2.0 Short-term investments 22,804 1.4 Investment in limited partnership 25,594 1.6 Policy loans 20,291 1.3 Common and preferred stocks 1,012 0.1 Other invested assets 2,469 0.2 ------------- ----------- Total $ 1,586,167 100.0% ============= =========== - ------------------ (1) Generally stated at amortized cost adjusted for permanent impairment in value. Total fair value of held-to-maturity and available-for-sale Fixed Maturity Securities at December 31, 1995, was approximately $1.2 billion, representing net unrealized gains of $44.5 million.
As reflected in the following table, the carrying value of the Company's investments classified as investment grade at December 31, 1995, was approximately $1.1 billion or 94.4% of the fixed maturity portfolio:
Percent of Amortized Fair Carrying Carrying Cost Value Value Value ---------- ------------ ----------- ----------- (dollars in thousands) Investment Quality(1) Aaa $ 734,721 $ 756,251 $ 756,251 63.5% Aa 25,255 26,768 26,768 2.2 A 227,800 244,562 244,434 20.5 Baa 91,322 97,728 97,306 8.2 ---------- ------------ ----------- ----------- Total Investment Grade 1,079,098 1,125,309 1,124,759 94.4 Ba and below 21,980 22,093 22,093 1.9 Not rated 44,227 42,369 44,227 3.7 ---------- ------------ ----------- ----------- Total Fixed Maturity Securities $1,145,305 $ 1,189,771 $ 1,191,079 100.0% ========== ============ =========== =========== - ------------------------- (1)Fixed maturity investments are classified according to the ratings assigned by Moody's Investors Service, Inc., or, in the absence of such rating, by the National Association of Insurance Commissioners ("NAIC") whose ratings operate as follows: NAIC Class 1 was assumed equivalent to an A rating; NAIC Class 2, BBB/Baa; and NAIC Classes 3-6, BB/Ba and below.
As a significant percentage of the Company's investment portfolio is invested in fixed rate, fixed maturity investments, the fair value of these investments is sensitive to changes in market rates of interest. In a rising interest rate environment, the fair value of these investments would be expected to decrease in value. An unanticipated increase in policy surrenders or claims could impact the Company's liquidity and require the sale of certain assets, such as bonds, prior to their maturity at a loss. FIXED MATURITY INVESTMENTS. As of December 31, 1995, the amortized cost of the Company's fixed maturity investments totaled $1.1 billion or approximately 72.2% of the Company's invested assets. The fair value of fixed maturity investments at that date exceeded its amortized cost by approximately $44.5 million. In accordance with the provisions of Financial Accounting Standards Board ("FASB") Statement of Financial Accounting Standards No. 115 ("SFAS 115"), the Company classifies its securities in one of three categories: "available-for-sale," "held-to-maturity" or trading." Securities classified as held-to maturity are carried at amortized cost, whereas securities classified as trading securities or available-for-sale are recorded at fair value. The adjustment, net of applicable income taxes, for investments classified as available-for-sale is recorded in "Net unrealized gains (losses) on securities" and is included in stockholder's equity on the balance sheet and the adjustment for investments classified as trading is recorded in "Net investment income" in the statement of income. The Company may for business or regulatory reasons be required to sell certain of its investments prior to maturity, and in some cases these sales may be made at times when the fair value is less than carrying value, thereby resulting in a loss in the statements of income for financial and statutory reporting purposes. At December 31, 1995, 49.0% of the Company's total invested assets were invested in mortgage-backed securities. These mortgage-backed securities consist principally of collateralized mortgage obligations and mortgage-backed pass-through securities. Mortgage-backed securities generally are collateralized by mortgages backed by GNMA, FNMA and FHLMC. Only GNMA mortgages are backed by the full faith and credit of the United States Government. Certain mortgage-backed securities are subject to significant prepayment risk. In periods of declining interest rates, mortgages may be repaid more rapidly than scheduled as individuals refinance higher-rate mortgages to take advantage of lower interest rates. As a result, holders of mortgage-backed securities may receive large prepayments on their investments that cannot be reinvested at an interest rate comparable to the rate on the prepaid mortgage. In addition to decreased investment yields, earnings could also be affected by capital gains or losses realized on these prepayments since the carrying value of securities purchased at a discount or premium may be different than the amount received upon prepayment. The Company has reduced the prepayment risk associated with mortgage-backed securities by investing in planned amortization class ("PAC") instruments. These instruments are designed to amortize in a predictable manner by shifting the primary risk of prepayment of the underlying collateral to other investors. PAC instruments represented approximately 54% of the Company's investments in mortgage-backed securities at December 31, 1995. MORTGAGE LOANS ON REAL ESTATE. At December 31, 1995, the Company's investment in mortgage loans on real estate was comprised of $168.9 million in residential home equity mortgage loans and $167.4 million in commercial real estate mortgage loans, substantially all of which were originated by UC Lending. During 1995, the Company funded $21.3 million in new commercial real estate loans which were originated by UC Lending and refinanced $18.2 million of existing commercial real estate mortgage loans. The mortgage loan portfolio of the Company is serviced by UC Lending. The Company has full credit recourse to UC Lending with respect to substantially all of the home equity mortgage loans acquired from UC Lending. The servicing of the commercial loan portfolio will be transferred from UC Lending to the Company under the terms of the proposed sale of the Company. See "Recent Developments" above. The Company has purchased on an interim basis a substantial portion of the first mortgage home equity loans originated by UC Lending. These loans are typically held by the Company for short time periods (typically no longer than 90 days) and then sold back to UC Lending prior to their sale in public securitization transactions by an affiliate of UC Lending. UC Lending, not the Company, retains the contingent credit risk in connection with these transactions. A portion of the home equity loans are held by the Company in its portfolio and are not sold by the Company to UC Lending. Mortgage loans are carried at amortized cost less valuation adjustments for permanently impaired value where appropriate. Commercial mortgages range in size up to approximately $1.9 million with an average loan size of approximately $.6 million. At origination, substantially all of the mortgages were on existing leased properties rather than on properties in construction or on start-up properties. The origination of commercial mortgages was subject to underwriting procedures, including: (i) maximum loan to value ratio of 75% of the property's appraised value; (ii) specified debt coverage requirements; (iii) on-site inspections; (iv) third-party appraisals; and (v) personal guarantees of borrowers. For these reasons, the Company does not consider its commercial loans to be high risk. The weighted average interest rate on the Company's commercial mortgage loan portfolio was 9.83% and 10.07% at December 31, 1995 and 1994, respectively. The following table provides information at December 31, 1995, regarding the Company's commercial mortgage loans on real estate by property type, state and contractual maturity (excluding loan loss reserves and discount):
Percent of Amount Total ------------- ----------- (dollars in thousands) Commercial Mortgage Loans by Property Type Retail $ 74,321 43.9% Office 43,527 25.7 Office and warehouse 38,888 22.9 Other 12,775 7.5 ------------- ----------- Total $ 169,511 100.0% ============= =========== Commercial Mortgage Loans by State Florida $ 37,475 22.1% Georgia 32,530 19.2 Colorado 21,428 12.6 Virginia 13,873 8.2 Tennessee 12,316 7.3 Texas 9,750 5.8 All others 42,139 24.8 ------------- ----------- Total $ 169,511 100.0% ============= =========== Commercial Mortgage Loans by Contractual Maturity 1995 $ 26,316 15.5% 1996 17,781 10.5 1997 19,633 11.6 1998 16,387 9.7 After 1998 89,394 52.7 ------------- ----------- Total $ 169,511 100.0% ============= ===========
INVESTMENT REAL ESTATE. At December 31, 1995, the Company's investment real estate was $32.4 million. Investment real estate included two office buildings, adjacent land, and related improvements utilized by its Parent, other affiliates, and unrelated third party tenants. In addition, it included property acquired through foreclosure on commercial mortgage loans. At December 31, 1995, the Company owned $13.6 million of commercial properties obtained through foreclosure. For substantially all commercial mortgages which the Company has foreclosed, an independent appraisal was obtained and, if warranted, the Company established a specific reserve based on its judgment as to the amount which may not be recoverable. As of December 31, 1995, the specific reserve amounted to $4.0 million. During 1995 the Company moved from its previous home office property into an office building owned by an affiliate. The Company also establishes a general reserve for all commercial mortgages where a specific reserve or write-down has not been established. As of December 31, 1995, the general reserve amounted to $1.0 million. INSURANCE RATINGS. The ability of an insurance company to compete successfully depends in part on its financial strength, operating performance and claims-paying ability as rated by Best and other rating agencies. The Company is presently rated "A-" (Excellent) by Best. Best's 15 categories of ratings for insurance companies currently range from "A++" (Superior) to "F" (In Liquidation). According to Best, an "A" or "A-" rating is assigned to companies which, in Best's opinion, have achieved excellent overall performance when compared to the standards of the life insurance industry and generally have demonstrated a strong ability to meet their obligations to policyholders over a long period of time. In evaluating a company's statutory financial and operating performance, Best reviews the company's statutory profitability, leverage and liquidity, as well as the company's spread of risk, quality and appropriateness of its reinsurance program, quality and diversification of assets, the adequacy of its policy reserves and surplus, capital structure and the experience and competency of its management. Best ratings are based upon factors of concern to policyholders, agents and intermediaries and are not directed toward the protection of investors. On October 24, 1995, Duff & Phelps placed its "A+" (Single-A-Plus) rating of the Company on Rating Watch-Uncertain because of the October 20, 1995, announcement by the Company's Parent that the Parent was considering strategic alternatives regarding the Company, including the pending sale of the Company (see "Management's Discussion and Analysis of Financial Condition and Results of Operations - Pending Sale of the Company"). Duff & Phelps reported that the claims paying ability rating would remain on Rating Watch-Uncertain until more information becomes known about the Company's ultimate position within the organization or another organization. In 1995, Standard & Poor's revised the rating scale used in assigning its qualified solvency ratings of insurance companies and, as a result, revised the Company's rating from "BBq" to "Aq." Ratings such as those held by the Company are important to maintaining public confidence in the Company and its ability to market its annuity products. Any lowering of the Company's ratings could materially and adversely affect the Company's ability to market its products, particularly the sale of annuities through financial institutions, and could increase the surrender of its annuity policies. Both of these consequences could, depending upon the extent thereof, have a materially adverse effect on the Company's liquidity and, under certain circumstances, net income. The Company believes that its present ratings will enable it to continue to compete successfully. GOVERNMENT REGULATION AND LEGISLATION GENERAL REGULATION. The Company is subject to regulation by the State of Louisiana, its state of domicile, and the other states in which it transacts business. The laws of such states are designed for the protection of policyholders rather than security-holders. The Company is a member of a holding company system in Louisiana. All transactions within a holding company system affecting insurers must be both reasonable in relation to its outstanding liabilities and adequate for its needs. State laws also require prior notice or regulatory agency approval of changes in control of an insurer or its holding company and of material intercorporate transfers of assets within the holding company structure. Generally, under insurance holding company statutes, a state insurance authority must approve in advance the direct or indirect acquisition of 10% or more of the voting securities of an insurance company chartered in its state. The laws of the various states establish regulatory agencies with broad administrative powers to approve policy forms, grant and revoke licenses to transact business, regulate trade practices, license agents, and prescribe the type and amount of investments permitted. Insurance companies are required to file detailed annual statements with the state insurance regulators in each of the states in which they do business, and their business and accounts are subject to examination by such agencies at any time. In addition, insurance regulators periodically examine the insurer's financial condition, adherence to statutory account practices, and compliance with insurance department rules and regulations. As part of their routine regulatory oversight process, state insurance departments conduct detailed examinations periodically (generally once every three years) of the books, records and accounts of insurance companies domiciled in their states. Such examinations are generally conducted in cooperation with the departments of two or three other states under guidelines promulgated by the National Association of Insurance Commissions ("NAIC"). The Company's last examination occurred during 1994 for the three year period ended December 31, 1993. Final reports issued by the Louisiana Commissioner of Insurance did not raise any significant issues or adjustments. REGULATION AT FEDERAL LEVEL. Although the federal government generally does not directly regulate the insurance business, federal initiatives often have an impact on the business in a variety of ways. Current and proposed federal measures that may significantly affect the insurance business include limitations on antitrust immunity, minimum solvency requirements and the removal of barriers restricting banks from engaging in the insurance and mutual fund business. Congress has from time to time in the past considered possible legislation that would adversely affect the federal income tax treatment of certain annuity products offered by the Company. There can be no assurance that future tax legislation will not contain provisions that may result in adverse effects on the Company's products. A substantial amount of the Company's annuity policies are marketed through financial institutions. In a recent decision, the United States Supreme Court upheld the United States Comptroller of the Currency's decision to permit national banks to sell annuities in towns with more than 5,000 inhabitants. REGULATION OF DIVIDENDS AND OTHER PAYMENTS. As a Louisiana domiciled insurance company, the Company is subject to Louisiana requirements relating to dividends and restrictions on payments to affiliates. The Louisiana Insurance Code (the "Code") provides that no Louisiana stock insurance company shall declare and pay any dividends to its stockholders unless (i) its capital is fully paid in cash and is unimpaired and (ii) it has a surplus beyond its capital stock and the initial minimum surplus required and all other liabilities equal to 15% of its capital stock, provided that this restriction shall not apply to an insurance company when its paid-in capital and surplus exceed the minimum required by the Code by 100% or more. Additional dividend restrictions are imposed by the Louisiana Insurance Holding Company System Regulatory Law (the "Insurance Holding Company Law"). Specifically, extraordinary dividends by insurance companies are subject to a prior approval requirement by the Louisiana Commissioner of Insurance (the "Louisiana Commissioner") and an insurance company's surplus as regards policyholders following any dividends or distributions to affiliates must be reasonable to the insurance company's outstanding liabilities and adequate to its financial needs. An extraordinary dividend is defined as an amount in excess of the lesser of (a) 10% of surplus as of the preceding December 31, or (b) the net gain from operations for the preceding calendar year. The Insurance Holding Company Law also subjects all transactions between a Louisiana insurance company and its affiliates to certain fairness and reasonableness standards, and, furthermore, certain types of transactions with its affiliates are subject to prior notice to the Louisiana Insurance Commissioner who may disapprove the transaction if it is determined that such transaction does not meet certain fairness and reasonableness standards or if it may adversely affect the interests of policyholders. If insurance regulators determine that payment of a dividend or any other payment to an affiliate (such as a payment under a tax allocation agreement or for employee or other services or pursuant to a surplus debenture) would, because of the financial condition of the paying insurance company or otherwise, be hazardous to such insurance company's policyholders or creditors, the regulators may block payment of such dividend or such other payment to the affiliate that would otherwise be permitted without prior approval. Under the current statutory and regulatory scheme in Louisiana, the Company has, as of December 31, 1995, the capacity to pay dividends of $9.2 million. No dividends were paid during 1993, 1994 or 1995 in order to retain capital in the Company. INSURANCE REGULATORY CHANGES. The NAIC and insurance regulators have undertaken a process of re-examining existing laws and regulations and their application to insurance companies. In particular, this re-examination has focused on insurance company investment and solvency issues and, in some instances, has resulted in new interpretations of existing law, the development of new laws and the implementation of non-statutory guidelines. The NAIC has formed committees to study and formulate regulatory proposals on such diverse issues as the use of surplus debentures, accounting for reinsurance transactions and the adoption of risk-based capital rules. It is not possible to predict the future impact of changing state and federal regulation on the operations of the Company. Statutory filings require classifications of investments and require the establishment of an Asset Valuation Reserve ("AVR") account which consists of two main components: a "default component" to provide for future credit-related losses on fixed income investments and an "equity component" to provide for losses on all types of equity investments, including real estate. The AVR at December 31, 1995, was $20.9 million. Also required is the establishment of a reserve called the Interest Maintenance Reserve ("IMR"), which is a reserve for fixed income realized capital gains and losses, net of taxes, related to changes in interest rates. The IMR is required to be amortized into statutory earnings on a basis reflecting the remaining period to maturity of the fixed income securities sold. The deferred realized gains and losses included in the IMR at December 31, 1995, was $2.7 million, net of taxes. INSURANCE REGULATORY INFORMATION SYSTEM. The NAIC has developed the Insurance Regulatory Information System ("IRIS") which involves calculation of ratios covering eleven (11) categories of financial data with defined "usual ranges" for each category. The ratios are designed to provide regulators "early warnings" as to when a given company might warrant special attention. The Company had only two ratios outside the usual range in 1995. These two relate to the decrease in premiums in 1995 and the effect on reserves of the continued run-off of the credit life business. RISK-BASED CAPITAL REQUIREMENTS. The NAIC has developed risk-based capital ("RBC") requirements for life insurance companies. The formula, which is set forth in instructions adopted by the NAIC, is designed to take into account asset risks, insurance risks, interest rate risks and other relevant risks with respect to the insurer's business. The NAIC has further provided for categorization of life insurance companies according to the extent to which they meet specified RBC thresholds, with increasing degrees of regulatory scrutiny or intervention provided for companies in categories of lesser RBC compliance. The following degrees or levels of regulatory action are triggered by certain events with respect to an insurer's RBC compliance as follows: (I) a "company action level event" (requiring the insurer to file and obtain approval of a comprehensive financial plan for the improvement of its RBC compliance): (ii) a "regulatory action level event" (resulting in, in addition to the requirement of a financial plan, regulatory actions including examination of the insurer's assets, liabilities and operations followed by an order specifying such corrective actions as are determined to be required); (iii) an "authorized control level event" (resulting in, in addition to the regulatory actions specified above, such actions as are necessary to cause the insurer to be placed under regulatory control under the applicable rehabilitation and/or liquidation statutes if deemed to be in the best interests of policyholders, creditors and the public): and (iv) a "mandatory control level event" (resulting in, on a mandatory basis, such actions as are necessary to cause the insurer to be placed under regulatory control under the applicable rehabilitation and/or liquidation statutes). The Company is adequately capitalized under the RBC requirements and believes that the thresholds will not have any significant regulatory effect on it. However, should the Company's RBC position decline in the future, its continued ability to pay dividends and the degree of regulatory supervision or control to which it is subject may be affected. At December 31, 1995, the Company's risk-based capital ratio was approximately 229%. ASSESSMENTS AGAINST INSURERS. Guaranty laws exist in all states, the District of Columbia and Puerto Rico. Life insurers doing business in any of these regions can be assessed for policyholder losses incurred by insolvent life insurance companies. The amount and timing of any future assessment on the Company under these laws cannot be reasonably estimated and are beyond its control. Regulatory actions against life insurers encountering financial difficulty have prompted the various state guaranty associations to assess life insurance companies for the deemed loss. A large part of the assessments paid by the Company pursuant to these laws may be used as credits for a portion of premium taxes. COMPETITION As a marketer of annuity products, the Company faces intense competition. Competitors include an increasing number of insurance companies which have begun to offer annuity products. Many of the Company's competitors are substantially larger and have more capital and other resources than the Company. Competition can take many forms including convenience in obtaining an annuity, customer service, marketing and distribution channels as well as crediting rates. ITEM 2. PROPERTIES The Company owns two office buildings in United Plaza office park, Baton Rouge, Louisiana. All of one and part of the other building are leased to affiliates of the Company. The Company's executive offices are located in a third building owned by an affiliate, from which the Company leases approximately 30,000 square feet. As part of the proposed sale of the Company by UCFC, the two office buildings in Baton Rouge will be distributed to UCFC, while the Company will continue to lease its executive office space from an affiliate. See "Management's Discussion and Analysis of Financial Condition and Results of Operations - Pending Sale of the Company." Management believes that the properties are adequately maintained and insured and satisfactorily meet the requirements of the business conducted therein. ITEM 3. LEGAL PROCEEDINGS The nature of the Company's business is such that it is routinely involved in litigation and is a party to or subject to other items of pending or threatened litigation. Although the outcome of these matters cannot be predicted, management of the Company believes, based upon information available, that the resolution of these various matters will not result in any material adverse effect on its Consolidated financial statements. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None. PART II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND SECURITY HOLDER MATTERS The Company is a wholly-owned subsidiary of United Companies Financial Corporation ("UCFC") which is headquartered in Baton Rouge, Louisiana. UCFC owns all of the Company's 4,200,528 shares of $2 par value common stock. UCFC's Common Stock is traded on the National Association of Securities Dealers Automated Quotation System/National Stock Market under the symbol "UCFC." ITEM 6. SELECTED FINANCIAL DATA The selected financial data set forth below is derived from the Company's audited consolidated financial statements.
Year Ended December 31, --------------- -------------- 1995 1994 1993 1992 1991 ----------- ----------- --------------- -------------- ----------- (in thousands) Income Statement Data: Net investment income $ 123,107 $ 114,380 $ 109,661 $ 104,814 $ 103,894 Net insurance premiums 8,508 11,373 18,684 22,860 36,269 Realized investment gains (losses) (3,498) (4,811) (19,393) 1,486 (2,349) ----------- ----------- --------------- -------------- ----------- Total revenues 128,117 120,942 108,952 129,160 137,814 Total expenses 116,017 111,862 121,317 123,695 135,737 ----------- ----------- --------------- -------------- ----------- Income (loss) before income taxes 12,100 9,080 (12,365) 5,465 2,077 Provision (benefit) for income taxes 4,065 3,194 (4,107) 1,438 173 ----------- ----------- --------------- -------------- ----------- Net income (loss) $ 8,035 $ 5,886 $ (8,258) $ 4,027 $ 1,904 ----------- ----------- --------------- -------------- ----------- Balance Sheet Data - Period End: Total investments(1) $1,631,723 $1,453,094 $ 1,428,405 $ 1,253,915 $1,154,486 Due from reinsurance 33,583 34,985 36,577 37,716 38,600 Deferred policy acquisition costs 90,703 91,915 83,495 80,007 78,599 Total assets 1,789,608 1,658,154 1,625,718 1,464,475 1,343,076 Annuity reserves 1,417,803 1,425,973 1,294,983 1,147,555 1,014,649 Policy benefit reserves 111,209 116,501 123,328 125,177 125,908 Total liabilities 1,603,083 1,555,975 1,482,591 1,327,610 1,211,080 Stockholder's equity(1) 186,525 102,179 143,127 136,385 132,358 Other Data: Annuity sales $ 135,534 $ 249,737 $ 207,682 $ 187,050 $ 175,796 Net interest spread on annuities 2.37% 2.73% 2.20% 1.84% 1.88% Investment grade bonds as % of invested assets 68.0% 69.6% 59.6% 54.3% 25.1% - --------------------------- (1) During the first quarter of 1994, the Company implemented the provisions of FASB Statement of Financial Accounting Standards No. 115 ("SFAS 115"), which revised the method of accounting for certain of the Company's investments. Prior to adoption of SFAS 115, the Company reported its investments in fixed income investments at amortized cost, adjusted for declines in value considered to be other than temporary, SFAS 115 requires the classification of securities in one of three categories: "available-for-sale," "held-to-maturity" or "trading securities." Securities classified as held-to-maturity are carried at amortized cost, whereas securities classified as trading securities or available-for-sale are recorded at fair value. Effective with the adoption of SFAS 115, the Company determined the appropriate classification of its investments and, if necessary, adjusted the carrying value of such securities accordingly as if the unrealized gains or losses had been realized. The adjustment, net of applicable income taxes, for investments classified as available-for-sale is recorded in "Net unrealized loss on securities" and is included in Stockholders' equity and the adjustment for investments classified as trading is recorded in "Investment Income" in the Statement of income. In accordance with the provisions of SFAS 115, prior year investments were not restated.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS following analysis should be read in conjunction with the Company's Consolidated financial statements and accompanying notes presented elsewhere herein. United Companies Life Insurance Company ("the Company") is a wholly-owned subsidiary of United Companies Financial Corporation ("UCFC"), a financial services holding company founded in 1946. UCFC has mortgage operations that are focused on the origination, sale and servicing of first mortgage, nonconventional, home equity loans; and insurance operations that are focused, principally on the sale of deferred annuities. On February 2, 1996, UCFC entered into an agreement to sell all of the outstanding capital stock of the Company, subject to approval of UCFC's stockholders and regulatory authorities and satisfaction of certain other conditions. See "Pending Sale of the Company" and Note 9 to Notes to Consolidated financial statements. The Company, a life insurance company domiciled in Louisiana and organized in 1955, is currently authorized to conduct business in 47 states, the District of Columbia and Puerto Rico. The primary products of the Company are deferred annuities, marketed on a commission basis principally through financial institutions and independent agents. As of December 31, 1995, premiums for these annuities averaged approximately $21,000 per policy and are generally sold to middle income customers seeking tax deferred insurance products, primarily to provide savings for retirement. The Company's deferred annuity policies typically guarantee an interest crediting rate for the first policy year. Thereafter, the interest crediting rate generally may be adjusted by the Company at any time (subject to certain minimum crediting rates stated in the policy). A policyholder is permitted at any time to withdraw all or part of the accumulated premiums plus the amount of interest credited on the policy, less a surrender charge if applicable. The initial surrender charge is typically 9% - 10% of accumulated premium or accumulated value, depending on the particular contract, and decreases to zero during a penalty period of from five to ten years. Approximately 78% of the Company's deferred annuity policies at December 31, 1995, were subject to a surrender penalty. The interest earned on the annuity policies accumulates on a tax-deferred basis until withdrawal by the policyholder. The deferred annuity contracts written by the Company provide a death benefit equal to the amount of the accumulated premium and interest earned less the amount of any prior withdrawals. The Company has continued to focus its efforts on expanding its distribution network of financial institutions and independent general agents, and expansion of the independent general agents' share of the distribution network has been a primary goal since 1993. Independent general agents sold approximately 55% of the total dollar amount of annuities written in 1995 compared to 46% in 1994 and 20% in 1993. Annuity sales in 1995 were $136 million compared to $250 million in 1994 and $208 million in 1993. The Company believes that the decrease in annuity sales in 1995 is due in part to the interest rate environment, particularly the relative relationships between short-term and intermediate- term interest rates and to the focus of the Companys resources on development of its variable annuity product. In addition, a financial institution which produced approximately 10% of the Company's annuity sales in 1994 discontinued the sale of the Company's annuities in 1995, subsequent to the merger of such financial institution. Fluctuations in and the level of interest rates directly impact the operations of the Company. The average spread on the annuity business was 2.20% in 1993, and increased to 2.73% during 1994. This spread declined to 2.37% for 1995. This decrease can be attributed to the more favorable interest rate environment that existed in 1994 compared to 1995. Surrenders of annuity policies increased in 1995 and 1994 compared to the prior years due in part to the reduction in interest rates on new and existing annuity contracts and to a rising interest rate environment and an increase in the number of annuity contracts which were beyond the surrender penalty period. The Company has continued its efforts to improve the quality and liquidity of its investment portfolio as the weighted average rating of the publicly traded bond portfolio was improved from "A" to "AA" in 1992, the amount of non-investment grade publicly traded bonds in the portfolio was reduced from $86.7 million or 14.7% of the bond portfolio at the end of 1990 to $22 million or 1.9% of the portfolio at December 31, 1995. The assets allocated to investments in mortgage-backed securities have increased from $218 million at year-end 1990 to $777.7 million at December 31, 1995. At December 31, 1995, the weighted average rating of the publicly traded bond portfolio was "AA," the amortized cost of assets allocated to investments in investment grade fixed maturity securities was $345.6 million or 30.2% of the portfolio and in investment grade mortgage-backed securities was $733.5 million or 64.0% of the portfolio. At December 31, 1995, the amortized cost of the Company's holdings of non-investment grade traded bonds was $22 million or 1.9% of the portfolio. Invested assets of the Company also include residential and commercial real estate mortgages originated and serviced by United Companies Lending Corporation ("UC Lending"), an affiliate. The annuities sold by the Company are monetary in nature and therefore sensitive to changes in the interest rate environment. Profitability of the Company is directly affected by its ability to invest annuity premiums at yields above the interest crediting rates on the related policy liabilities. One of the primary financial objectives is to effectively manage this interest spread over time in changing interest rate environments. This is accomplished, in part, by adjusting the interest crediting rate paid on its existing and new annuity policies. During periods of declining interest rates, the fair value of the Company's investments, primarily fixed maturity investments, increases; however, yields earned on investments made during such periods decline. In contrast, during periods of rising interest rates, the fair value of the investment portfolio declines and the risk of policy surrenders increases. An unanticipated increase in surrenders would impact the Company's liquidity, potentially requiring the sale of certain investments prior to their maturities, which may be at a loss. Reserves for annuity policies constitute the Company's primary liabilities. The duration of these liabilities is affected by a number of factors, including interest rates, surrender penalties, ratings, public confidence in the insurance industry, generally, and in the Company, specifically, governmental regulations and tax laws. Since insurance commissions incurred at the origination of annuity policies are generally deferred and recognized over the estimated life of the policies, any unexpected increase in surrenders of annuity contracts would require more rapid recognition of these expenses, thereby adversely impacting profitability. RESULTS OF OPERATIONS YEAR ENDED DECEMBER 31, 1995 COMPARED TO YEAR ENDED DECEMBER 31, 1994 Net income for 1995 was $8.0 million, compared to $5.9 million for 1994. The increase in net income for 1995 resulted primarily from improved investment results from the Company's interest in a limited partnership. The following table sets forth certain financial data for the periods indicated:
Year Ended December 31, --------------- --------------- 1995 1994 --------------- --------------- (in thousands) (in thousands) Total revenues $ 128,117 $ 120,942 Total expenses 116,017 111,862 Income before taxes 12,100 9,080 Net income 8,035 5,886
REVENUES The following table sets forth information regarding the components of the Company's revenues for the periods indicated:
Year Ended December 31, --------------- --------------- 1995 1994 --------------- --------------- (in thousands) (in thousands) Net investment income $ 123,107 $ 114,380 Net insurance premiums 8,508 11,373 Realized investment losses (3,498) (4,811) --------------- --------------- Total $ 128,117 $ 120,942 =============== ===============
Net investment income totaled $123.1 million on average investments of approximately $1.5 billion for 1995, compared to net investment income of $114.4 million on average investments of approximately $1.4 billion during the same period of 1994. At December 31, 1995, the amortized cost of the fixed income portfolio totaled $1.1 billion and was comprised principally of $733.5 million in investment grade mortgage-backed securities and $345.6 million in investment grade bonds. In addition, net income before income taxes for 1995 increased $4.8 million as compared to 1994 by results from an investment in a limited partnership. At December 31, 1995, the weighted average rating of the publicly traded bond portfolio, according to nationally recognized statistical rating agencies, was "AA." During 1994, the Company established a trading account for a portion of its investment portfolio invested in common stocks. At December 31, 1995, the carrying value of investments in the Company's trading account was $752,000 reflecting a $207,000 unrealized loss, which is included in investment income for 1995. Interest, charges and fees on mortgage real estate loans decreased $5.3 million during 1995 compared to the same period of 1994. A reduction in the holding periods of home equity loans acquired by the Company from UC Lending was the primary reason for the reduction in interest charges and fees on loans in 1995. At December 31, 1995, the Company's mortgage loans on real estate were comprised of $168.9 million in home equity mortgage loans and $167.4 million in commercial real estate mortgage loans, compared to $158.5 million and $153.0 million, respectively at December 31, 1994. The mortgage loan portfolio of the Company is serviced by UC Lending. The Company has full credit recourse to UC Lending with respect to substantially all home equity mortgage loans acquired by it from UC Lending. Although the Company, since 1991, had limited its investment in commercial real estate loans, the Company decided in 1995 to invest on a limited basis in new commercial real estate loans, substantially all of which were originated by UC Lending. During 1995, the Company funded $21.3 in new commercial real estate loans and refinanced $18.2 million of existing commercial loans. The servicing of the commercial loan portfolio will be transferred from UC Lending to the Company pursuant to the terms of the proposed sale of the Company. See "Pending Sale of the Company." The Company estimates that non-accrual loans reduced mortgage loan interest by approximately $121,000 and $124,000 during the 1995 and 1994, respectively. Loans are placed on a non-accrual status when they are 150 days past due. During the year ended December 31, 1995, the average amount of non-accrual mortgage loans owned by the Company was $2.4 million, compared to approximately $2.6 million during the same period of 1994. At December 31, 1995, the Company owned approximately $7.2 million of commercial loans which were on an accrual status, but which the Company considers as potential problem loans, compared to $7.6 million at December 31, 1994. The Company evaluates each of these commercial loans to estimate its risk of loss in the investment and provides for such loss through a charge to earnings. Investment income for the year of 1995 was also reduced by $.9 million as compared to the same period of 1994 for the excess of the amortization of prior loan sale gains over the related pass-through income. An increase in the amortization of prior loan sale gains was the result of an adjustment in the estimated prepayment assumptions of certain mortgage loans. This adjustment was made in connection with the Company's evaluation which is performed as of each balance sheet date of the prepayment assumptions used in calculating loan sale gains in relation to the current rate of prepayment, and if necessary, revising the estimate using the original discount rate. Any losses arising from adverse prepayment experience are recognized immediately while favorable experience is recognized prospectively. Net insurance premiums declined approximately $2.9 million for the year of 1995 compared to the same period of 1994. Net insurance premiums reflect revenues associated primarily with pre-need life insurance and credit insurance. Management has chosen to focus on deferred annuities, its primary product line, and on developing its variable annuity product introduced in the fourth quarter of 1995, and thus new sales of pre-need life insurance and credit insurance have been discontinued. The decrease in premium income reflects that decision. Realized investment gains and losses may vary significantly from year to year since the decision to sell investments is determined principally by considerations on investment timing and tax consequences. Realized investment gains and losses can also result from early redemption of securities at the election of the issuer (calls) and changes in write-downs and reserves. Realized gains (losses) were as follows for the indicated periods:
Year Ended December 31, --------------- --------------- 1995 1994 --------------- --------------- (in thousands) (in thousands) Sales of fixed maturity securities $ 423 $ (121) Calls and maturities of fixed maturity securities (42) 98 Sales of equity securities 172 (8) Sales of investment real estate - 279 Write-downs/reserve changes (4,051) (5,059) --------------- --------------- Realized investment losses $ (3,498) $ (4,811) =============== ===============
EXPENSES following table presents the components of the Company's expenses for the periods indicated:
Year Ended December 31, --------------- -------------- 1995 1994 --------------- -------------- (in thousands) in thousands) Interest on annuity policies $ 79,086 $ 73,065 Amortization of deferred policy acquisition costs 13,159 13,528 Insurance commissions 432 328 Insurance benefits 9,930 12,654 Other operating 13,410 12,287 --------------- -------------- Total $ 116,017 $ 111,862 =============== ==============
Interest on annuity policies increased $6.0 million in 1995 compared to the same period of 1994, primarily as a result of a $70 million increase in average annuity reserves. However, annuity reserves decreased $8.2 million during 1995 from 1994 primarily because of annuity surrenders. As expected, annuity surrenders increased in comparison with 1994, primarily because of the current interest rate environment and the effect of policies no longer subject to surrender charges. Management continues to aggressively manage its interest spread between earnings and crediting rates in an effort to balance competitiveness and profitability goals. Average renewal credited rates ranged from 5.60% to 5.75% and 5.60% to 6.45% for years ended December 31, 1995 and 1994, respectively. Net insurance commissions for the year of 1995 increased by approximately $.1 million from the same period of 1994. Refunds of commissions on the unearned premiums of the Company's credit life business exceeded the net commissions after capitalization during a portion of 1994 and contributed to the increase in 1995. Commissions paid on issuance of the Company's deferred annuity products are generally capitalized as deferred policy acquisition costs ("DPAC") and amortized over the estimated life of the policy. The accounting method prescribed for determining the cumulative amount of DPAC requires a regular reevaluation of the estimated present value of gross profits to be earned on a block of policies. If, based on actual experience and other information, the estimate of the present value of gross profits significantly changes, either positively or negatively, the cumulative amount of DPAC is redetermined and the resulting adjustment is charged against or credited to income. Factors used in determining DPAC include policy surrender levels, policy crediting rates and investment yields. During 1995, the Company capitalized as deferred policy acquisition costs approximately $11.9 million in commissions paid on sales of annuities, compared to $20.7 million during 1994. Amortization of commission expense on annuities capitalized in prior periods was $11.0 million during 1995, compared to $9.5 million during 1994. Amortization of DPAC decreased $.4 million in 1995 compared to 1994. In 1995, total amortization was increased by the impact of the increase in production in 1994, but was decreased by the reduction in amortization of the declining credit life business. In addition, the Company adjusted its assumptions and related factors to bring them in line with current Company experience during its annual review and updates. Insurance benefits for the year ended December 31, 1995 decreased $2.7 million, compared to the comparable period of 1994, generally reflecting the run-off of credit life insurance. Other operating expenses, which include general insurance and taxes, licenses and fees, increased approximately $1.1 during 1995, compared to the comparable period in 1994. This increase is primarily attributable to the start-up costs, including legal and printing expenses, associated with the Company's new variable annuity product introduced in the fourth quarter of 1995, and increased corporate expenses allocated from its Parent. YEAR ENDED DECEMBER 31, 1994 COMPARED TO YEAR ENDED DECEMBER 31, 1993 - ----------------------------------------------------------------------- Net income for 1994 was $5.9 million, compared to a net loss of $8.3 million for 1993. The increase in net income in 1994 resulted primarily from an improved interest margin earned on annuities and a non-recurring $15.0 million pre-tax investment loss on preferred stock of Foster Mortgage Corporation, an affiliate, in 1993. The following table sets forth certain financial data for the periods indicated:
Year Ended December 31, --------------- --------------- 1994 1993 --------------- --------------- (in thousands) (in thousands) Total revenues $ 120,942 $ 108,952 Total expenses 111,862 121,317 Income (loss) before income taxes 9,080 (12,365) Net income (loss) 5,886 (8,258)
REVENUES The following table sets forth information regarding the components of the Company's revenues for the periods indicated:
Year Ended December 31, --------------- --------------- 1994 1993 --------------- --------------- (in thousands) (in thousands) Net investment income $ 114,380 $ 109,661 Net insurance premiums 11,373 18,684 Realized investment losses (4,811) (19,393) --------------- --------------- Total $ 120,942 $ 108,952 =============== ===============
Net investment income totaled $114.4 million on average investments of approximately $1.4 billion for 1994, compared to net investment income of $109.7 million on average investments of approximately $1.4 billion during the same period of 1993. Annuity sales of $250 million in 1994 set a Company annual sales record, was an increase of 20.2% over 1993, and contributed to the increase in funds available for investment. At December 31, 1994, the amortized cost of the fixed income portfolio totaled $1.1 billion and was comprised principally of $791 million in investment grade mortgage-backed securities and $291 million in investment grade bonds. At December 31, 1994, the weighted average rating of the publicly traded bond portfolio, according to nationally recognized statistical rating agencies, was "AA." During 1994, the Company established a trading account for a portion of its investment portfolio invested in common stocks. At December 31, 1994, the carrying value of investments in the Company's trading account was $679,000 reflecting a $22,751 unrealized gain, which is included in investment income for 1994. Interest, charges and fees on loans decreased $2.1 million in 1994 compared to 1993. At December 31, 1994, the Company's portfolio of loans was comprised of $159.1 million in first mortgage home equity loans and $175.6 million in first mortgage commercial real estate loans, compared to $263.6 million and $209.3 million, respectively, in 1993. The mortgage loan portfolio of the Company is serviced by UC Lending. The Company has full credit recourse to UC Lending with respect to all home equity mortgage loans acquired by it from UC Lending. A reduction in the volume of and related holding periods for home equity loans acquired by the Company from UC Lending contributed to the reduction in interest, charges and fees on loans in 1994. The Company estimates that non-accrual loans reduced mortgage loan interest for 1994 and 1993 by approximately $124,000 and $420,000, respectively. During 1994, the average amount of non-accrual loans owned by the Company was approximately $2.6 million, compared to approximately $8.1 million during 1993. At December 31, 1994, the Company owned approximately $7.6 million of commercial loans which were on an accrual status, but which the Company considered as potential problem loans, compared to $8.1 million at December 31, 1993. The Company evaluates each of these commercial loans to estimate its risk of loss in the investment and provides for such loss through a charge to earnings. Net insurance premiums reflect revenues associated primarily with sales of pre-need life insurance and credit insurance. Management has chosen to focus on deferred annuities, its primary product line, and on developing a variable annuity product to be introduced in 1995. Therefore, the sale of credit life insurance was discontinued in 1993. The decrease in premium income reflects that decision. Realized investment gains and losses may vary significantly from year to year since the decision to sell investments is determined principally by considerations of investment timing and tax consequences. Realized investment gains and losses can also result from early redemption of securities at the election of the issuer (calls) and changes in write-downs and reserves. Realized gains (losses) were as follows:
Year Ended December 31, --------------- --------------- 1994 1993 --------------- --------------- (in thousands) (in thousands) From: Sales of fixed maturity securities $ (121) $ (701) Calls and maturities of fixed maturity securities 98 1,187 Sales of equity securities (8) 62 Sales of mortgage loans on real estate - 1,018 Sales of investment real estate 279 195 Sales of other investments - - Write-downs/reserve changes (5,059) (21,154) --------------- --------------- Realized investment losses $ (4,811) $ (19,393) =============== ===============
The write-downs in 1993 include a $15.0 million loss associated with the Company's ownership of preferred stock of Foster Mortgage Corporation, an affiliate. EXPENSES The following table presents the components of the Company's expenses for the periods indicated:
Year Ended December 31, --------------- --------------- 1994 1993 --------------- --------------- (in thousands) (in thousands) Interest on annuity policies $ 73,065 $ 76,086 Amortization of deferred policy acquisition costs 13,528 10,229 Insurance commissions 328 3,116 Insurance benefits 12,654 18,200 Other operating 12,287 13,686 --------------- --------------- Total $ 111,862 $ 121,317 =============== ===============
Interest on annuity policies declined $3.0 million in 1994 compared to 1993, as the result of a reduction in the average interest crediting rate on the Company's annuity policies, offset by the impact of an increase in annuity reserves. Average annuity reserves were $1.4 billion during 1994, an increase of approximately $117 million from 1993. In comparison with 1993, annuity surrenders increased in 1994, but were managed to a level less than expected, notwithstanding the aggressive policy crediting rate strategy. Net insurance commissions for 1994 decreased by approximately $2.8 million from the same period of 1993. This decrease was primarily attributable to the discontinuation of credit life insurance sales by the Company in 1993. Commissions paid on issuance of the Company's deferred annuity products are generally capitalized as DPAC and amortized over the estimated life of the policy. The accounting method prescribed for determining the cumulative amount of DPAC requires a regular reevaluation of the estimated present value of gross profits to be earned on a block of policies. If, based on actual experience and other information, the estimate of the present value of gross profits significantly changes, either positively or negatively, the cumulative amount of DPAC is redetermined and the resulting adjustment is charged against or credited to income. Factors used in determining DPAC include policy surrender levels, policy crediting rates and investment yields. During 1994, the Company capitalized as DPAC approximately $20.7 million in commissions paid on sales of annuities, compared to $13.7 million during 1993. Amortization of commission expense on annuities capitalized in prior periods was $9.5 million during 1994, compared to $5.6 million during 1993. Amortization of DPAC increased $3.3 million in 1994, compared to 1993. In 1994, total amortization was impacted by the amortization of the large increase in production from 1993. In addition, the Company adjusted its assumptions and related factors to bring them in line with current company experience during its annual review and update. Insurance benefits for 1994 decreased $5.5 million, compared to 1993, generally reflecting the run-off of credit life insurance, which the Company discontinued in 1993. Other operating expenses for 1994 decreased approximately $1.4 million, compared to 1993. Other operating expenses in 1993 included a non-recurring $2.1 million estimated loss in connection with the termination of a third party administrative contract for credit life insurance. Personnel expenses increased approximately $1.1 million in 1994 compared to 1993 primarily because of an increase in the cost of the Company's employee benefit and incentive plans. A $1.2 million reduction in expenses in 1994 compared to 1993 also resulted from an increase in acquisition expenses deferred as DPAC in 1994 over 1993. Assessments by state guaranty associations also increased approximately $920,000 in 1994 over 1993. ASSET QUALITY AND RESERVES The quality of the Company's commercial loan and bond portfolios significantly affects the profitability of the Company. The values of and markets for these assets are dependent on a number of factors, including general economic conditions, interest rates and governmental regulations. Adverse changes in such factors, which become more pronounced in periods of economic decline, may affect the quality of these assets and the Company's resulting ability to sell these assets for acceptable prices. General economic deterioration can result in increased delinquencies on existing loans, reductions in collateral values and declines in the value of investments resulting from a reduced capacity of issuers to repay the bonds. The Company has full credit recourse to UC Lending for principal and interest on its home equity loans originated by UC Lending. Substantially all of the loans owned by the Company were originated by UC Lending, with the home equity loans being originated primarily through its branch (i.e., retail) network or wholesale loan programs. The Company's investment in mortgage loans on real estate at December 31, 1995, was comprised primarily of $168.9 million in home equity loans and $167.4 million in commercial loans. At December 31, 1995, the contractual balance of loans serviced by UC Lending for the Company was approximately $338.7 million. Included in the serviced portfolio are the Company's commercial loans, a substantial portion of which were originated in the following states: Florida (22.1%), Georgia (19.2 %), Colorado (12.6%), Virginia (8.2%), Tennessee (7.3%), Texas (5.8%) and Louisiana (5.2%). No other state accounted for more than 5% by outstanding principal balance of the Company's commercial real estate loan portfolio. The risk inherent in such concentrations is dependent not only upon regional and general economic stability which affects property values, but also the financial well-being and credit worthiness of the borrower. Management continues to emphasize reducing the level of non-earning assets owned by focusing on expediting the foreclosure process on its commercial real estate loans and disposing of the properties on a timely basis. The balance of foreclosed loans totaled $13.6 million at December 31, 1995, compared to $19.3 million at December 31, 1994. The Company can neither quantify the impact of property value declines, if any, on its loans nor predict whether, to what extent, or how long such declines may exist. In a period of such declines, the rates of delinquencies, foreclosures and losses on loans could be higher than those previously experienced. Adverse economic conditions (which may or may not affect real property values) may affect the timely payment by borrowers of scheduled payments of principal and interest on the home equity loans, and, accordingly the actual rates of delinquencies, foreclosures and losses. The following table provides a summary of mortgage loans owned by the Company which are past due 30 days or more, and loans charged-off as of the dates indicated:
Contractual Delinquencies % of % of Balance Contractual Contractual Net Loans Average Year Ended of Loans Balance Balance Charged-Off Loans - ---------------------------- ------------ -------------- ------------ ------------ -------- (dollars in thousands) Year ended December 31, 1995 Home equity $ 169,175 $ 1,020 .60% $ - -% Commercial 169,512 3,238 1.91% 194 .11% ------------ -------------- ------------ Total $ 338,687 $ 4,258 1.26% $ 194 .06% ============ ============== ============ Year ended December 31, 1994 Home equity $ 158,943 $ 1,516 .96% $ - -% Commercial 154,790 2,335 1.51% 1,510 .98% ------------ -------------- ------------ Total $ 313,733 $ 3,851 1.23% 1,510 .48% ============ ============== ============ Year ended December 31, 1993 Home equity $ 263,456 $ 1,304 .49% $ 33 .01% Commercial 188,686 9,692 5.14% 475 .25% ------------ -------------- ------------ Total $ 452,142 $ 10,996 2.43% $ 508 .11% ============ ============== ============
The above delinquencies of home equity loans are covered by full credit recourse to UC Lending except $.2 million, $.3 million, and $.7 million at December 31, 1995, 1994 and 1993, respectively. The Company, however, retains the entire risk associated with its commercial real estate loans. The Company owns senior and subordinated pass-through certificates issued in 1990 for commercial mortgage loans previously owned by the Company for which an election has been made under the real estate mortgage investment conduit provisions of the Internal Revenue Code of 1986, as amended ("the Code"). These certificates are included in bonds in the accompanying consolidated financial statements. The outstanding principal balance of all of the senior and subordinated certificates was $46.8 million as of December 31, 1995. The principal balance of the subordinated certificates at December 31, 1995, all of which were owned by the Company, was $26.5 million. Losses associated with defaults and related foreclosures which may occur on the loans backing these pass-through certificates first reduce the principal balance of the subordinated certificates. The losses resulting from such foreclosures were $1.7 million, $2.5 million, and $.8 million, for the periods ending December 31, 1995, 1994 and 1993, respectively. The Company provides an estimate for future credit losses in an allowance for losses. A summary analysis of the changes in the Company's allowance for losses for the indicated periods is as follows:
1995 1995 1995 1994 1994 1994 -------- ---------- ---------- -------- -------- ---------- Real Mortgage Real Mortgage Bonds Estate(1) Loans Bonds Estate Loans -------- ---------- ---------- -------- -------- ---------- Balance at beginning of period $ 317 $ 5,120 $ 1,778 $ 1,515 $ 4,473 $ 2,639 Losses charged to allowance (1,664) (2,638) (194) (3,047) (1,929) (1,510) Recoveries on loans previously charged to allowance - - - - 15 - -------- ---------- ---------- -------- -------- ---------- Net charge-offs (1,664) (2,638) (194) (3,047) (1,914) (1,510) Loss provision 2,013 1,505 533 1,849 2,561 (649) -------- ---------- ---------- -------- -------- ---------- Balance at end of period $ 666 $ 3,987 $ 2,117 $ 317 $ 5,120 $ 1,778 ======== ========== ========== ======== ======== ========== Specific reserves $ 666 $ 3,987 $ 1,117 $ 317 $ 5,120 $ 752 Unallocated reserves - - 1,000 - - 1,026 -------- ---------- ---------- -------- -------- ---------- Total Reserves $ 666 $ 3,987 $ 2,117 $ 317 $ 5,120 $ 1,778 ======== ========== ========== ======== ======== ========== (1) The provision for real estate losses relate to losses from properties acquired in satisfaction of debt.
At December 31, 1995 and 1994, the Company owned $13.6 million and $19.3 million, respectively, of property acquired in settlement of loans, excluding the specific reserves attributed to these properties, which is included in the Company's allowance for loan losses to reduce the carrying value of these properties to their market value.Company's fixed maturity securities portfolio consists primarily of mortgage-backed securities and corporate bonds, comprising 67.9% and 29.3% of the portfolio at December 31, 1995, respectively. Investment purchases are made with the intention of holding fixed maturity securities until maturity. Prior to January 1, 1994, securities were generally carried at cost adjusted for discount accretion and premium amortization. At December 31, 1995, the amortized cost of the Company's fixed maturity portfolio was $1.1 billion, consisting primarily of $777.7 million in mortgage-backed securities and $335.2 million in corporate bonds. At December 31, 1995, bonds with an amortized cost of approximately $1.1 billion or 95.6% of the Company's portfolio of fixed maturity securities were classified in an available-for-sale category and the carrying value adjusted to fair value by means of an adjustment to stockholder's equity. The remainder of the portfolio consists primarily of private placement investments traded directly and are classified as held-to-maturity and valued at cost. At December 31, 1995, the Company owned $0.8 million in equity securities classified as trading securities. The pre-tax net unrealized gain in the available-for-sale fixed maturity and equity portfolio (fair value over amortized cost) at December 31, 1995, was $45.4 million, compared to a pre-tax unrealized loss of $72.1 million at December 31, 1994. The Company has an investment in certain limited partnerships which were formed for the purpose of participating in privately placed mezzanine investments. These investments generally include higher risk subordinated debt combined with equity securities. The partnerships are carried on an equity basis at $25.6 million and $26.7 million at December 31, 1995 and 1994, respectively. Income attributable to the partnerships for 1995 was $6.3 million and $1.5 million for 1994. LIQUIDITY AND CAPITAL RESOURCES The Company's principal cash requirements consist of funding the payment of policyholder claims and surrenders. Liquidity requirements for the Company's operations are generally met by funds provided from the sale of annuities and cash flow from its investments in fixed income securities and mortgage loans. Net cash flow from annuity operations is used to build the Company's investment portfolio, which in turn produces future cash flows from investment income and provides a secondary source of liquidity. Net cash provided by operating activities for 1995 and 1994 was approximately $88.4 million and $62.6 million, respectively, resulting primarily from cash earnings on investments. The Company monitors available cash and cash equivalents to maintain adequate balances for current payments while maximizing cash available for longer term investment activities. The Company's financing activities during the years ended December 31, 1995 and 1994 reflect cash received primarily from sales by the Company of its annuity products of approximately $135.3 million and $249.7 million, respectively. The Company believes that the decrease in annuity sales in 1995 compared to the same period of 1994 is due in part to the interest rate environment, particularly the relative relationship between short term and intermediate term interest rates, and to the focus of the Company's resources on development of its variable annuity product. In addition, a financial institution which produced approximately 10% of the Company's annuity sales in 1994 discontinued the sale of annuities of the Company in 1995 subsequent to the merger of such financial institution. As reflected in the net cash used by investing activities during the same periods, investment purchases, which include loans purchased on an interim basis from UCLC, were approximately $1.34 billion and $1.20 billion, respectively, reflecting the investment of these funds and the reinvestment of proceeds from maturities of investment. Cash used by financing activities during 1995 and 1994 also reflects payments of $222.8 million and $191.8 million, respectively, primarily on annuity products resulting from policyholder surrenders and claims. The increase in annuity surrenders during 1995 was expected, due in part to an increase in the amount of annuity policies which were beyond the surrender penalty period and to the general interest rate environment during this period. The interest margin on the Company's annuity liabilities during the year ended December 31, 1995 was 2.37% compared to 2.73% during the same period of 1994. Investments at December 31, 1995, included approximately $336.3 million in home equity and commercial mortgage loans, and the amortized cost of the bond portfolio included $367.5 million in corporate and government bonds and private debt placements and $777.7 million in mortgage-backed securities. The investment portfolio is also managed to provide a secondary source of liquidity as investments can be sold, if necessary, to fund abnormal levels of policy surrenders, claims and expenses. An unanticipated increase in surrenders would impact the Company's liquidity, potentially requiring the sale of certain assets, such as bonds and loans, prior to their maturities, which may be at a loss. Reserves for annuity policies comprise the primary liabilities of the Company. The Company believes it has established adequate reserves on these products as well as on its other insurance products. The effective life of these liabilities is influenced by a number of factors, including interest rates, surrender penalties, ratings, public confidence in the insurance industry generally, and in the Company specifically, governmental regulations and tax laws. The Company employs an actuarial model to measure the interest rate sensitivity of these liabilities to assist in the selection of assets with appropriate characteristics. The Company is a Louisiana domiciled insurance company, and, as such, is subject to certain regulatory restrictions on the payment of dividends. The Louisiana statutes allow payments of dividends without the approval of the commissioner to the extent of the lesser of ten percent of surplus as of the prior year end, or the current year's net gain from operations. At December 31, 1995, the Company could to pay dividends of $9.2 million without such approval. No dividends were paid during 1995 or 1994 in order to retain capital in the Company. RATINGS In the second quarter of 1995, A.M. Best Company ("Best"), an independent rating organization, reaffirmed its "A-" (Excellent) rating of the Company. Best's ratings depend in part on its analysis of an insurance company's financial strength, operating performance and claims paying ability In addition, the Company's claims paying ability has been rated "A+" (Single-A-Plus) by Duff & Phelps Credit Rating Company ("Duff & Phelps"). On October 24, 1995, Duff & Phelps placed its "A+" rating of the Company on its Rating Watch-Uncertain list because of the October 20, 1995, announcement by the Company's Parent that strategic alternatives which it was considering included the pending sale of the Company (see "Pending Sale of the Company" below). Duff & Phelps reported that the claims paying ability rating would remain on Rating Watch-Uncertain until more information becomes known about the Company's ultimate position within the organization or another organization. In 1995, Standard & Poor's, a division of The McGraw-Hill Companies, Inc. revised the rating scale used in assigning its qualified solvency ratings of insurance companies and, as a result, revised the Company's rating from "BBq" to "Aq." Ratings such as those held by the Company can affect the Company's ability to market its annuity products. Any lowering of the Company's ratings could materially and adversely affect the Company's ability to market its products, particularly the sale of annuities through financial institutions, and could increase the surrender of its annuity policies. Both of these consequences could, depending upon the extent thereof, have a materially adverse effect on the Company's liquidity and, under certain circumstances, net income. The Company believes that its ratings will enable it to continue to compete successfully. PENDING SALE OF THE COMPANY On February 2, 1996, UCFC signed a stock purchase agreement dated as of January 30, 1996, for the sale of all of the outstanding capital stock of the Company to UC Life Holding Corp., a new Delaware corporation formed by Knightsbridge Capital Fund I, L.P. ("Knightsbridge"), for an aggregate amount of $164 million plus earnings of the Company from January 1, 1996, to closing of the transaction. Knightsbridge, which is a private investment partnership with institutional partners, was formed in 1995 to make equity investments in companies engaged primarily in the life insurance industry. Under the terms of the agreement, the sales price is comprised of cash, currently estimated to be $109 million, and real estate and other assets owned by the Company to be distributed to UCFC prior to the closing. The real estate to be distributed includes portions of the United Plaza office park, including UCFC's home office. In addition, UCFC will purchase a convertible promissory note from an affiliate of the purchaser for $15 million in cash. The purchaser also agreed that the Company would continue to be an investor in first lien home equity loans originated by UCFC's lending operations and that the home office operations would be maintained in its present location in Baton Rouge, Louisiana following the closing for at least two years. The agreement is subject to approval by UCFC's shareholders and regulatory authorities and the satisfaction of other conditions, and provides that the closing will occur on or before July 31, 1996. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA INDEPENDENT AUDITOR'S REPORT To the Stockholders and Board of Directors of United Companies Life Insurance Company We have audited the accompanying consolidated balance sheets of United Companies Life Insurance Company (a wholly-owned subsidiary of United Companies Financial Corporation) and its subsidiary as of December 31, 1995 and 1994, and the related consolidated statements of income, stockholder's equity, and cash flows for each of the three years in the period ended December 31, 1995. Our audits also included the financial statement schedules listed in the Index at Item 14. These financial statements and financial statement schedules are the responsibility of the Company's management. Our responsibility is to express an opinion on the financial statements and financial statement schedules based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of United Companies Life Insurance Company and its subsidiary at December 31, 1995 and 1994, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1995 in conformity with generally accepted accounting principles. Also, in our opinion, such financial statements schedules, when considered in relation to the basic consolidated financial statements taken as a whole, present fairly in all material respects the information set forth therein. DELOITTE & TOUCHE LLP Baton Rouge, Louisiana February 29, 1996
UNITED COMPANIES LIFE INSURANCE COMPANY AND SUBSIDIARY CONSOLIDATED BALANCE SHEETS December 31, December 31, --------------- --------------- 1995 1994 --------------- --------------- (in thousands) (in thousands) Assets - ------------------------------------------- Investments: Fixed maturity securities: Available-for-sale at fair value $ 1,140,160 $ 959,857 Held-to-maturity at amortized cost 50,919 57,074 Equity securities at fair value 794 721 Mortgage loans on real estate 336,269 311,537 Investment real estate 32,423 17,292 Policy loans 20,291 20,243 Investments in limited partnerships 25,594 26,672 Short-term investments 22,804 54,664 Other invested assets 2,469 5,034 --------------- -------------- Total investments 1,631,723 1,453,094 Cash 3,028 13,169 Investment in indebtedness of affiliate 10,000 10,000 Accrued investment income 16,529 15,032 Due from reinsurers 33,583 34,985 Deferred policy acquisition costs 90,703 91,915 Property-net 575 20,299 Deferred income tax benefit - 17,128 Other assets 3,256 2,532 Assets held in separate accounts 211 - --------------- -------------- Total assets $ 1,789,608 $ 1,658,154 =============== ============== Liabilities and stockholder's equity - ---------------------------------------- Annuity reserves $ 1,417,803 $ 1,425,973 Policy benefit reserves 111,209 116,501 Unearned premium reserves 1,793 4,491 Repurchase agreements 40,857 - Deferred income tax payable 22,770 - Other liabilities 8,440 9,010 Liabilities related to separate accounts 211 - --------------- -------------- Total liabilities 1,603,083 1,555,975 --------------- -------------- Stockholder's equity: Common stock, $2 par value; Authorized - 4,200,528 shares; Issued - 4,200,528 shares 8,401 8,401 Additional paid-in capital 28,980 28,980 Retained earnings 119,667 111,632 Net unrealized gains (losses) on securi 29,477 (46,834) --------------- -------------- Total stockholder's equity 186,525 102,179 --------------- -------------- Total liabilities and stockholder's equity $ 1,789,608 $ 1,658,154 =============== ============== See notes to consolidated financial statements.
UNITED COMPANIES LIFE INSURANCE COMPANY AND SUBSIDIARY CONSOLIDATED STATEMENTS OF INCOME
Year Ended Year Ended Year Ended -------------- --------------- -------------- December 31, December 31, December 31, -------------- --------------- -------------- 1995 1994 1993 -------------- --------------- -------------- (in thousands) Revenues: Net investment income $ 123,107 $ 114,380 $ 109,661 Net insurance premiums 8,508 11,373 18,684 Realized investment losses (3,498) (4,811) (19,393) -------------- --------------- -------------- Total 128,117 120,942 108,952 -------------- --------------- -------------- Expenses: Interest on annuity policies 79,086 73,065 76,086 Amortization of deferred policy acquisition costs 13,159 13,528 10,229 Insurance commissions 432 328 3,116 Insurance benefits 9,930 12,654 18,200 Other operating expenses 13,410 12,287 13,686 -------------- --------------- -------------- Total 116,017 111,862 121,317 -------------- --------------- -------------- Income (loss) before income taxes 12,100 9,080 (12,365) -------------- --------------- -------------- Provision (benefit) for income taxes: Current 5,259 5,915 (2,263) Deferred (1,194) (2,721) (1,844) -------------- --------------- -------------- Total 4,065 3,194 (4,107) -------------- --------------- -------------- Net income (loss) $ 8,035 $ 5,886 $ (8,258) ============== =============== ============== See notes to consolidated financial statements.
UNITED COMPANIES LIFE INSURANCE COMPANY AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended Year Ended --------------- --------------- December 31, December 31, --------------- --------------- 1995 1994 --------------- --------------- (in thousands) Cash flows from operating activities: Net income (loss) $ 8,035 $ 5,886 Adjustments to reconcile net income to net cash provided by operating activities: Decrease (increase) in deferred policy acquisition costs 1,212 (8,419) (Increase) decrease in policy loans (48) (609) (Increase) in accrued interest and accounts receivable (1,497) (498) Decrease in due from reinsurers 1,402 1,574 Decrease in other invested assets 2,565 2,241 (Increase) in other assets (1,215) (1,924) (Decrease) in policy benefit reserves (5,292) (6,827) Interest on annuity policies 79,086 73,065 (Decrease) in unearned premium reserves (2,698) (5,769) Deferred income tax (benefit) (1,194) (2,721) Increase (decrease) in other liabilities 359 (1,404) Provision for loan losses 4,051 5,059 Amortization and depreciation 1,648 1,883 Amortization of prior loan sale gains 2,451 2,012 Investment (gains) losses (381) (256) Net cash flows from trading investment securities (73) (679) --------------- --------------- Net cash provided by operating activities 88,411 62,614 --------------- --------------- Cash flows from investment activities: Proceeds from sales of loans held for investment 1,111,636 940,099 Principal collected on loans 71,294 94,084 Loan originations and acquisitions (39,547) (8,799) Loans purchased from affiliates (1,168,648) (893,099) Proceeds from sales, calls or maturities of available-for-sale securities 75,937 84,155 Proceeds from maturities or calls of held-to-maturity securities 2,188 2,256 Purchase of available-for-sale securities (136,503) (300,384) Purchase of held-to-maturity securities - - Change in investment in limited partnerships 1,078 26 Change in short-term investments 31,860 (17,813) Capital expenditures (1,258) (656) --------------- --------------- Net cash (used) by investing activities (51,963) (100,131) --------------- --------------- Cash flows from financing activities: Deposits received from annuities and interest sensitive products 135,325 249,738 Payments on annuities and interest sensitive products (222,791) (191,812) Increase (decrease) in repurchase agreement 40,857 (30,000) Decrease in debt with maturities of three months or less - - Proceeds from capital contribution - - Other 20 44 --------------- --------------- Net cash (used) provided by financing activities (46,589) 27,970 --------------- --------------- (Decrease) in cash (10,141) (9,547) Cash at beginning of period 13,169 22,716 --------------- --------------- Cash at end of period $ 3,028 $ 13,169 =============== =============== Year Ended -------------- December 31, -------------- 1993 -------------- Cash flows from operating activities: Net income (loss) $ (8,258) Adjustments to reconcile net income to net cash provided by operating activities: Decrease (increase) in deferred policy acquisition costs (3,488) (Increase) decrease in policy loans 332 (Increase) in accrued interest and accounts receivable (129) Decrease in due from reinsurers 1,158 Decrease in other invested assets 921 (Increase) in other assets (875) (Decrease) in policy benefit reserves (1,699) Interest on annuity policies 76,086 (Decrease) in unearned premium reserves (6,878) Deferred income tax (benefit) (1,844) Increase (decrease) in other liabilities 813 Provision for loan losses 4,994 Amortization and depreciation 1,914 Amortization of prior loan sale gains 735 Investment (gains) losses 14,400 Net cash flows from trading investment securities - -------------- Net cash provided by operating activities 78,182 -------------- Cash flows from investment activities: Proceeds from sales of loans held for investment 457,945 Principal collected on loans 95,752 Loan originations and acquisitions (4,560) Loans purchased from affiliates (572,576) Proceeds from sales, calls or maturities of available-for-sale securities - Proceeds from maturities or calls of held-to-maturity securities 136,429 Purchase of available-for-sale securities - Purchase of held-to-maturity securities (293,816) Change in investment in limited partnerships 6,126 Change in short-term investments (20,926) Capital expenditures (133) -------------- Net cash (used) by investing activities (195,759) -------------- Cash flows from financing activities: Deposits received from annuities and interest sensitive products 207,681 Payments on annuities and interest sensitive products (136,489) Increase (decrease) in repurchase agreement 30,000 Decrease in debt with maturities of three months or less (15,570) Proceeds from capital contribution 15,000 Other 242 -------------- Net cash (used) provided by financing activities 100,684 -------------- (Decrease) in cash (16,893) Cash at beginning of period 39,609 -------------- Cash at end of period $ 22,716 ============== See notes to consolidated financial statements.
UNITED COMPANIES LIFE INSURANCE COMPANY AND SUBSIDIARY CONSOLIDATED STATEMENTS OF STOCKHOLDER'S EQUITY
Net Unrealized Additional Gains Total Common Paid-in Retained (Losses) Stockholder's Stock Capital Earnings on Securities Equity ------- ----------- --------------- --------------- --------------- (in thousands) Balance, December, 1992 $ 8,401 $ 13,980 $ 114,004 $ 136,385 Net loss (8,258) (8,258) Capital contribution 15,000 15,000 ----------- --------------- --------------- --------------- Balance, December 31, 1993 8,401 28,980 105,746 143,127 Net income 5,886 5,886 Mark-to-market adjustment on investments (46,834) (46,834) ------- ----------- -------------- --------------- --------------- Balance, December 31, 1994 8,401 28,980 111,632 (46,834) 102,179 Net income 8,035 8,035 Mark-to-market adjustment on investments 76,311 76,311 ------- ----------- -------------- --------------- --------------- Balance, December 31, 1995 $ 8,401 $ 28,980 $ 119,667 $ 29,477 $ 186,525 ======= =========== =============== =============== =============== See notes to consolidated financial statements.
UNITED COMPANIES LIFE INSURANCE COMPANY AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993 1. ACCOUNTING POLICIES 1.1 Principles of Consolidation. The consolidated financial statements include United Companies Life Insurance Company (the "Company") and its wholly-owned subsidiary, United Variable Services, Inc. All significant intercompany balances and transactions have been eliminated in the consolidated financial statements. 1.2 Organization. United Companies Life Insurance Company (the "Company") is a wholly-owned subsidiary of United Companies Financial Corporation ("UCFC" or the "Parent"), a financial services holding company founded in 1946. UCFC focuses on the origination, sale and servicing of first mortgage, nonconventional, home equity loans and insurance. The Company, a life insurance company domiciled in Louisiana and organized in 1955, is currently authorized to conduct business in 47 states, the District of Columbia and Puerto Rico. The primary products of the Company are tax deferred annuity contracts marketed to individuals principally through financial institutions and independent agents. 1.3 Investments. 1.3(a) Fixed Maturity and Equity Securities. During the first quarter of 1994, the Company implemented the provisions of Financial Accounting Standards Board ("FASB") Statement of Financial Accounting Standards No. 115 ("SFAS 115"), which revised the method of accounting for certain of the Company's investments. Prior to adoption of SFAS 115, the Company reported its investments in fixed income investments at amortized cost, adjusted for declines in value considered to be other than temporary. SFAS 115 requires the classification of securities in one of three categories: "available-for-sale," "held-to-maturity" or "trading." Securities classified as held-to-maturity are carried at amortized cost, whereas securities classified as trading securities or available-for-sale are recorded at fair value. Effective with the adoption of SFAS 115, the Company determined the appropriate classification of its investments and, if necessary, adjusted the carrying value of such securities, accordingly, as if the unrealized gains or losses had been realized. The adjustment, net of applicable income taxes, for investments classified as available-for-sale is recorded in "Net unrealized gains (losses) on securities" and is included in stockholder's equity on the balance sheet. The adjustment for investments classified as trading is recorded in "Net investment income" in the statement of income. In accordance with the provisions of SFAS 115, prior year investments were not restated. 1.3(b) Mortgage Loans on Real Estate. Loans are carried at amortized cost, net of an allowance for losses. The Company provides for estimated loan losses on loans owned by the Company by establishing an allowance for loan losses through a charge to earnings. The Company conducts periodic reviews of the quality of the loan portfolio and estimates the risk of loss based upon historical loss experience, prevailing economic conditions, estimated collateral value and such other factors which, in management's judgment, are relevant in estimating the adequacy of the Company's allowance for loan losses. While management uses the best information available in conducting its evaluation, future adjustments to the allowance may be necessary if there are significant changes in economic conditions, collateral value or other elements used in conducting the review. 1.3(c) Investment Real Estate. The Company's investments in real estate are comprised of properties received in settlement of loans ("foreclosed properties") and two office buildings, adjacent land, and related improvements (its former home office property). The Company records foreclosed properties at the lower of their market value less estimated costs to sell ("market") or the outstanding loan amount plus accrued interest ("cost"). The Company accomplishes this by providing a specific reserve, on a property by property basis, for the difference between market and cost. Market value is determined by property appraisals performed either by its affiliate, United Companies Lending Corporation ("UCLC"), or independent appraisers. The related adjustments are included in the Company's provision for loan losses. During 1995, the Company moved its offices from its previous location, and converted One and Two United Plaza to investment real estate. One and Two United Plaza are leased primarily by the Company to its Parent and other affiliates. One and Two United Plaza are stated at cost less accumulated depreciation. Depreciation is computed on the straight-line method over its estimated useful life. 1.3(d) Policy Loans. Policy loans are reported at unpaid principal balance. 1.3(e) Investment in Limited Partnerships. The Company's investment in limited partnerships, whose affairs are not controlled by the Company, is reflected on the equity method. 1.3(f) Short-term Investments. At December 31, 1995, short-term investments totaled $22.8 million bearing interest rates ranging from 5.25% to 5.61% per annum. 1.4 Investment in Indebtedness of Affiliate. The Company has invested in three subordinated debentures of an affiliate, which are carried at cost. 1.5 Deferred Policy Acquisition Costs. Commissions and other costs related to the production of new and renewal business have been deferred. The deferred costs related to traditional life insurance are amortized over the premium payment period using assumptions consistent with those used in computing policy benefit reserves. Deferred costs related to annuities and interest sensitive products are amortized over the estimated life of the policy in relation to the present value of estimated gross profits on the contract. The Company periodically reviews the appropriateness of assumptions used in calculating the estimated gross profits on annuity contracts. Any change required in these assumptions may result in an adjustment to deferred policy acquisition costs which would affect income. 1.7 Property-Net. Property is stated at cost less accumulated depreciation. Depreciation is computed on the straight-line and accelerated methods over the estimated useful lives on the assets. 1.8 Policy Benefit Reserves. Policy benefit reserves for traditional life insurance policies have been provided on a net level premium method including assumptions as to investment yield, mortality and withdrawals based on the Company's experience and industry standards with provisions for possible adverse deviation. Investment yield assumptions range from 5.5% to 8.5% per annum. Policy benefit reserves include certain deferred profits on limited payment policies. These profits are being recognized in income over the policy term. Reserves for annuity policies and interest sensitive life policies represent the policy account balance, or accumulated fund value, before applicable surrender charges. Benefit claims incurred in excess of related policy account balances and interest credited during the period to policy account balances are charged to expense. 1.9 Repurchase agreements. At December 31, 1995, the Company had a liability of approximately $40.9 million incurred pursuant to securities sold under agreements to repurchase ("repurchase agreements"). The securities sold under these agreements are classified as "Available-for-sale" investment securities and are carried at their aggregate market value of $42.2 million at December 31, 1995. The repurchase agreements bear interest at 5.70% and 5.74% and matured in January, 1996. 1.10 Income Taxes. The Company files a consolidated federal income tax return with its Parent and other affiliated companies. The Parent allocates to the Company its proportionate share of the consolidated tax liability under a tax allocation agreement whereby each affiliate's federal income tax provision is computed on a separate return basis. Deferred income taxes are provided for the effect of revenues and expenses which are reported in different periods for financial reporting purposes than for tax purposes. Such differences result primarily from deferring policy acquisition costs, providing for bond, real estate and and loan losses, differences in the methods of computing reserves, and depreciation. 1.11 Premiums. Income on short duration single premium contracts, primarily credit insurance products, is recognized over the contract period. Premiums on other insurance contracts principally traditional life insurance and limited payment life insurance policies, are recognized as revenue when due. 1.12 Reinsurance. The Company generally reinsures with other insurance companies the portion of any one risk which exceeds $100,000. On certain types of policies this limit is $25,000. The Company is contingently liable for insurance ceded to reinsurers. Premiums ceded under reinsurance agreements were $1.7 million, $2.1 million and $3.6 million in 1995, 1994 and 1993, respectively. Reserve credit taken under reinsurance agreements totaled $32.9 million, $34.0 million and $35.2 million at December 31, 1995, 1994 and 1993, respectively. The Company has assumed the following reinsurance from other insurers:
Insurance in Force Premiums --------------- --------------- (in thousands) (in thousands) 1995 $ 992,979 $ 2,589 1994 1,106,148 2,966 1993 1,106,721 3,039
The Company has a receivable at December 31, 1995 of approximately $33.9 million from one reinsurer; however, the funds supporting the receivable are escrowed in a separate trust account for the benefit of the Company by the reinsurer. The following table reflects the effect of reinsurance agreements on premiums and the amounts earned for the periods indicated.
Year Ended Year Ended Year Ended -------------- --------------- -------------- December 31, December 31, December 31, -------------- --------------- -------------- 1995 1994 1993 -------------- --------------- -------------- (in thousands) Direct premiums $ 7,659 $ 10,537 $ 19,294 Reinsurance assumed 2,589 2,966 3,039 Reinsurance ceded (1,740) (2,130) (3,649) -------------- --------------- -------------- Net insurance premiums $ 8,508 $ 11,373 $ 18,684 ============== =============== ==============
1.13 Participating Policies. Direct participating business, primarily related to the Company's pre-need funeral policies, represented 8.2%, 7.2% and 6.3% of the life insurance in force as of December 31, 1995, 1994 and 1993, respectively. The amount of dividends paid on participating policies is based on published dividend scales and totaled $1.2 million, $1.0 million and $1.5 million for the years ended December 31, 1995, 1994 and 1993, respectively. 1.14 Accounting Standards. In May, 1993 and in October, 1994, respectively the FASB issued Statements of Financial Accounting Standards Nos. 114 and 118 ("SFAS 114" and "SFAS 118") which address the accounting by creditors for impairment of loans and specify how allowances for credit losses related to certain loans should be determined. The statements also address the accounting by creditors for all loans that are restructured in a troubled debt restructuring involving modification of terms of a receivable. The implementation of the provisions of SFAS 114 and SFAS 118 in the first quarter of 1995 did not have a material effect on the financial statements of the Company. 1.15 Use of Estimates. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. 1.16 Reclassifications. Certain prior year amounts have been reclassified to conform with the current year presentation. Such reclassifications had no effect on net income. 2. INVESTMENTS 2.1 Fixed Maturity Securities. The Company's portfolio of fixed maturity securities consisted of the following:
December 31 December 31, December 31, December 31, --------------- --------------- --------------- --------------- 1995 1995 1995 1995 --------------- --------------- --------------- --------------- Amortized Unrealized Unrealized Fair Cost Gains Losses Value --------------- --------------- --------------- --------------- (in thousands) (in thousands) (in thousands) (in thousands) Available-for-Sale: U.S. Government $ 11,504 $ 409 $ - $ 11,913 Municipal 425 21 - 446 Foreign 20,394 1,916 - 22,310 Corporate 328,546 22,452 679 350,319 Mortgage-backed 733,516 22,258 602 755,172 --------------- --------------- --------------- --------------- Total $ 1,094,385 $ 47,056 $ 1,281 $ 1,140,160 =============== =============== =============== =============== Held-to-Maturity: Corporate $ 6,692 $ 550 $ - $ 7,242 Mortgage-backed 44,227 1,414 3,272 42,369 --------------- --------------- --------------- --------------- Total $ 50,919 $ 1,964 $ 3,272 $ 49,611 =============== =============== =============== ===============
December 31, December 31, December 31, December 31, --------------- -------------- -------------- -------------- 1994 1994 1994 1994 --------------- -------------- -------------- -------------- Amortized Unrealized Unrealized Fair Cost Gains Losses Value --------------- -------------- -------------- -------------- (in thousands) (in thousands (in thousands (in thousands Available-for-Sale: U.S. Government $ 10,720 $ 31 $ 238 $ 10,513 Municipal 425 13 - 438 Foreign 18,433 190 603 18,020 Corporate 258,549 321 13,148 245,722 Mortgage-backed 743,359 22 58,217 685,164 --------------- -------------- -------------- -------------- Total $ 1,031,486 $ 577 $ 72,206 $ 959,857 =============== ============== ============== ============== Held-to-Maturity: Corporate $ 10,828 $ 300 $ 211 $ 10,917 Mortgage-backed 46,246 110 2,188 44,168 --------------- -------------- -------------- -------------- Total $ 57,074 $ 410 $ 2,399 $ 55,085 =============== ============== ============== ==============
Included in the Company's mortgage-backed Held-to-Maturity Securities is an investment in subordinated junior certificates in securitized pools of commercial real estate loans for which an election under the real estate mortgage investment conduit provisions ("REMIC") of the Internal Revenue Code was made. Associated with the ownership of those junior certificates are certain credit risks for which the Company has established an estimate of future credit losses as follows:
Year Ended Year Ended Year Ended --------------- --------------- --------------- December 31, December 31, December 31, --------------- --------------- --------------- 1995 1994 1993 --------------- --------------- --------------- (in thousands) Balance at beginning of period $ 317 $ 1,515 $ 98 Losses charged to allowance (1,664) (3,047) (811) Loss provision 2,013 1,849 2,228 --------------- --------------- --------------- Balance at end of period $ 666 $ 317 $ 1,515 =============== =============== ===============
The cost and estimated fair value of fixed maturity securities by contractual maturity are shown below. Expected maturities may differ from contractual maturities because certain issuers may have the right to call or prepay obligations with or without call or prepayment penalties.
December 31, 1995 --------------- --------------- Available- for-Sale Held-to- Maturity --------------- --------------- --------------- --------------- Amortized Fair Amortized Fair Cost Value Cost Value --------------- --------------- --------------- --------------- (in thousands) (in thousands) (in thousands) (in thousands) 1 year or less $ 6,601 $ 6,513 $ - $ - Over 1 year through 5 years 80,080 84,349 2,286 2,361 Over 5 years through 10 years 266,238 285,826 4,406 4,881 After 10 years 7,950 8,300 - - Mortgage-backed securities 733,516 755,172 44,227 42,369 --------------- --------------- --------------- --------------- Total $ 1,094,385 $ 1,140,160 $ 50,919 $ 49,611 =============== =============== =============== ===============
Net unrealized gains on available-for-sale securities of $29.5 million included in Stockholder's equity at December 31, 1995, are presented net of deferred income taxes of $15.9 million. Net unrealized losses of $46.8 million at December 31, 1994, were net of deferred income taxes of $25.2 million. Proceeds from the sales, calls and maturities of investments in debt securities during 1995 totaled $78.1 million and resulted in realized investment gains of approximately $.5 million and realized investment losses of approximately $2.1 million. During 1994 and 1993, proceeds totaled $86.4 million and $136.4 million, respectively; resulting in realized capital gains of $303,000 and $1.5 million, respectively. Realized losses for 1994 and 1993 were $4.5 million and $3.2 million, respectively. In addition to losses incurred in connection with the sale of investments during 1993, the Company reduced the carrying value of a corporate bond by $.5 million to reflect the Company's estimate of a permanent decline in the value of this investment. At December 31, 1995, securities with a cost of $9.4 million were on deposit with insurance regulatory authorities. In 1990, the Company securitized pools of commercial real estate loans owned by it in two transactions and in connection therewith sold pass-through certificates("Series 90-1" and "Series 90-2") for which an election under the real estate mortgage investment conduit provisions ("REMIC") of the Internal Revenue Code of 1986, as amended were made. The Company retained as an investment subordinated junior certificates in both issues, as well as a senior certificate interest in Series 90-2. Included in "Held-to-maturity," fixed maturity securities are investments in the two REMIC's of approximately $44.2 million at December 31, 1995 and $46.2 million at December 31, 1994. A summary of the Company's investment at December 31, 1995 in the REMIC's is as follows:
Remaining Date of Principal Carrying Interest Maturity Issue Balance Value Rate Date ------------ -------------- --------------- --------- ------------ (in thousands (in thousands) United Companies Life REMIC Series 90-1, Class B-1 Mar 29, 1990 $ 10,794 $ 10,296 10.05% Sep 25, 2009 Series 90-2, Class A-3 Dec 18, 1990 20,250 19,974 9.88% May 25, 2000 Series 90-2, Class B-1 Dec 18, 1990 15,709 13,957 9.88% Jan 25, 2009 -------------- --------------- $ 46,753 $ 44,227 ============== ===============
2.2 Equity Securities. The net unrealized capital gains and losses on common stocks are as follows:
December 31, 1995 --------------- --------------- Unrealized Unrealized Fair Cost Gains Losses Value --------------- --------------- --------------- --------------- (in thousands) (in thousands) (in thousands) (in thousands) Trading $ 545 $ 215 $ 28 $ 752 Available-for-Sale 467 - 425 42 --------------- --------------- --------------- --------------- Total $ 1,012 $ 215 $ 433 $ 794 =============== =============== =============== ===============
December 31, 1994 --------------- --------------- Unrealized Unrealized Fair Cost Gains Losses Value --------------- --------------- --------------- --------------- (in thousands) (in thousands) (in thousands) (in thousands) Trading $ 656 $ 51 $ 28 $ 679 Available-for-Sale 467 - 425 42 --------------- --------------- --------------- --------------- Total $ 1,123 $ 51 $ 453 $ 721 =============== =============== =============== ===============
2.3 Mortgage Loans on Real Estate. The following schedule summarizes the composition of mortgage loans on real estate:
December 31, --------------- --------------- 1995 1994 --------------- --------------- (in thousands) (in thousands) Residential $ 169,175 $ 158,943 Unearned loan charges (301) (418) --------------- --------------- 168,874 158,525 --------------- --------------- Commercial 169,512 154,790 Allowance for loan losses (2,117) (1,778) --------------- --------------- 167,395 153,012 --------------- --------------- Total $ 336,269 $ 311,537 =============== ===============
Included in the loans owned at December 31, 1995 and 1994 were non-accrual loans of $2.4 million and $2.6 million, respectively. The Company provides an estimate for future credit losses in an allowance for loan losses. A summary analysis of the changes in the Company's allowance for loan losses is as follows:
Year Ended December 31, ------------ --------------- ------- 1995 1994 1993 ------------ --------------- ------- (in thousands) Balance at beginning of year $ 1,778 $ 2,639 $2,489 Loans charged to allowance (194) (1,510) (508) Loan loss provision 533 649 658 ------------ --------------- ------- Balance at end of year $ 2,117 $ 1,778 $2,639 ============ =============== ======= Specific reserves $ 1,117 $ 752 1,376 Unallocated reserves 1,000 1,026 1,263 ------------ --------------- ------- Total reserves $ 2,117 $ 1,778 $2,639 ============ =============== =======
2.4 Investment Real Estate. Investment real estate at December 31, 1995 and 1994 was as follows:
1995 1994 --------------- --------------- (in thousands) (in thousands) Investment real estate $ 22,845 $ 3,073 Foreclosed real estate 13,565 19,339 Allowance for losses (3,987) (5,120) --------------- --------------- $ 32,423 $ 17,292 =============== ===============
The specific allowance for investment real estate losses was as follows:
1995 1994 1993 -------- --------------- -------- (in thousands) Balance, January 1 $ 5,120 $ 4,473 $ 4,062 Additions (a) 1,505 2,561 2,607 Deductions (b) (2,638) (1,914) (2,196) -------- --------------- -------- Balance, December 31 $ 3,987 $ 5,120 $ 4,473 ======== =============== ======== (a) Charged to realized investment gains (losses). (b) Resulting from sales.
2.5 Investment In Limited Partnerships. Following is an analysis of the Company's investment in limited partnerships:
Year Ended December 31, 1995 1994 1993 ------------ --------------- --------- (in thousands) Balance, beginning of year $ 26,672 $ 26,698 $ 32,824 Contributions and capitalized costs 9,869 5,168 4,326 Net partnership income 6,279 1,480 2,944 Distributions (17,226) (6,674) (13,396) ------------ --------------- --------- Balance, end of year $ 25,594 $ 26,672 $ 26,698 ============ =============== =========
The limited partnerships were formed for the purpose of participating in privately placed mezzanine investments. These investments, acquired in leveraged investment transactions, generally include higher risk subordinated debt combined with equity securities. 2.6 Investment Income. Investment income by type that exceeds five percent of total investment income was as follows:
Year Ended December 31, 1995 1994 1993 ------------ --------------- --------- (in thousands) Fixed maturity securities $ 85,852 $ 74,443 $ 63,751 Mortgage loans on real estate 35,056 42,763 45,709 All other investment income 14,386 8,925 11,243 ------------ --------------- --------- 135,294 126,131 120,703 Less: Investment expenses (12,187) (11,751) (11,042) ------------ --------------- --------- Net investment income $ 123,107 $ 114,380 $109,661 ============ =============== =========
2.7 Realized Investment Gains (Losses). Net realized investment gains (losses) were as follows:
Year Ended December 31, ------------ --------------- --------- 1995 1994 1993 ------------ --------------- --------- (in thousands) Fixed maturity securities: Gross gains $ 524 $ 303 $ 1,536 Gross losses (1,807) (3,373) (1,816) Loss provision (350) 1,198 (1,417) ------------ --------------- --------- Net losses on fixed maturity securities (1,633) (1,872) (1,697) ------------ --------------- --------- Equity securities: Gross gains 205 51 882 Gross losses (33) (59) (15,715) ------------ --------------- --------- Net gains (losses) on equity securities 172 (8) (14,833) ------------ --------------- --------- Mortgage loans on real estate: Losses on sale (194) - - Loss provision (339) (861) (150) ------------ --------------- --------- Net losses on mortgage loans on real estate (533) (861) (150) ------------ --------------- --------- Investment real estate: Losses on sale (2,638) (2,840) (2,302) Loss provision 1,134 (952) (411) ------------ --------------- --------- Net losses on investment real estate (1,504) (3,792) (2,713) ------------ --------------- --------- Realized investment losses $ (3,498) $ (4,811) $(19,393) ============ =============== =========
3. PROPERTY-NET Property is summarized as follows:
December 31, December 31, --------------- --------------- 1995 1994 --------------- --------------- (in thousands) (in thousands) Land and buildings $ - $ 27,350 Furniture, fixtures and equipment 2,370 2,084 --------------- --------------- Total 2,370 29,434 Less accumulated depreciation (1,795) (9,135) --------------- --------------- Property-net $ 575 $ 20,299 =============== ===============
Rental expense on operating leases, including real estate, computer equipment and automobiles, totaled $.7 million, $.5 million and $.4 million during 1995, 1994 and 1993, respectively. Minimum annual commitments under noncancellable operating leases are as follows (in thousands):
December 31, 1995 ------------- 1996 $ 509 1997 503 1998 503 1999 481 2000 241 ------------- Total $ 2,237 =============
4. INCOME TAXES The provision (benefit) for income taxes attributable to operations is as follows:
Year Ended December 31, ------------ --------------- -------- 1995 1994 1993 ------------ --------------- -------- (in thousands) Current $ 5,259 $ 5,915 $(2,263) Deferred (1,194) (2,721) (1,844) ------------ --------------- -------- Total $ 4,065 $ 3,194 $(4,107) ============ =============== ========
Reported income tax expense attributable to operations differs from the amount computed by applying the statutory federal income tax rate to income from operations before income taxes for the following reasons:
Year Ended December 31, ------------ --------------- -------- 1995 1994 1993 ------------ --------------- -------- (in thousands) Federal income tax (benefit) at statutory rate $ 4,235 $ 3,178 $(4,328) Differences resulting from: Reversal of temporary differences at prior tax rates - - 48 Other (170) 16 173 ------------ --------------- -------- Reported income tax provision benefit $ 4,065 $ 3,194 $(4,107) ============ =============== ========
The significant components of the Company's net deferred income tax benefit and liability are as follows:
Year Ended December 31 --------------- --------------- 1995 1994 --------------- --------------- (in thousands) (in thousands) Deferred income tax benefit: Policy reserves $ 21,530 $ 21,457 Investment securities - 27,263 Real estate and loan income 1,861 1,956 Other - 4 --------------- --------------- Total 23,391 50,680 --------------- --------------- Deferred income tax liabilities: Other 11 - Investment securities 12,495 - Real estate and loan income 4,180 3,926 Deferred policy acquisition costs 29,475 29,626 --------------- --------------- Total 46,161 33,552 --------------- --------------- Net deferred income tax (benefit) liability $ 22,770 $ (17,128) =============== ===============
Payments made for income taxes, net of refunds received, during the years ended December 31, 1995, 1994 and 1993 were $4.6 million, $1.4 million and $.6 million, respectively. Retained earnings at December 31, 1995 include approximately $5.2 million of "Policyholders' Surplus" on which no federal income tax payment will be required unless it is distributed as a dividend or exceeds the limits prescribed by tax laws applicable to life insurance companies. A deferred income tax liability has not been recognized for this amount. The maximum federal income tax provision possibly required based on the current federal income tax rate would be $1.8 million. The Company had a current income tax payable, which is included in "Other liabilities," in the amount of $2.3 million at December 31, 1995, and $1.7 million at December 31, 1994. 5. TRANSACTIONS WITH AFFILIATES The Company has an agreement with UCLC to purchase qualifying residential home equity mortgage loans originated or purchased and underwritten by UCLC. These loans are usually held three to six months until resold to UCLC for sale by UCLC in loan securitizations. Also, under an agreement, UCLC is obligated to repurchase these home-equity loans previously sold to the Company at the time of foreclosure. At December 31, 1995, approximately $166.5 million of home-equity loans originated by UCLC were owned by the Company. During the years ended December 31, 1995, 1994 and 1993 the Company purchased home-equity loans of approximately $1,169 million, $893 million and $569.9 million, respectively, from UCLC. Sales of these home-equity loans to UCLC by the Company were $1,112 million in 1995, $932.7 million in 1994, and $457.3 million in 1993. No gain or loss was recorded by the Company in these transactions. As of December 31, 1995, 1994 and 1993 UCLC serviced loans owned by the Company having aggregate unpaid principal balances of approximately $338.4 million, $296.9 million and $338.7 million, respectively. The Company paid servicing fees relative to these loans of approximately $.9 million in 1995, $1.1 million in 1994 and $1.3 million in 1993. The Company leases home office space to its Parent and other affiliates. Rent income attributable to these affiliates was approximately $1.0 million in each of the years ended December 31, 1995, 1994 and 1993. United Companies Realty & Development Co., Inc. ("UCRD"), an affiliate, managed the home office buildings leased by the Company to its Parent and other third party tenants under a real estate management contract in 1995, 1994 and 1993. The Company paid approximately $443,000, $306,000 and $312,000 to UCRD in management fees in 1995, 1994 and 1993, respectively. The Company is allocated certain costs from its Parent and affiliates under a cost sharing agreement. Amounts allocated to the Company from UCFC and affiliates were as follows:
Year Ended --------------- December 31, --------------- 1995 1994 1993 ------ --------------- ------ (in thousands) Personnel expense $2,014 $ 1,776 $ 937 Other operating expenses 2,116 1,532 1,452 ------ --------------- ------ Total $4,130 $ 3,308 $2,389 ====== =============== ======
In May 1993, the Company purchased three subordinated debentures from UCLC. Listed below is summarized information on the subordinated debentures that were issued by UCLC:
Date of Principal Interest Maturity Series Issue Balance Rate Date - ------- ------------ ----------- --------- ------------ A-1 May 14, 1993 $ 3,000,000 6.05% May 20, 1998 B May 14, 1993 3,000,000 6.64% May 20, 2000 C May 14, 1993 4,000,000 7.18% May 20, 2003 ----------- Total $10,000,000 ===========
Interest income received from UCLC with respect to those subordinated debentures totaled approximately $668,000 in each of 1995 and 1994 and $345,000 in 1993. All principal is payable upon maturity. The Company is a participant in UCFC's consolidated income tax agreement. See Note 1.9. 6. EMPLOYEE BENEFIT PLANS All employees who meet minimum age and service requirements participate in UCFC's Employee Stock Ownership Plan ("ESOP"). Under the ESOP, UCFC makes tax deductible contributions of its common stock (or cash which is used to purchase its common stock or to repay debt used by the ESOP to purchase such stock) to a trust for the benefit of participating employees. Contributions are allocated among participants based on years of service and compensation. Upon retirement, death or disability, the employee or a beneficiary receives the designated common stock. Contributions to the ESOP are determined on an annual basis. The Company's contributions to the ESOP were $244,000, $189,000 and $74,000 for the years ended December 31, 1995, 1994 and 1993, respectively. Eligible employees may elect to participate in the UCFC Employees' Savings Plan and Trust which is designed to be a qualified plan under Sections 401(a) and 401(k) of the Internal Revenue Code of 1988, as amended. Under the plan, employees are allowed to defer income on a pre-tax basis through contributions to the plan and the Company matches a portion of such contributions. The Company's matching contributions totaled $170,000, $138,000 and $49,000 during 1995, 1994 and 1993, respectively. Employees have five investment options, one of which is to invest in the Parent's common stock. 7. REGULATORY ACCOUNTING Accounting records of the Company are also maintained in accordance with practices prescribed or authorized by insurance regulatory authorities. Prescribed statutory accounting principles include a variety of publications of the National Association of Insurance Commissioners, as well as state laws, regulations, and general administrative rules. Permitted statutory accounting practices encompass all accounting practices not so prescribed. The Company's capital and surplus pursuant to the regulatory accounting basis as of December 31, 1995 and 1994 was $99.9 million and $90.0 million, respectively. On a regulatory accounting basis, net gain from operations for the years ended December 31, 1995, 1994 and 1993 was $12.8 million, $9.7 million and $13.0 million, respectively. Net income (loss) on a regulatory accounting basis, which includes realized capital gains and losses, was $10.0 million, $5.8 million and $(1.7) million for the years ended December 31, 1995, 1994 and 1993, respectively. As a Louisiana domiciled insurance company, the Company is subject to certain regulatory restrictions on the payment of dividends. At December 31, 1995 dividends of $9.2 million may be paid without prior regulatory approval. The Company did not pay any dividends during 1995, 1994 or 1993 in order to retain capital. The Company received written approval from the Louisiana Department of Insurance to invest in first lien residential mortgage loans originated by UCLC on a short-term basis without recording the assignment of the mortgage loans to the Company, which differs from prescribed statutory accounting practices. Statutory accounting practices prescribed by the State of Louisiana require that investments in mortgage loans be secured by unrestricted first liens on the underlying property. As of December 31, 1995, statutory surplus was increased by approximately $53.7 million as a result of this permitted practice. 8. DISCLOSURE ABOUT FINANCIAL INSTRUMENTS Statement of Financial Accounting Standards No. 107 ("SFAS 107") requires that the Company disclose the estimated fair values of its financial instruments, both assets and liabilities recognized and not recognized in its financial statements. SFAS 107 defines financial instruments as cash and contractual rights and obligations that require settlement in cash or by exchange of financial instruments. Fair value is defined as the amount at which the instrument could be exchanged in a current transaction between willing parties other than in a forced or liquidation sale. The carrying value and fair value of the Company's financial assets and liabilities were as follows:
December 31, 1995 December 31, 1994 --------------- --------------- --------------- --------------- Carrying Fair Carrying Fair Value Value Value Value --------------- --------------- --------------- --------------- (in thousands) (in thousands) (in thousands) (in thousands) Financial assets: Investments: Fixed maturity securities: Available-for-sale $ 1,140,160 $ 1,140,160 $ 959,857 $ 959,857 Held-to-maturity 50,919 49,611 57,074 55,085 Equity securities: Trading 752 752 679 679 Available-for-sale 42 42 42 42 Mortgage loans on real estate 336,269 335,157 311,537 307,775 Investment real estate 32,423 38,978 17,292 15,179 Policy loans 20,291 20,291 20,243 20,243 Investment in limited partnership 25,594 25,594 26,672 26,672 Short-term investments 22,804 22,804 54,664 54,664 Other invested assets 2,469 2,469 5,034 5,034 Cash 3,028 3,028 13,169 13,169 Financial liabilities: Annuity reserves 1,417,803 1,350,626 1,425,673 1,354.944 Repurchase agreements 40,857 40,857 - -
The above values do not reflect any premium or discount from offering for sale at one time the Company's entire holdings of a particular financial instrument. Fair value estimates are made at a specific point in time based on relevant market information, if available. Because no market exists for certain of the Company's financial instruments, fair value estimates for these assets and liabilities were based on subjective estimates of market conditions and perceived risks of the financial instruments. Fair value estimates were also based on judgments regarding future loss and prepayment experience and were influenced by the Company's historical information. The following methods and assumptions were used to estimate the fair value of the Company's financial instruments. FIXED MATURITY AND EQUITY SECURITIES. The estimated fair value for the Company's investment portfolio was generally determined from quoted market prices for publicly traded securities. Certain of the securities owned by the Company may trade infrequently or not at all; therefore, fair value for these securities was determined by management by evaluating the relationship between quoted market values and carrying value and assigning a liquidity factor to this segment of the investment portfolio. MORTGAGE LOANS ON REAL ESTATE. The fair value of the Company's loan portfolio was determined by segregating the portfolio by type of loan and further by its performing and non-performing components. Performing loans were further segregated based on the due date of their payments, an analysis of credit risk by category was performed and a matrix of pricing by category was developed. Loans which were current were valued at remaining principal balance which is believed to represent an estimate of market discount from similar loans identified for sale. The fair value of delinquent loans was estimated by using the Company's historical recoverable amount on defaulted loans. INVESTMENT REAL ESTATE. The fair value of the Company's investment real estate was based upon independent appraisals of the properties. POLICY LOANS. Policy loans are generally settled at the loan amount plus accrued interest; therefore, the carrying value of these assets is a reasonable estimate of their fair values. OTHER INVESTMENT ASSETS. The fair value of the Company's investment in other invested assets approximate their carrying value. SHORT-TERM INVESTMENTS. The carrying amount of short-term investments approximates their fair values because these assets generally mature in 90 days or less and do not present any significant credit concerns. INVESTMENT IN LIMITED PARTNERSHIPS. The fair value of the Company's investment in limited partnerships approximated their carrying value. ANNUITY RESERVES. The Company's annuity contracts generally do not have a defined maturity and are considered as deposits under SFAS 97. SFAS 107 states that the fair value to be disclosed for deposit liabilities with no defined maturities is the amount payable on demand at the reporting date. Accordingly, the Company has estimated the fair value of its annuity reserves as the cash surrender value of these contracts. REPURCHASE AGREEMENTS. The repurchase agreements mature in less than 60 days; therefore, the carrying value of the repurchase agreements is considered to be a reasonable estimate of fair value. 9. SUBSEQUENT EVENT On February 2, 1996, UCFC signed a stock purchase agreement dated as of January 30, 1996, for the sale of all of the outstanding capital stock of the Company to UC Life Holding Corp., a new Delaware corporation, formed by Knightsbridge Capital Fund I, L.P. for an aggregate amount of $164 million plus earnings of the Company from January 1, 1996, to closing of the transaction. Knightsbridge, which is a private investment partnership with institutional partners, was formed in 1995 to make equity investments in companies engaged primarily in the life insurance industry. Under the terms of the agreement, the sales price is comprised of cash, currently estimated to be $109 million, and real estate and other assets owned by the Company to be distributed to UCFC prior to the closing. The real estate to be distributed includes portions of the United Plaza office park, including the home office. In addition, UCFC will purchase a convertible promissory note from an affiliate of the purchaser for $15 million in cash. The note matures in 11 years and bears interest at 8% per annum payable at maturity. The purchaser also agreed that the Company would continue to be an investor in first lien home equity loans originated by UCFCs lending operations and that the Companys home office operations would be maintained in its present location in Baton Rouge, Louisiana following the closing for at least two years. The agreement is subject to approval by UCFCs shareholders and regulatory authorities and the satisfaction of other conditions, and provides that the closing will occur on or before July 31, 1996. 10. CONTINGENCIES The Company is subject to various litigation arising during the ordinary course of business. While the outcome of such litigation cannot be predicted with certainty, management does not expect the resolution of these matters to have a material adverse effect on the financial condition or results of operations of the Company. 11. QUARTERLY FINANCIAL DATA (UNAUDITED) Summarized quarterly financial date is as follows:
Three Months Ended --------------- --------------- March 31 June 30 September 30 December 31 --------------- --------------- --------------- --------------- (in thousands) (in thousands) (in thousands) (in thousands) 1995 Total revenues $ 32,036 $ 33,977 $ 31,779 $ 30,325 Income from operations before income taxes 3,170 4,563 2,671 1,696 Net income 2,266 2,963 1,732 1,074 1994 Total revenues $ 32,806 $ 34,512 $ 35,554 $ 34,880 Income from operations before income taxes 1,579 2,925 2,703 1,873 Net income 1,024 1,897 1,753 1,212
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None EX-99 2 PART 2 OF UC ANNUAL REPORT PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The directors and executive officers of the Company as of March 15, 1996 are listed below, together with information as to their ages, dates of election and principal business occupation during the last five years (if other than their present business occupation). Principal Business Occupation Name During Last Five Years - ------------------------------------------------------------------------------ J. Terrell Brown Mr. Brown is a director and is Chief Executive (Age 56) Officer of the Company, is Chairman of the Board and Chief Executive Officer of the Company's parent, United Companies Financial Corporation ("UCFC") and is Chief Executive Officer of each of UCFC's subsidiaries. Mr. Brown has served as a director and executive officer of the Company since 1964. Mr. Brown is also a director of Hibernia Corporation and Sizeler Property Investors, Inc. Robert B. Thomas, Jr. Mr. Thomas is Chairman of the Board and (Age 50) President of the Company and is an Executive Vice President of UCFC. Mr. Thomas joined the Company in February 1993 as Chairman of the Board and was named President of the Company in 1994. Mr. Thomas also serves as Director of United Variable Services, Inc. Prior to his employment with the Company, Mr. Thomas served as a principal of Lewis and Ellis, Inc., a Dallas, Texas actuarial consulting firm and, through Lewis and Ellis, served as consulting actuary to the Company for approximately 15 years. John D. Dienes Mr. Dienes was named a director of the Company (Age 54) in 1995 and is President and Chief Operating Officer of UCFC. He is also President of United Companies Lending Group, Inc. Mr. Dienes joined UCFC in 1994 as Executive Vice President and Chief Operating Officer. Prior to his employment with UCFC, Mr. Dienes served as Executive Vice President and director of Western Corporate Banking for NationsBank Corporation, Dallas, Texas, his employer since 1988. At the time Mr. Dienes joined UCFC, he had over 30 years of experience in the financial industry. Dale E. Redman Mr. Redman has served as a director of (Age 48) the Company since 1983. He is Executive Vice President, Chief Financial Officer and Assistant Secretary of UCFC and is Vice Chairman of each of the subsidiaries of UCFC. Prior to his appointment as Chief Financial Officer served as Secretary and Treasurer of UCFC. Mr. Redman is also a director of Piccadilly Cafeterias, Inc. Gary L. Warrington Mr. Warrington has served as a director of the (Age 56) Company since 1988 and serves as Executive Vice President of the Company, Senior Vice President of UCFC and President of United Variable Services, Inc. Mr. Warrington joined the Company as Vice President and Controller in 1982 and served as President of the Company from 1988 to 1994. Lindsay C. Seals Mr. Seals has served as a director of the (Age 60) Company since 1988 and serves as Executive Vice President of the Company, Senior Vice President of UCFC, and Executive Vice President of United Variable Services, Inc. Mr. Seals joined the Company in 1971 and since that time has served in various management positions within the company. Kitty S. Kennedy Ms. Kennedy has served as Executive Vice (Age 47) President, Chief Actuary and Chief Administrative Officer since 1993 and serves as Senior Vice President of UCFC. Ms. Kennedy joined the Company in 1984, was named Senior Vice President in 1991 and has served in various management positions within the Company. Donald M. Woodard Mr. Woodard is Senior Vice President and (Age 47) Controller of the Company. Mr. Woodard joined the Company in June 1994. Prior to his employment with the Company, Mr. Woodard served as Chief Financial Officer of National Financial Insurance Company and American Insurance Company of Texas, both of Dallas, Texas. Francis G. Miller Mr. Miller is a Senior Vice President, (Age 49) Information Services, of the Company and is a Senior Vice President of UCFC. He transferred to the Company in August 1993 from UCFC, which he had joined in 1989. R. Andrew Davidson, III Mr. Davidson is Senior Vice President (Age 43) of Investments for the Company. Mr. Davidson joined the Company in October 1992 as Vice President. Prior to his employment with the Company, Mr. Davidson served as Investment adviser/Portfolio Analyst with Southwest Corporate FCU in Dallas, Texas, his employer since 1990. At the time Mr.Davidson joined the Company, he had over 11 years of experience in the insurance industry. C. Keith Cook Mr. Cook is a Senior Vice President in the (Age 41) Marketing Divison of the Company. Mr. Cook was named Senior Vice President in 1994. Mr. Cook joined the Company in 1974 and has served in various positions within the Company. ITEM 11. EXECUTIVE COMPENSATION The following table sets forth certain information on the annual and long-term Compensation paid by the Company and its affiliates for the Chief Executive Officer and each of the other four most highly compensated executive officers of the Company for the three years ended December 31, 1995, 1994, and 1993. The salary and bonus of each of the executive officers, except that of Mr. Brown, were paid by the Company. Mr. Brown's salary and bonus were paid by UCFC, a portion of which was allocated to the Company.
Long-Term Long-Term Compensation Compensation Summary Compensation Table Annual Compensation Awards Awards -------- -------------- -------------- -------------- Other Annual Restricted Name and Compensation Stock Awards Options(3)/ All Other Principal Position Year Salary Bonus ($)(1) ($)(2) ($)(5) SARs(%) Compensation(4) - ---------------------------- ---- -------- -------------- ------------- -------------- -------------- ---------------- J. Terrell Brown 1995 $393,750 $ 833,666 $ 304,000 $ 50,000 $ 39,308 Chief Executive Officer 1994 378,304 297,205 - - 41,240 1993 375,625 76,395 - 55,000 32,114 Robert B. Thomas, Jr. 1995 219,625 395,818 160,000 - 20,505 Chairman of the Board and 1994 209,366 168,116 - - 21,882 President 1993 175,269 49,732 - 22,000 - Kitty S. Kennedy 1995 108,970 49,988 - - 16,015 Executive Vice President, 1994 100,320 40,800 - - 15,280 Chief Actuary and 1993 - - - - - Chief Administrative Officer Gary L. Warrington 1995 158,980 71,541 - - 18,047 Executive Vice President 1994 158,980 63,592 - - 21,939 1993 158,208 14,308 - 3,300 10,849 Lindsay C. Seals 1995 106,600 48,204 - - 17,443 Executive Vice President 1994 103,333 41,600 - - 16,474 1993 99,773 9,000 - 2,200 6,680 - ---------------------------------------- NOTES: (1) Amounts awarded under the United Companies Financial Corporation Management Incentive Plan for the respective years, even if deferred. Included in the amount awards to J. Terrell Brown in 1995, 1994 and 1993 were $16,562, $16,729 and $16,998, respectively, which were deferred pursuant to an unfunded salary deferral agreement entered into between UCFC and Mr. Brown in 1989. The aggregate amount payable to UCFC to Mr. Brown at December 31, 1995 was $136,023. (2) No personal benefits, which are non-cash compensation, are disclosed in the "Other Annual Compensation" column since they did not exceed the lesser of either $50,000 or 10% of the total annual salary and bonus for any of the named executive officers. (3) Represents options granted under the United Companies Financial Corporation stock option plans for employees after giving effect to stock dividends. All options have been granted at an exercise price equal to 100% of the fair market value of the Common Stock on the date of the grant. For additional information regarding current holdings of options, see table below entitled "Aggregate Option Exercises in Last Fiscal Year and Year-End 1994 Option Values." (4) Amount reported include amounts contributed or accrued for 1995, 1994, and 1993 for the named officers under the United Companies Financial Corporation Employee Stock Ownership Plan ("ESOP") and Employees' Savings Plan and Trust. Amounts for J. Terrell Brown for 1995, 1994, and 1993 include $16,729, $16,998 and $17,134, respectively, in loans to Mr. Brown made by UCFC for payment of a portion of the premium on a life insurance policy. The loans were made without interest and are secured by an assignment of the policy. (5) Reflects the value of the shares of restricted stock based upon the closing price of the Company's Common Stock reported on the National Association of Securities Dealers Quaotations National Stock Market (the "Nasdaq Stock Market") on the date of award. The shares of the restricted stock vest in 50% increments on the anniversary date of the award in each of the two years thereafter. The awards are also subject to certain performance-based conditions. During the restriction period for the shares of restricted stock, the named executive officer is entitled to receive dividends and exercise voting privileges on such restricted shares. At December 20, 1995, the shares of restricted stock held by Messsrs. Brown and Thomas had a fair market value of $501,125 and $263,750, respectively.
Options Granted in Last Fiscal Year The following table sets forth information regarding the options granted during the year ended December 31, 1995, to the Named Executive Officers:
Options Grants in Last Fiscal Year Individual Grants --------------- ----------- ------------- Number of % of Total Securities Options Potential Realization Value Underlying Granted to at Assumed Annual Rates Options Employees Exercise of Stock Price Appreciation Granted in Fiscal Price Expiration for Option Term Name (#)(1) Year ($/Sh)(1) Date 5% ($) 10% ($) - ---------------- ----------- -------------- ----------- ------------- ------------------- ---------------- J. Terrell Brown 50,000 7.5 22.375 June 14, 2000 703,576 1,782,999 - ------------------------ (1) The options granted to the Named Executive Officer were awarded under the Company's 1993 Stock Incentive Plan (the "1993 Plan"). The options granted under the 1993 Plan are not exercisable, except in limited circumstances, until three years have elapsed from the date such options are granted. The exercise price of the options, which can be no less than 100% of the fair market value of a share of Common Stock on the date of grant, has been adjusted to reflect a 100% stock dividend paid by the Company on October 20, 1995. The number of shares underlying the above options have also been adjusted to reflect such stock dividend. The options will expire ten years from the date of grant.
AGGREGATE OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR - END 1995 OPTION VALUES The following table sets forth information as of December 31, 1995, regarding the number and value of exercisable and unexercisable options to purchase Common Stock of UCFC held by the Company's Chief Executive Officer and the other four most highly compensated officers.
Value of Unexercised Number of Unexercised In-the-Money Options at Shares Acquired Value Options at Fiscal Year End Fiscal Year-End ($)(1)(2)(3) ----------------- ------------- --------------- -------------- Name on Exercise (%) Realized Exercisable Unexercisable Exercisable Unexercisable - --------------------- ---------------- -------- ----------------- ------------- --------------- -------------- J. Terrell Brown - - 153,824 160,000 3,534,794 2,394,995 Robert B. Thomas, Jr. - - 22,000 22,000 489,625 438,999 Kitty S. Kennedy - - - 8,800 - 175,600 Gary L. Warrington 36,682 563,381 - 6,600 - 131,700 Lindsay C. Seals - - - 4,400 - 87,800 (1) All options were awarded under the United Companies Financial Corporation Stock Options plans for Employees and were awarded at the fair market value of the shares of Common Stock Options Plans for Employees and were awarded at the fair market value of the shares of Common Stock on the date of the grant. (2) Values in each column are based on the closing price, as reported on the National Association of Securities Dealers Quotations National Stock Market of the Company's Common Stock on December 31, 1995 ($26.375). (3) The exercise prices of the reported options range from $5.53 to $12.84 per share (as adjusted for stock dividends).
Directors of the Company receive no fees for their services as members of the Board of Directors. No shares of capital stock of the Company are owned by the executive officer or director. The Company is a wholly-owned subsidiary of UCFC. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT All of the Company's issued and outstanding common stock is owned by United Companies Financial Corporation. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS None UNITED COMPANIES LIFE INSURANCE COMPANY AND SUBSIDIARY PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K Financial Statements Included in Part II of this report: Independent Auditor's Report Page 22 December 31, 1995 and 1994 Consolidated Balance Sheets Page 23 For the three years ended December 31, 1995 Consolidated States of Income Page 24 Consolidated Statements of Cash Flows Page 25 Consolidated Statements of Stockholders Equity Page 26 Notes to Consolidated Financial Statements Pages 27-39 Financial Statement Schedules Included in Part IV of this report: Individual financial statements of the registrant have been omitted because consolidated financial statements of the registrant and its subsidiary required by Item 8 have been included in Part II of this report and, as of December 31, 1995, the registrant was primarily an operating company and its subsidiary is wholly owned. Schedule I Summary of Investments at December 31, 1995. Page 43 Schedule III Supplementary Insurance Information, for the three years ended December 31, 1995. Page 44 Schedule IV Reinsurance, for the three years ended December 31, 1995. Page 45 Schedule V Valuation and Qualifying Accounts, for the three years ended December 31, 1995. Page 46 EXHIBITS EXHIBIT NO. DESCRIPTION OF DOCUMENT - ----------- ------------------------- 21.1(1) Subsidiary of the Company 23.1(1) Consent of Deloitte & Touche LLP (1) Filed herewith Exhibit No. 21.1 - Page 51 Exhibit No. 23.1 - Page 52 REPORTS ON FORM 8K On February 9, 1996, the Company filed a current report on Form 8-K that United Companies Financial Corporation ("UCFC"), its Parent, on February 2, 1996, signed a stock purchase agreement for the sale of all of the Company's outstanding capital stock to UC Life Holding Corp., a new Delaware corporation formed by Knightsbridge Capital Fund I, LP, a private investment partnership. Closing is scheduled to occur on or before July 31, 1996, subject to approval of UCFC stockholders, regulatory authorities and the satisfaction of other conditions. SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized. Dated: March 28, 1996 UNITED COMPANIES LIFE INSURANCE COMPANY By: /s/ ROBERT B. THOMAS, JR. ------------------------------------- Robert B. Thomas, Jr. Chairman of the Board and President Pursuant to the requirements of the Securities Exchange Act of 1934 this Report has been signed below by the following persons on behalf of the registrant and in the capacities indicated on March 28, 1996. /s/ ROBERT B. THOMAS, JR. Chairman of the Board and President - --------------------------------- (Principal Executive Officer) Robert B. Thomas, Jr. /s/ J. TERRELL BROWN Chief Executive Office and Director - --------------------------------- (Principal Executive Officer) Terrell Brown /s/ DALE E. REDMAN Executive Vice President, Vice Chairman, - --------------------------------- and Assistant Secretary Dale E. Redman (Principal Executive Officer) DONALD M. WOODARD Senior Vice President and Controller - --------------------------------- (Principal Accounting Officer) Donald M. Woodard /s/ JOHN D. DIENES Director - --------------------------------- John D. Dienes /s/ GARY L. WARRINGTON Executive Vice President and Director - --------------------------------- Gary L. Warrington /s/ LINDSAY C. SEALS Executive Vice President and Director - --------------------------------- Lindsay C. Seals SCHEDULE I UNITED COMPANIES LIFE INSURANCE COMPANY AND SUBSIDIARY SUMMARY OF INVESTMENTS December 31, 1995
Amount Shown Type of Investment Cost Value on Balance Sheet - ----------------------------------------------------- ---------- --------------- ----------------- (in thousands) Fixed maturity securities available for sale: U.S. Government and agencies and authorities $ 698,913 $ 719,358 $ 719,358 Municipal 425 446 446 Foreign 20,394 22,310 22,310 Public utilities 13,697 14,672 14,672 All other corporate bonds 360,957 383,374 383,374 ---------- --------------- ----------------- Total fixed maturity securities available for sale 1,094,386 1,140,160 1,140,160 ---------- --------------- ----------------- Fixed maturity securities held to maturity: All other corporate bonds 50,919 49,611 50,919 ---------- --------------- ----------------- Total fixed maturity securities 1,145,305 1,189,771 1,191,079 ---------- --------------- ----------------- Equity securities: Common Stock Banks, trust and insurance companies - Industrial and miscellaneous 1,012 794 794 ---------- --------------- ----------------- Total equity securities 1,012 794 794 ---------- --------------- ----------------- Mortgage loans on real estate 336,269 XXXXXX 336,269 Investment real estate 32,423 XXXXXX 32,423 Policy loans 20,291 XXXXXX 20,291 Investment in limited partnerships 25,594 XXXXXX 25,594 Short-term investments 22,804 XXXXXX 22,804 Other long-term investments 2,469 XXXXXX 2,469 ---------- --------------- ----------------- Total investments $1,586,167 XXXXXX $ 1,631,723 ========== =============== =================
SCHEDULE III UNITED COMPANIES LIFE INSURANCE COMPANY AND SUBSIDIARY SUPPLEMENTARY INSURANCE INFORMATION For the Three Years Ended December 31, 1995
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN F COLUMN G COLUMN H - ---------------------------- ------------ --------------- --------- --------------- ----------- ------------- Deferred Policy Net Benefits, Acquisition Future Policy Unearned Premium Investment Claims Costs Benefits(1) Premiums Revenues(3) Income Losses, Etc. ------------ --------------- --------- --------------- ----------- ------------- (in thousands) Year ended December 31, 1995 $ 90,703 $ 1,529,012 $ 1,793 $ 8,508 $ 123,107 $ 9,930 Year ended December 31, 1994 $ 91,915 $ 1,542,474 $ 4,491 $ 11,373 $ 114,380 $ 12,654 Year ended December 31, 1993 $ 83,495 $ 1,418,311 $ 10,260 $ 18,684 $ 109,661 $ 18,200 COLUMN A COLUMN I & J - ---------------------------- ----------------- Deferred Policy Acquisition Cost Amortization and Other Operating Expenses ----------------- Year ended December 31, 1995 $ 26,569 Year ended December 31, 1994 $ 25,815 Year ended December 31, 1993 $ 23,915 NOTES: (1) Column C includes accumulated fund values on annuity and interest sensitive products. (2) Column E is omitted as amounts are not material and are included with Column C. (3) Column F excludes premiums on annuity and interest sensitive products which are accounted for as deposits.
SCHEDULE IV UNITED COMPANIES LIFE INSURANCE COMPANY AND SUBSIDIARY REINSURANCE For the Three Years Ended December 31, 1995
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E COLUMN F - -------------------------------- --------- ---------- --------------- ---------- ----------- Percentage Ceded to Assumed of Amount Direct Other From Other Net Assumed to Amount Companies Companies Amount Net Amount --------- ---------- --------------- ---------- ----------- (in thousands) December 31, 1995 Life insurance in force $ 554,131 $ 149,080 $ 992,979 $1,398,030 71.0% ========= ========== =============== ========== Premiums Life insurance 6,016 1,625 2,588 6,979 37.1 Accident and health insurance 1,643 115 1 1,529 - --------- ---------- --------------- ---------- Total premiums $ 7,659 $ 1,740 $ 2,589 $ 8,508 30.4 ========= ========== =============== ========== December 31, 1994 Life insurance in force $ 709,883 $ 177,585 $ 1,106,148 $1,638,446 67.5 ========= ========== =============== ========== Premiums Life insurance $ 7,467 $ 1,931 $ 2,959 $ 8,495 34.8 Accident and health insurance 3,070 199 7 2,878 0.2 --------- ---------- --------------- ---------- Total premiums $ 10,537 $ 2,130 $ 2,966 $ 11,373 26.1 ========= ========== =============== ========== December 31, 1993 Life insurance in force $ 956,788 $ 215,917 $ 1,106,721 $1,847,591 59.9 ========= ========== =============== ========== Premiums Life insurance $ 12,657 $ 3,196 $ 3,020 $ 12,481 23.2 Accident and health insurance 6,637 453 19 6,203 - --------- ---------- --------------- ---------- Total premiums $ 19,294 $ 3,649 $ 3,039 $ 18,684 15.5% ========= ========== =============== ==========
SCHEDULE V UNITED COMPANIES LIFE INSURANCE COMPANY AND SUBSIDIARY VALUATION AND QUALIFYING ACCOUNTS For the Three Years Ended December 31, 1995
COLUMC C COLUMN D COLUMN A COLUMN B ADDITIONS DEDUCTIONS(2) COLUMN E(3) - ---------------------------------- ----------- -------------- ------------ Charged Balance at to Costs Charged Balance at Beginning and to Other End of Year Expenses Accounts(1) of Year ----------- ---------- --------------- ------------ (in thousands) December 31, 1995 Allowance for loan losses $ 1,778 $ 533 $ - $ 194 $ 2,117 Allowance for real estate losses 5,120 1,505 - 2,638 3,987 Allowance for bond losses 317 2,013 - 1,664 666 Unearned loan charges 419 - - 118 301 ----------- ---------- --------------- -------------- ------------ Total $ 7,634 $ 4,051 $ - $ 4,419 $ 7,071 =========== ========== =============== ============== ============ December 31, 1994 Allowance for loan losses $ 2,639 $ 649 $ - $ 1,510 $ 1,778 Allowance for real estate losses 4,473 2,561 - 1,914 5,120 Allowance for bond losses 1,515 1,849 - 3,047 317 Unearned loan charges 592 - - 173 419 ----------- ---------- --------------- -------------- ------------ Total $ 9,219 $ 5,059 $ - $ 6,644 $ 7,634 =========== ========== =============== ============== ============ December 31, 1993 Allowance for loan losses $ 2,489 $ 658 $ - $ 508 $ 2,639 Allowance for real estate losses 4,062 2,607 - 2,196 4,473 Allowance for bond losses 98 2,228 - 811 1,515 Unearned loan charges 764 - - 172 592 ----------- ---------- --------------- -------------- ------------ Total $ 7,413 $ 5,493 $ - $ 3,687 $ 9,219 =========== ========== =============== ============== ============ --------------------------------------- NOTES: (1) Represents the approximate amount of unearned loan charges on installment loans originated during the period. (2) Represents loans and bonds charged off and loan charges earned during the period. (3) All of the above are deducted in the balance sheet from the asset to which they apply.
EXHIBIT 21.1 UNITED COMPANIES LIFE INSURANCE COMPANY LIST OF SUBSIDIARIES December 31, 1995 State of Name Incorporation - --------------- ----------------- United Variable Services, Inc. . . . . . . . . . . . . . . Louisiana EXHIBIT 23.1 INDEPENDENT AUDITORS' CONSENT We consent to the incorporation by reference of our opinion dated February 29, 1996 appearing in this Annual Report on Form 10-K of United Companies Life Insurance Company for the year ended December 31, 1995 in the following: Registration Statement No. 33-91358 on Form S-1, Registration Statement No. 33-91362 on Form N-4, Registration Statement No. 33-95968 on Form S-1, and Registration Statement No. 33-05778 on Form N-4, pertaining to United Companies Life Insurance Company's variable annuity separate account and United Companies Separate Account One. Deloitte & Touche LLP Baton Rouge, Louisiana March 27, 1996 -----END PRIVACY-ENHANCED MESSAGE-----