-----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, Vm1ABv42OUssUMkE769/4iZ5iwXRlfE9/bb9FVW7W9hwGZeC3fYAMXakl0qQvFzA Dem3Qu/HaBYl+Eyb6Jt3zA== 0000950134-97-002508.txt : 19970401 0000950134-97-002508.hdr.sgml : 19970401 ACCESSION NUMBER: 0000950134-97-002508 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 19961231 FILED AS OF DATE: 19970331 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-K405 SEC ACT: 1934 Act SEC FILE NUMBER: 033-91358 FILM NUMBER: 97570266 BUSINESS ADDRESS: STREET 1: PO BOX 260100 STREET 2: 4041 ESSEN LANE CITY: BATON ROUGE STATE: LA ZIP: 70826-0100 BUSINESS PHONE: 5049246007 MAIL ADDRESS: STREET 1: PO BOX 260100 STREET 2: PO BOX 3257 CITY: BATON ROUGE STATE: LA ZIP: 70826-0100 10-K405 1 FORM 10-K FOR YEAR ENDED DECEMBER 31, 1996 1 ================================================================================ 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, 1996 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE PERIOD FROM ....................... TO ...................... COMMISSION FILE NUMBERS 33-91358, 33-95968, 33-91362, 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) 952-6000 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. [X] THE AGGREGATE MARKET VALUE OF VOTING STOCK HELD BY NON-AFFILIATES OF THE REGISTRANT, AS OF MARCH 17, 1997 WAS $-0-. THE NUMBER OF SHARES OF $2.00 PAR VALUE COMMON STOCK ISSUED AND OUTSTANDING AS OF MARCH 17, 1997 WAS 4,200,528. ================================================================================ 2 PART I ITEM 1. BUSINESS General. United Companies Life Insurance Company and its subsidiary ("the Company", "UC Life"), 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 Pacific Life and Accident Insurance Company ("PLAIC"), which is in turn a wholly-owned subsidiary of PennCorp Financial Group, Inc. ("PennCorp"). (See note 2 to Notes to Consolidated Financial Statements.) PennCorp is an insurance holding company which offers, through its wholly-owned subsidiaries, a broad range of life insurance, annuity and accident and sickness products. The principal products of the Company are tax 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 savings investments. During the fourth quarter of 1995, the Company added variable annuity products to its annuity line of business. Sale of the Company. On July 24, 1996, United Companies Financial Corporation ("UCFC") and PLAIC consummated the sale of UC Life, a wholly-owned subsidiary of UCFC. Pursuant to an Amended and Restated Stock Purchase Agreement (the "Agreement"), UCFC sold 100% of the outstanding capital stock of UC Life (the "UC Life Common Stock") to PLAIC for a total purchase price of $110.1 million including expenses incurred of $9.7 million and earnings through the date of consummation of the acquisition of $3.6 million. The Company paid a $10.0 million cash dividend and distributed certain real estate and other assets to UCFC immediately prior to the closing with a value of $48.3 million. Immediately following the acquisition of the Company, PLAIC contributed $57.3 million in cash to the Company, which represented the market value of the real estate and other assets (but excluded the $10.0 million cash dividend) distributed by the Company to UCFC. The sale of the Company to PLAIC has been accounted for as a purchase transaction in accordance with generally accepted accounting principles, and accordingly, all assets and liabilities acquired were recorded at fair value, as of the acquisition date, which became the new cost basis. Principal Products. The principal products marketed by the Company since 1978 have been tax deferred fixed annuities. During 1996, the average premium received on the sale of these policies was approximately $23,000. These 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 premiums 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 73% of the Company's annuity policies in force at December 31, 1996, were subject to a surrender penalty. 1 3 The Company produced $109.1 million, $135.3 million, and $249.7 million in sales of annuity products during the years ended December 31, 1996, 1995 and 1994, respectively. The Company believes that the decrease in annuity sales in 1995 and 1996 is due in part to (i) the interest rate environment, particularly the relative relationship between short term and intermediate term interest rates, (ii) the focus of the Company's resources on the introduction of its variable annuity product, and (iii) the uncertainty associated with announcements by UCFC concerning the possible sale of the Company. During the fourth quarter of 1995, the Company introduced a variable annuity product. During 1996, the average premium received on the sale of variable policies was $38,000 with total sales aggregating $18.4 million. The Company assumes no investment risk on the funds invested in the separate account of a variable annuity, but receives income from policy related charges. The following table presents the Company's direct annuity sales by state by percent of total premiums for the periods indicated:
Years ended December 31 --------------------------------------- 1996 1995 1994 ----------- ----------- ----------- State Missouri.................. 25.3% 20.9% 10.3% Louisiana................. 24.9 9.8 13.7 Florida................... 12.6 21.8 28.9 Illinois.................. 9.5 9.8 8.6 All others................ 27.7 37.7 38.5 ----------- ----------- ---------- Total 100.0% 100.0% 100.0% =========== =========== ==========
No other state individually accounted for more than 5% of annuity sales during 1996 or 1995. 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 1996 and 1995, the Company focused on expanding the independent general agent share of its distribution network. Of the annuity policies sold during 1996 and 1995, approximately 54% and 55%, respectively, of the total dollar amount were attributable to sales by independent general agents versus 46% in 1994. Reinsurance. The Company generally limits the amount of life 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 life 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 A.M. Best Company ("Best") at December 31, 1996. Aetna and Continental are rated "A" (Excellent"). First Capital is rated "B" (Adequate). In the case of First Capital, assets equal to the reserve credit taken by the Company are held in trust for the benefit of the Company. Annuity and Life Insurance Reserves. 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. 2 4 The annuity reserves reflected in the consolidated financial statements are calculated based on generally accepted accounting principles ("GAAP"). As of December 31, 1996 and 1995, annuity reserves were $1.3 billion and $1.4 billion, life reserves were $111.2 million and $111.1 million, and unearned premium reserves related to credit insurance were $.3 million and $1.8 million, respectively. 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. Subsequent to the purchase, the Company utilizes statutory reserves as a reasonable approximation of GAAP reserves for all non-interest sensitive products. 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 summarizes the Company's investments as of December 31, 1996:
PERCENT AMORTIZED FAIR CARRYING CARRYING COST VALUE(1) VALUE VALUE ---------- ---------- ---------- ---------- (dollars in thousands) Fixed maturities held for investment: Investment-grade corporate bonds .............. $ 4,394 $ 4,405 $ 4,394 .3% Non-rated bonds ............................... 44,079 46,497 44,079 3.0 ---------- ---------- ---------- ---------- Total securities held for investment ..... 48,473 50,902 48,473 3.3 ---------- ---------- ---------- ---------- Fixed maturities available for sale: U.S. Government and agency bonds .............. 9,029 9,122 9,122 .6 Debt securities issued or guaranteed by foreign government(2) ....................... 10,920 11,105 11,105 .8 Municipal bonds ............................... 5,434 5,387 5,387 .4 Investment-grade corporate bonds .............. 375,943 380,198 380,198 26.1 Below-investment-grade corporate bonds ........ 30,608 31,233 31,233 2.1 Non-rated corporate bonds ..................... 8,000 8,000 8,000 .5 Mortgage-backed bonds ......................... 687,916 699,120 699,120 48.0 ---------- ---------- ---------- ---------- Total securities available for sale ...... 1,127,850 1,144,165 1,144,165 78.5 ---------- ---------- ---------- ---------- Commercial mortgages ............................ 182,070 185,187 182,070 12.5 Residential mortgages ........................... 53,911 55,203 53,911 3.7 Policy loans .................................... 21,536 21,536 21,536 1.5 Investment in limited partnerships .............. 5,704 5,704 5,704 .4 Short-term investments .......................... 467 467 467 -- Other investments ............................... 1,491 1,491 1,491 .1 ---------- ---------- ---------- ---------- Total invested assets .................... $1,441,502 $1,464,655 $1,457,817 100.0% ========== ========== ========== ==========
- -------------- (1) Fair values are obtained principally from the Company's investment advisor. (2) Consists principally of Canadian provincial government bonds and bonds issued or guaranteed by the Canadian federal government (in U.S. Dollars). 3 5 As reflected in the following table, the carrying value of the Company's investments classified as investment grade at December 31, 1996, was approximately $1.1 billion or 93% of the fixed maturity portfolio:
Total Total Held for Available Carrying Percent of Investment for Sale Value Carrying Value ---------- ---------- ---------- ---------- (dollars in thousands) Investment grade(1) Aaa ...................... $ -- $ 692,616 $ 692,616 58.0% Aa ....................... -- 26,105 26,105 2.2 A ........................ 1,165 260,747 261,912 22.0 Baa ...................... 3,229 125,464 128,693 10.8 ---------- ---------- ---------- ---------- Total investment grade .. 4,394 1,104,932 1,109,326 93.0 Ba and below ................. -- 31,233 31,233 2.6 Not rated .................... 44,079 8,000 52,079 4.4 ---------- ---------- ---------- ---------- Total fixed maturity investments ............. $ 48,473 $1,144,165 $1,192,638 100.0% ========== ========== ========== ==========
- ------------- (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. Of the bonds held by the Company, 88.8% were in the highest two NAIC designations at December 31, 1996. The following table sets forth as of December 31, 1996, the carrying values of these securities according to NAIC designations:
Total Held for Available Carrying Percent of Total NAIC Rating Investment for Sale Value Carrying Value ---------- ---------- ---------- ---------- (dollars in thousands) Class 1 ............ $ 1,165 $ 929,206 $ 930,371 78.0% Class 2 ............ 3,229 125,090 128,319 10.8 Class 3 ............ -- 19,806 19,806 1.7 Class 4 ............ -- 6,355 6,355 0.5 Not Rated .......... 44,079 63,708 107,787 9.0 ---------- ---------- ---------- ---------- Total ...... $ 48,473 $1,144,165 $1,192,638 100.0% ========== ========== ========== ==========
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. 4 6 At December 31, 1996, 50.3% 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 58% of the Company's investments in mortgage-backed securities at December 31, 1996. At December 31, 1996, the Company's investment in mortgage loans on real estate was comprised of $53.9 million in residential home equity mortgage loans and $182.1 million in commercial real estate mortgage loans, substantially all of which were originated by UC Lending. During 1996, the Company funded $36.7 million in new commercial real estate loans and refinanced $10.8 million of existing commercial real estate mortgage loans. 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. Commercial mortgages range in size up to approximately $1.9 million with an average loan size of approximately $.6 million. The weighted average interest rate on the Company's commercial mortgage loan portfolio was 9.40% and 9.83% at December 31, 1996 and 1995, respectively. The mortgage loan portfolio of the Company is serviced by UC Mortgage, an affiliate. 5 7 The following table provides information at December 31, 1996, 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............................................................. $ 78,203 41.9% Office............................................................. 63,424 33.9 Office and warehouse............................................... 42,376 22.7 Other.............................................................. 2,822 1.5 -------- ----- Total......................................................... $186,825 100.0% ======== ===== Commercial mortgage loans by state Florida............................................................ $ 34,052 18.2% Georgia............................................................ 40,408 21.6 Colorado........................................................... 32,253 17.3 Virginia........................................................... 17,266 9.2 Tennessee.......................................................... 11,877 6.4 Texas.............................................................. 9,150 4.9 All others......................................................... 41,819 22.4 -------- ----- Total......................................................... $186,825 100.0% ======== ===== Commercial mortgage loans by contractual maturity 1997............................................................... $ 15,284 8.2% 1998............................................................... 17,956 9.6 1999 16,366 8.8 2000 24,174 12.9 After 2000......................................................... 113,045 60.5 -------- ----- Total......................................................... $186,825 100.0% ======== =====
The following table reflects investment results for the Company for each of the periods indicated.
Purchase basis of accounting Historical basis of accounting ----------- ------------------------------------------- Period from Period from Jul 24 to Jan 1 to Dec 31, Jul 23, Year Ended December 31, ----------- ----------- ----------- ----------- 1996 1996 1995 1994 ----------- ----------- ----------- ----------- (dollars in thousands) End of the period total invested assets(1) ..... $ 1,472,304 $ 1,486,423 $ 1,644,751 $ 1,415,557 Net investment income(2) ....................... $ 50,041 $ 66,421 $ 125,591 $ 117,105 Net realized investment gains (losses)(3) .................................. $ 559 $ (1,592) $ (3,670) $ (4,803) Average annual yield ........................... 7.8% 8.1% 8.1% 8.3%
- ------------------- (1) Consists of total investments plus cash, less amounts due to brokers for securities committed to be purchased at end of period. (2) Net investment income is net of investment expenses and excludes capital gains or losses and provision for income taxes. (3) Amounts shown above are before taxes, and include provisions for impairments in value, if any, which are considered to be other than temporary. The Company's investments must comply with the insurance laws of the states in which it is domiciled and in which it is licensed. These laws prescribe the kind, quality and concentration of investments that may be made by insurance companies. 6 8 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 A.M. Best Co. ("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. During 1996, Duff & Phelps Credit Rating Company ("Duff & Phelps") reaffirmed its "A+" (Single-A-Plus) rating of the Company. Duff & Phelps indicated, "The rating reflects the Company's strong and stable profitability, reasonable operating leverage and expanding distribution channels." Standard & Poor's revised the Company's rating to "BBBq" from "Aq" primarily as a result of the decrease in sales during 1996. (See Management's Discussion and Analysis of Financial Condition and Results of Operations.) 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. Life insurance companies are subject to regulation and supervision by the states in which they transact business. The laws of the various states establish regulatory agencies with broad administrative and supervisory powers related to, among other things, granting and revoking licenses to transact business, regulating trade practices, establishing guaranty associations, licensing agents, approving policy forms, filing premium rates on certain business, setting reserve requirements, determining the form and content of required financial statements, determining the reasonableness and adequacy of capital and surplus and prescribing the type of permitted investments and the maximum concentrations of certain classes of investments. The Company is subject to periodic examinations by state regulatory authorities. Management does not expect the results of any on-going examinations to have a material effect on the financial condition of the Company. Most states have enacted legislation regulating insurance holding company systems, including acquisitions of control of insurance companies, dividends, the terms of transactions with affiliates, investments in subsidiaries and other related matters. Regulatory restrictions on investments in subsidiaries and affiliates requires the Company to continually review and may cause it to occasionally modify or restructure such investments. The Company has ongoing dialogues with the applicable state insurance departments regarding this issue. The Company is registered as an insurance holding company system in Louisiana, its domiciliary state, and routinely reports to other jurisdictions in which it is licensed. There continues to be substantial scrutiny of the insurance regulatory framework, and a number of state legislatures have enacted legislative proposals that alter, and in many cases increase, state authority to regulate insurance companies and their holding company systems. The NAIC and state insurance regulators also have become involved in a process of reexamining existing laws and regulations and their application to insurance companies. In particular, this reexamination 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 internal 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, assumption reinsurance, valuation of securities, the adoption of risk-based capital rules, and the regulation of various products offered by insurance companies. 7 9 In connection with its accreditation of states to conduct periodic insurance company examinations, the NAIC has encouraged states to adopt model NAIC laws on specific topics, such as holding company regulations and the definition of extraordinary dividends. Model legislation proposed by the NAIC to control the amount of dividends that may be paid by insurance companies without prior regulatory approval has been adopted in most states and is being considered by the legislatures of the other states. As of the date hereof, Louisiana has adopted the NAIC's most restrictive dividend test. Louisiana Law permits the Company to pay a dividend without prior consent of the Louisiana Insurance Commissioner if the amount paid, together with all other dividends paid in the preceding 12 months, does not exceed the lesser of (i) 10% of such insurer's surplus as regards to policyholders as of the 31st day of December next preceding, or (ii) the insurer's net gain from operations, not including realized capital gains, for the 12 month period ending the 31st day of December next preceding. Any dividend above this amount would be considered an "extraordinary" dividend and could not be paid until the earlier of (i) 30 days after the Louisiana Insurance Commissioner has received notice of the declaration thereof and has not within such period disapproved such payment, or (ii) the receipt of approval from the Louisiana Insurance Commissioner. Based upon Louisiana statutes, the Company has the capacity to pay dividends of $9.4 million in 1997. As part of its July 1996 approval of PLAIC's acquisition of the Company, the Louisiana Insurance Commissioner approved an extraordinary dividend plan for the Company pursuant to which the Company may pay a specified amount of dividends for each of the five years following the acquisition, beginning in 1997, amounting to the lesser of the pro forma dividend amounts in such plan or the actual earnings of the Company, and conditioned on the Company maintaining a risk-based capital ratio of at least 300% of the Authorized Control Level. On the basis of statutory financial statements filed with the state insurance regulators annually, the NAIC calculates twelve financial ratios to assist state regulators in monitoring the financial condition of insurance companies. A "usual range" of results for each ratio is used as a benchmark. Departure from the usual range could lead to inquiries from individual state insurance departments. The NAIC has not yet issued the 1996 ratios for the Company. The Company has calculated what it expects its ratios will be. Based on statutory financial statements for 1996, UC Life expects one of the twelve ratios outside of the usual ranges. In the past, variances in the Company's ratios have resulted in inquiries from insurance departments to which the Company has responded. The Company may receive inquiries from certain insurance departments concerning its ratio results for 1996, and there can be no assurance that such insurance departments will not take action against the Company. In December 1992, the NAIC adopted the Risk-Based Capital for Life and/or Health Insurers Model Act (the "Model Act"). The main purpose of the Model Act is to provide a tool for insurance regulators to evaluate the capital of insurers with respect to the risks assumed by them and determine whether there is a need for possible corrective action with respect to them. Louisiana, the Company's domiciliary state, has adopted the Model Act. The Model Act provides for four different levels of regulatory action with respect to statutory financial statements for the calendar year 1994 and thereafter, each of which may be triggered if an insurer's Total Adjusted Capital (as defined in the Model Act) is less than a corresponding "level" of risk-based capital ("RBC"). The "Company Action Level" is triggered if an insurer's Total Adjusted Capital is less than 200% of its "Authorized Control Level RBC" (as defined in the Model Act) or less than 250% of its Authorized Control Level RBC and the insurer has a negative trend. At the Company Action Level, the insurer must submit a comprehensive plan to the regulatory authority which discusses proposed corrective actions to improve its capital position. The "Regulatory Action Level" is triggered if an insurer's Total Adjusted Capital is less than 150% of its Authorized Control Level RBC. At the Regulatory Action Level, the regulatory authority will perform a special examination of the insurer and issue an order specifying corrective actions that must be followed. The "Authorized Control Level" is triggered if an insurer's Total Adjusted Capital is less than 100% 8 10 of its Authorized Control Level RBC, and at that level the regulatory authority is authorized (although not mandated) to take regulatory control of the insurer. The "Mandatory Control Level" is triggered if an insurer's Total Adjusted Capital is less than 70% of its Authorized Control Level RBC, and at that level the regulatory authority must take regulatory control of the insurer. Regulatory control may lead to rehabilitation or liquidation of an insurer. Calculations using the NAIC formula and the Company's statutory financial statements as of December 31, 1996 indicate that its capital substantially exceeded RBC requirements. The State of Michigan requires insurance companies to requalify for their insurance licenses following a change in control, and has enacted legislation substantially increasing capital and surplus requirements for companies filing requalification applications following a change in control. This requalification requirement may impact the Company's Michigan license status as Michigan initially denied the Company's application for requalification but has postponed the effective date of the denial pending further discussions by the Company with Michigan. The Company believes the denial was based primarily on its performance prior to its acquisition by PennCorp. Michigan accounted for approximately 2.9% of the Company's collected premiums in 1996. The Company may be required, under the solvency or guaranty laws of most states in which it does business, to pay assessments (up to certain prescribed limits) to fund policyholder losses or liabilities of insurance companies that become insolvent. Recent insolvencies of insurance companies increase the possibility that such assessments may be required. These assessments may be deferred or forgiven under most guaranty laws if they would threaten an insurer's financial strength and, in certain instances, may be offset against future premium taxes. The occurrence and amount of such assessments have increased in recent years and generally are expected to increase in future years. The Company paid approximately $1.3 million in each of the years ended December 31, 1996, 1995 and 1994, as a result of such assessments. The likelihood and amount of any other future assessments cannot be estimated and are beyond the control of the Company. Although the federal government does not directly regulate the business of insurance, federal legislation and administrative policies in several areas, including pension regulation, age and sex discrimination, financial services regulation and federal taxation can significantly affect the insurance 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 places with 5,000 or less inhabitants. The decision is viewed by the Company as favorable. However, many states continue to restrict the ability of state banks to sell insurance products, and pending legislation may adversely affect the authority of banks in certain states in this regard. Competition. The Company competes with other life insurers, and also competes for customers' funds with a variety of investment products offered by financial services companies other than life insurance companies, such as banks, investment advisers, mutual fund companies and other financial institutions. Within the U.S. life insurance industry, there are approximately 125 companies that individually collect in excess of $150 million of annuity premiums annually. Certain of these companies and other life insurers with which the Company competes are significantly larger and have available to them much greater financial and other resources. The Company believes the primary competitive factors among life insurance companies for investment-oriented insurance products, such as annuities and guaranteed interest contracts, include product flexibility, product pricing, innovation in product design, the claims-paying ability rating and the name recognition of the issuing company, the availability of distribution channels and service rendered to the customer before and after a contract is issued. Other factors affecting the annuity business include the benefits (including before-tax and after-tax investment returns) and guarantees provided to the customer and the commissions paid. Employees. At December 31, 1996, the Company had a total of 116 employees. None of the Company's employees are represented by unions. The Company considers its relations with its employees to be good. Item 2. Properties The Company's executive offices are located in a building owned by a former affiliate, from which the Company leases approximately 30,000 square feet. 9 11 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. 10 12 PART II Item 5. Market for the Registrant's Common Stock and Security Holder Matters The Company is a wholly-owned subsidiary of PLAIC, and is headquartered in Baton Rouge, Louisiana. PLAIC owns all of the Company's 4,200,528 shares of $2 par value common stock. PennCorp's Common Stock is traded on the New York Stock Exchange under the symbol "PFG." Item 6. Selected Financial Data The selected financial data set forth below is derived from the Company's audited consolidated financial statements.
Purchase basis of accounting Historical basis of accounting ---------- ---------------------------------------------------------------------- Period from Period from Jul 24 to Jan 1 to Dec 31, Jul 23, Years ended December 31, ---------- ---------- ------------------------------------------------------- 1996 1996 1995 1994 1993 1992 ---------- ---------- ---------- ---------- ---------- ---------- (dollars in thousands) Income Statement Data: Net insurance premiums ................. $ 3,483 $ 3,732 $ 8,508 $ 11,373 $ 18,684 $ 22,860 Interest sensitive policy product charges ............................. 1,048 1,421 1,949 1,432 918 775 Net investment income .................. 50,041 66,421 125,591 117,105 112,186 107,229 Realized investment gains (losses) ..... 559 (1,592) (3,670) (4,803) (19,393) 1,486 Other income ........................... 907 52 172 (8) -- -- ---------- ---------- ---------- ---------- ---------- ---------- Total revenues ...................... 56,038 70,034 132,550 125,099 112,395 132,350 Total expenses ...................... 46,334 67,853 120,450 116,019 124,760 126,885 ---------- ---------- ---------- ---------- ---------- ---------- Income (loss) before income taxes ....... 9,704 2,181 12,100 9,080 (12,365) 5,465 Provision for income taxes (benefit) .... 3,628 769 4,065 3,194 (4,107) 1,438 ---------- ---------- ---------- ---------- ---------- ---------- Net income (loss) ................... $ 6,076 $ 1,412 $ 8,035 $ 5,886 $ (8,258) $ 4,027 ---------- ---------- ---------- ---------- ---------- ---------- Balance Sheet Data - Period End: Total investments ...................... 1,457,817 1,480,073 $1,641,723 $1,453,094 $1,428,405 $1,253,915 Due from reinsurance ................... 34,923 35,522 33,583 34,985 36,577 37,716 Present value of insurance in force .... 54,931 -- -- -- -- -- Deferred policy acquisition costs ...... 4,187 85,801 90,703 91,915 83,495 80,007 Costs in excess of net assets acquired . 33,373 -- -- -- -- -- Total assets ........................... 1,653,796 1,638,366 1,789,608 1,658,154 1,625,718 1,464,475 Annuity reserves ....................... 1,330,100 1,354,597 1,417,803 1,425,973 1,294,983 1,147,555 Policy benefit reserves ............... 111,206 108,633 111,209 116,501 123,328 125,177 Total liabilities ..................... 1,476,389 1,542,884 1,603,083 1,555,975 1,482,591 1,327,610 Stockholder's equity .................. 177,407 97,938 186,525 102,179 143,127 136,385 Other data: Annuity sales ......................... $ 52,675 $ 56,402 $ 135,534 $ 249,737 $ 207,682 $ 187,050 Average interest spread on annuities .. 2.33% 2.52% 2.37% 2.73% 2.20% 1.84% Fixed maturity securities as % of invested assets ................. 75.0% 69.4% 68.0% 69.6% 59.6% 54.3%
11 13 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations Cautionary Statement for purposes of the Safe Harbor Provisions of the Private Securities Litigation Reform Act of 1995. The statements below that relate to future plans, events or performances are forward-looking statements that involve a number of risks or uncertainties. Among those items that could adversely affect the Company's financial condition, results of operations and cash flows are the following: changes in regulations affecting insurance companies, interest rates, the federal income tax code (to the extent the Company's product mix includes tax deferred accumulation products), the ratings assigned to the Company by independent rating organizations such as A.M. Best (which the Company believes are particularly important to the sale of annuity and other accumulation products) and unanticipated litigation. There can be no assurance that other factors not currently anticipated by management will not also materially and adversely affect the Company's results of operations. General. United Companies Life Insurance Company and its subsidiary ("the Company", "UC Life"), 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 Pacific Life and Accident Insurance Company ("PLAIC"), which is in turn a wholly-owned subsidiary of PennCorp Financial Group, Inc. ("PennCorp"). (See note 2 to Notes to Consolidated Financial Statements.) PennCorp is an insurance holding company which offers, through its wholly-owned subsidiaries, a broad range of life insurance, annuity and accident and sickness products. The principal products of the Company are tax 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 savings investments. During the fourth quarter of 1995, the Company added variable annuity products to its annuity line of business. Sale of the Company. On July 29, 1996, United Companies Financial Corporation ("UCFC") and PLAIC consummated the sale of UC Life, a wholly-owned subsidiary of UCFC. Pursuant to an Amended and Restated Stock Purchase Agreement (the "Agreement"), UCFC sold 100% of the outstanding capital stock of UC Life (the "UC Life Common Stock") to PLAIC for a total purchase price of $110.1 million including expenses incurred of $9.7 million and earnings through the date of consummation of the acquisition of $3.6 million. The Company paid a $10.0 million cash dividend and distributed certain real estate and other assets to UCFC immediately prior to the closing with a carrying value of $48.3 million. Immediately following the acquisition of the Company, PLAIC contributed $57.3 million in cash to the Company, which represented the market value of the real estate and other assets (but excluded the $10.0 million cash dividend) distributed by the Company to UCFC. The sale of the Company to PLAIC has been accounted for as a purchase transaction in accordance with generally accepted accounting principles, and accordingly, all assets and liabilities acquired were recorded at fair value, as of the acquisition date, which became the new cost basis. The following analysis should be read in conjunction with the Company's consolidated financial statements and accompanying notes presented elsewhere herein. Principal Products. The principal products marketed by the Company since 1978 have been tax deferred fixed annuities. During 1996, the average premium received on the sale of these policies was approximately $23,000. These 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 premiums 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 73% of the Company's annuity policies in force at December 31, 1996, were subject to a surrender penalty. 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. 12 14 Revenues. The following table sets forth information regarding the components of the Company's revenues for the periods indicated:
Purchase basis of Historical basis accounting of accounting ----------- ----------------------------------------- Period from Period from Jul 24 to Jan 1 to Dec 31, Jul 23, Year Ended Dec 31, ----------- ----------- -------------------------- 1996 1996 1995 1994 ----------- ----------- ----------- ----------- (dollars in thousands) Premiums ............................... $ 3,483 $ 3,732 $ 8,508 $ 11,373 Interest sensitive policy product charges ................... 1,048 1,421 1,949 1,432 Net investment income .................. 50,041 66,421 125,591 117,105 Realized investment gains (losses) ..... 559 (1,592) (3,670) (4,803) Other income ........................... 907 52 172 (8) ----------- ----------- ----------- ----------- Total ............................. $ 56,038 $ 70,034 $ 132,550 $ 125,099 =========== =========== =========== ===========
Net investment income totaled $116.5 million on average invested assets of approximately $1.5 billion for the year ended December 31, 1996, compared to $125.6 million and $117.1 million on average investments of approximately $1.5 billion and $1.4 billion for the years ended December 31, 1995 and 1994, respectively. Weighted average yield on invested assets was 8.0%, 8.1% and 8.3% for the years ended December 31, 1996, 1995 and 1994, respectively. Approximately $4.6 million of non-recurring 1995 net investment income resulted from a limited partnership investment. During 1994, the Company established a trading account for a portion of its investment portfolio invested in common stocks. At December 31, 1996, the carrying value of investments in the Company's trading account was $900,000 reflecting a $135,000 unrealized gain. 13 15 The Company estimates that non-accrual loans reduced investment income by approximately $72,000, $121,000, and $124,000 during the years ended December 31, 1996, 1995 and 1994, respectively. Loans are placed on a non-accrual status when they are 180 days past due. As of December 31, 1996, 1995 and 1994, the amount of non-accrual mortgage loans owned by the Company was $1.4 million, $2.4 million and $2.6 million, respectively. Net insurance premiums declined in each of the years ended December 31, 1996, 1995 and 1994. Net insurance premiums reflect revenues associated primarily with pre-need life insurance and credit insurance. Management has chosen to focus on deferred annuities and variable annuities and as a result new sales of pre-need life insurance and credit insurance have been discontinued. Realized investment gains and losses may vary significantly from year to year. The Company continuously evaluates its investment portfolio and the conditions under which it might sell securities, including changes in interest rates, changes in prepayment risk, liquidity needs, asset-liability matching, tax planning strategies and other economic factors. 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:
Purchase basis of accounting Historical basis of accounting ---------- -------------------------------------- Period from Period from Jul 24 to Jan 1 to Dec 31, Jul 23, Year Ended Dec 31, ---------- ---------- ------------------------ 1996 1996 1995 1994 ---------- ---------- ---------- ---------- (dollars in thousands) Fixed maturity securities: Gross gains............................................ $ -- $ 42 $ 524 $ 303 Gross loses............................................ (157) (1,388) (1,807) (3,373) Loss provision......................................... -- 477 (350) 1,198 ------- -------- -------- -------- Net losses on fixed maturity securities........... (157) (869) (1,693) (1,872) ------- -------- -------- -------- Mortgage loans on real estate: Losses on sale......................................... -- (771) (194) -- Loss provision......................................... 716 293 (339) 861 ------- -------- -------- -------- Net gains (losses) on mortgage loans on estate.... 716 (478) (533) 861 ------- -------- -------- -------- Investment real estate: Losses on sale......................................... -- (1,098) (2,638) (2,840) Loss provision......................................... -- 853 1,134 (952) ------- -------- -------- -------- Net losses on investment real estate.............. -- (245) (1,504) (3,792) ------- -------- -------- -------- Realized investment gains (losses)................ $ 559 $ (1,592) $ (3,670) $ (4,803) ======= ======== ======== ========
The Company does not believe it has any impaired loans, other than non-accrual loans, as of December 31, 1996. 14 16 Expenses The following table presents the components of the Company's expenses for the periods indicated:
Purchase basis of Historical basis accounting of accounting ---------- ------------------------------------ Period from Period from Jul 24 to Jan 1 to Dec 31, Jul 23, Year Ended Dec 31, ---------- ---------- ----------------------- 1996 1996 1995 1994 ---------- ---------- ---------- ---------- (dollars in thousands) Interest on annuity policies ............................ $ 32,022 $ 42,434 $ 81,035 $ 74,497 Insurance benefits ...................................... 3,836 5,967 9,930 12,654 Amortization of present value of insurance in force and deferred policy acquisition costs .................. 5,068 9,699 13,159 13,528 Amortization of costs in excess of net assets acquired... 675 -- -- -- Underwriting and other administrative expenses........... 4,733 9,753 16,326 15,340 ---------- ---------- ---------- ---------- Total .............................................. $ 46,334 $ 67,853 $ 120,450 $ 116,019 ========== ========== ========== ==========
Interest on annuity policies decreased $6.6 million in 1996 and increased $6.5 million in 1995, respectively, compared to prior years primarily as a result of the decrease in average annuity reserves in 1996 to $1,374 million from $1,421 million in 1995, and the increase from $1,360 million in 1994. As expected, annuity surrenders increased in 1996 and 1995, primarily because of the current interest rate environment and the effect of policies first coming out of the surrender penalty period. 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 5.55% to 5.75%, 5.60% to 5.75% and 5.60% to 6.45% for years ended December 31, 1996, 1995 and 1994, respectively. Amortization of deferred policy acquisition costs in 1996 included an increase of approximately $2.9 million related to increased surrender activity through the date of sale of the Company (See note 10 to Notes to Consolidated Financial Statements.), but decreased in each of the periods presented as a result of the reduction in amortization of the closed block of credit life business. The Company adjusted certain assumptions related to the credit life business to bring them in line with current Company experience in the first quarter of 1996. Other operating expenses, which include general insurance and taxes, licenses and fees, decreased during 1996, compared to the comparable period in 1995 primarily because of the elimination of corporate expenses allocated from its former parent. The increase in 1995 from 1994 was 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 former parent. 15 17 Asset Quality. 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 $0 and $13.6 million at December 31, 1996 and 1995, respectively. All foreclosed loans as of the acquisition date, totalling $13.9 million, were distributed to UCFC as part of the closing transaction. (See note 2 to Notes to Consolidated Financial Statements.) The Company actively manages its mortgage loan and real estate portfolios, but, 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:
Period End --------------------------------------- Contractual Delinquencies % of % of Balance Contractual Contractual Net Loans Average Period Ended of Loans Balance Balance Charged-Off Loans - ------------------------------------ ---------- ---------- ------------ ----------- ----------- (dollars in thousands) PURCHASE BASIS OF ACCOUNTING: Period from July 24, 1996 to December 31,1996 Home equity .................... $ 62,356 $ 146 .2% $ -- -- % Commercial ..................... 186,825 1,669 .9% -- -- % ---------- ---------- ---------- Total .......................... $ 249,181 $ 1,815 .7% $ -- -- % ========== ========== ========== HISTORICAL BASIS OF ACCOUNTING: Period from January 1, 1996 to July 23, 1996 Home equity .................... $ 135,971 $ 242 .2% $ -- -- % Commercial ..................... 174,297 966 .6% 771 .4% ---------- ---------- ---------- Total .......................... $ 310,268 $ 1,208 .4% $ 771 .2% ========== ========== ========== 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% ========== ========== ==========
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:
Purchase basis of accounting Historical basis of accounting ----------------------- ------------------------------------------------------------------ Period from Jul 24 Period from Jan 1 to Dec 31,1996 to Jul 23, 1996 Dec 31, 1995 ----------------------- -------------------------------- ------------------------------ Real Mortgage Real Mortgage Real Mortgage Bonds Estate Loans Bonds Estate (1) Loans Bonds Estate (1) Loans ------ --- -------- -------- -------- -------- ------ -------- -------- (dollars in thousands) Balance at beginning of period $ 189 $-- $ 12,661 $ 666 $ 3,987 $ 2,117 $ 317 $ 5,120 $ 1,778 Losses charged to allowance -- -- (716) (1,361) (1,098) (771) (1,664) (2,638) (194) Loss provision -- -- -- 884 (2,889) 478 2,013 1,505 533 ------ --- -------- -------- -------- -------- ------ -------- -------- Balance at end of period $ 189 $-- $ 11,945 $ 189 $ -- $ 1,824 $ 666 $ 3,987 $ 2,117 ====== === ======== ======== ======== ======== ====== ======== ======== Specific reserves $ 189 $-- $ 8,440 $ 189 $ -- $ 824 $ 666 $ 3,987 $ 1,117 Unallocated reserves -- -- 3,505 -- -- 1,000 -- -- 1,000 ------ --- -------- -------- -------- -------- ------ -------- -------- Total reserves $ 189 $-- $ 11,945 $ 189 $ -- $ 1,824 $ 666 $ 3,987 $ 2,117 ====== === ======== ======== ======== ======== ====== ======== ========
(1) The provision for real estate losses relates to losses from properties acquired in satisfaction of debt. 16 18 The increase in mortgage loan loss reserves for the year ended December 31, 1996, is comprised of $7.7 million home equity loss reserves and $2.1 million commercial loss reserves. To the date of the sale of the Company on July 23, 1996, the Company assumed no credit risk on the residential loans portfolio whose principal and interest was guaranteed by UCFC. Therefore, residential loan loss reserves were established on the portfolio in conjunction with determining the acquisition value of the residential loans. The increase in commercial loan loss reserves relates to a change in the Company's portfolio management strategy concerning certain high risk loans. The Company has chosen to seek a more aggressive approach to the potential disposition of certain high risk loans as opposed to its former general strategy of holding loans to maturity. The Company anticipates a larger cost of disposition under the more aggressive strategy. 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 fixed maturities available for sale in the accompanying consolidated financial statements. The outstanding principal balance of all of the senior and subordinated certificates was $39.6 million and $46.8 million as of December 31, 1996 and 1995, respectively. The principal balance of the subordinated certificates at December 31, 1996 and 1995, respectively, all of which were owned by the Company, was $24.9 million and $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 million, $1.4 million, $1.7 million, and $2.5 million, for the periods from July 24, 1996, through December 31, 1996, January 1, 1996, through July 23, 1996, and years ended December 31, 1995 and 1994, respectively. The Company's fixed maturity securities portfolio consists primarily of mortgage-backed securities and corporate bonds, comprising 61.5% and 67.9%, and 36.4% and 29.3% of the portfolio as of December 31, 1996 and 1995, respectively. At December 31, 1996 and 1995, respectively, the amortized cost of the Company's fixed maturity portfolio was $1.2 billion and $1.1 billion consisting primarily of $722 million and $778 million in mortgage-backed securities and $428 million and $335 million in corporate bonds. As of December 31, 1996 and 1995, the Company owned $.9 million and $.8 million in equity securities classified as trading securities. Prior to the closing of the sale of the Company, the Company had investments in two 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. Included in the assets distributed to UCFC immediately prior to the closing of the sale of the Company was one of the limited partnership investments with a value of $17.8 million at July 23, 1996. (See note 2 to Notes to Consolidated Financial Statements.) The Company had a decrease in short-term investments of approximately $22.3 million at December 31, 1996 compared to December 31, 1995 as a result of reduced liquidity requirements primarily from the decline in the use of the home equity loan warehouse facility by UCFC. 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 flows 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 1996, 1995 and 1994 were approximately $83.7 million, $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, 1996, 1995 and 1994 reflect cash received primarily from sales by the Company of its annuity products of approximately $109.1 million, $135.3 million and $249.7 million, respectively. Cash used by financing 17 19 activities during 1996, 1995 and 1994 also reflects payments of $269.9 million, $222.8 million and $191.8 million, respectively, primarily resulting from policyholder surrenders and claims. The increase in annuity surrenders during 1995 and 1996 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. 18 20 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA INDEPENDENT AUDITORS' REPORT The Board of Directors and Stockholder United Companies Life Insurance Company: We have audited the accompanying consolidated balance sheet of United Companies Life Insurance Company and subsidiary as of December 31, 1996, and the related consolidated statements of operations, cash flows, and stockholder's equity for the periods from July 24, 1996 to December 31, 1996 (Successor period), and from January 1, 1996 to July 23, 1996 (Predecessor period). Our audit also included the financial statement schedules listed in the Index at Item 14. These consolidated financial statements and financial statement schedules are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements and financial statement schedules based on our audit. We conducted our audit 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 audit provides a reasonable basis for our opinion. In our opinion, the aforementioned consolidated financial statements present fairly, in all material respects, the financial position of United Companies Life Insurance Company and subsidiary as of December 31, 1996, and the results of their operations and their cash flows for the periods from July 24, 1996 to December 31, 1996 (Successor period), and from January 1, 1996 to July 23, 1996 (Predecessor period), in conformity with generally accepted accounting principles. Also in our opinion, the related 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. As discussed in Note 2 to the consolidated financial statements, effective July 24, 1996, PennCorp Financial Group, Inc. acquired all of the outstanding stock of United Companies Life Insurance Company in a business combination accounted for as a purchase. As a result of the acquisition, the consolidated financial information for the period after the acquisition is presented on a different cost basis than that for the periods before the acquisition and, therefore, is not comparable. /s/ KPMG PEAT MARWICK LLP Baton Rouge, Louisiana February 28, 1997 19 21 INDEPENDENT AUDITORS' REPORT To the Stockholders and Board of Directors of United Companies Life Insurance Company We have audited the accompanying consolidated balance sheet of United Companies Life Insurance Company and its subsidiary as of December 31, 1995, and the related consolidated statements of income, stockholder's equity, and cash flows for each of the two 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 the results of their operations and their cash flows for each of the two years in the period ended December 31, 1995 in conformity with generally accepted accounting principles. Also, in our opinion, such financial statement 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. /s/ DELOITTE & TOUCHE LLP Baton Rouge, Louisiana February 29, 1996 20 22 UNITED COMPANIES LIFE INSURANCE COMPANY AND SUBSIDIARY CONSOLIDATED BALANCE SHEETS
Purchase Historical basis of basis of accounting accounting ---------- ---------- December 31, December 31, 1996 1995 ---------- ---------- (dollars in thousands) Assets Investments: Fixed maturity securities: Held for investment at amortized cost (fair value $50,902 in 1996 and $59,330 in 1995)...................................... $ 48,473 $ 60,919 Available for sale at fair value (amortized cost $1,127,850 in 1996 and $1,094,385 in 1995)................................ 1,144,165 1,140,160 Mortgage loans on real estate, less allowances for doubtful loans of $11,945 in 1996 and $2,117 in 1995........................ 235,981 336,269 Investment real estate ............................................. -- 32,423 Policy loans ....................................................... 21,536 20,291 Investments in limited partnerships ................................ 5,704 25,594 Short-term investments ............................................. 467 22,804 Other invested assets .............................................. 1,491 3,263 ---------- ---------- Total investments .......................................... 1,457,817 1,641,723 Cash ................................................................. 14,487 3,028 Accrued investment income ............................................ 17,251 16,529 Due from reinsurers .................................................. 34,923 33,583 Present value of insurance in force .................................. 54,931 -- Deferred policy acquisition costs .................................... 4,187 90,703 Costs in excess of net assets acquired ............................... 33,373 -- Deferred income tax benefit .......................................... 11,589 -- Other assets ......................................................... 7,186 3,831 Assets held in separate accounts ..................................... 18,052 211 ---------- ---------- Total assets ............................................... $1,653,796 $1,789,608 ========== ========== Liabilities and stockholder's equity Liabilities: Policy reserves .................................................... $1,441,582 $1,530,805 Repurchase agreements .............................................. -- 40,857 Deferred income tax payable ........................................ -- 22,770 Other liabilities .................................................. 16,755 8,440 Liabilities related to separate accounts ........................... 18,052 211 ---------- ---------- Total liabilities .......................................... 1,476,389 1,603,083 ---------- ---------- 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 ......................................... 158,913 28,980 Retained earnings .................................................. 6,076 119,667 Net unrealized gains on securities ................................. 4,017 29,477 ---------- ---------- Total stockholder's equity ................................. 177,407 186,525 ---------- ---------- Total liabilities and stockholder's equity ................. $1,653,796 $1,789,608 ========== ==========
See accompanying notes to consolidated financial statements. 21 23 UNITED COMPANIES LIFE INSURANCE COMPANY AND SUBSIDIARY CONSOLIDATED STATEMENTS OF OPERATIONS
Purchase basis of accounting Historical basis of accounting ---------- -------------------------------------- Period from Period from Jul 24 to Jan 1 to Dec 31, Jul 23, Years ended December 31, ---------- ---------- ------------------------ 1996 1996 1995 1994 ---------- ---------- ---------- ---------- (dollars in thousands) REVENUES: Premiums ................................................... $ 3,483 $ 3,732 $ 8,508 $ 11,373 Interest sensitive policy product charges .................. 1,048 1,421 1,949 1,432 Net investment income ...................................... 50,041 66,421 125,591 117,105 Realized investment gains (losses) ......................... 559 (1,592) (3,670) (4,803) Other income ............................................... 907 52 172 (8) ---------- ---------- ---------- ---------- Total revenues ..................................... 56,038 70,034 132,550 125,099 ---------- ---------- ---------- ---------- EXPENSES: Interest on annuity policies ............................... 32,022 42,434 81,035 74,497 Insurance benefits ......................................... 3,836 5,967 9,930 12,654 Amortization of present value of insurance in force and deferred policy acquisition costs ................. 5,068 9,699 13,159 13,528 Amortization of costs in excess of net assets acquired ..... 675 -- -- -- Underwriting and other administrative expenses ............. 4,733 9,753 16,326 15,340 ---------- ---------- ---------- ---------- Total benefits and expenses ........................ 46,334 67,853 120,450 116,019 ---------- ---------- ---------- ---------- Income before income taxes ................................... 9,704 2,181 12,100 9,080 ---------- ---------- ---------- ---------- PROVISION (BENEFIT) FOR INCOME TAXES: Current .................................................... 2,427 1,139 5,259 5,915 Deferred ................................................... 1,201 (370) (1,194) (2,721) ---------- ---------- ---------- ---------- Total .............................................. 3,628 769 4,065 3,194 ---------- ---------- ---------- ---------- Net income ................................................. $ 6,076 $ 1,412 $ 8,035 $ 5,886 ========== ========== ========== ==========
See accompanying notes to consolidated financial statements. 22 24 UNITED COMPANIES LIFE INSURANCE COMPANY AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CASH FLOWS
Purchase basis of Historical basis accounting of accounting ---------- ------------- Period from Period from Jul 24 to Jan 1 to Dec 31, Jul 23, --------- --------- 1996 1996 --------- --------- (dollars in thousands) Cash flows from operating activities: Net income .............................................................................. $ 6,076 $ 1,412 Adjustments to reconcile net income to net cash provided by operating activities: Capitalization of deferred policy acquisition costs ................................... (5,172) (4,797) Amortization of intangibles, depreciation and accretion, net .......................... 5,743 9,699 Decrease in policy liabilities and accruals and other policyholder funds .............. 28,282 37,485 Purchases of trading securities ....................................................... (99) (593) Sales of trading securities ........................................................... 228 441 Other, net ............................................................................ 2,000 3,032 --------- --------- Net cash provided by operating activities ........................................ 37,058 46,679 --------- --------- Cash flows from investing activities: Purchases of securities available for sale ............................................ (94,025) (158) Maturities of securities held for investment .......................................... 7,796 2,790 Maturities of securities available for sale ........................................... 18,781 35,692 Acquisitions and originations of mortgage loans ....................................... (112,473) (749,952) Sales of securities available for sale ................................................ 3 -- Sales of mortgage loans ............................................................... 151,972 732,484 Principal payments on mortgage loans .................................................. 21,657 44,264 Decrease (increase) in short-term investments, net (including changes in amounts due to broker) ................................................................... 50,063 (27,726) Other, net ............................................................................ 153 235 --------- --------- Net cash provided by investing activities ........................................ 43,927 37,629 --------- --------- Cash flows from financing activities: Receipts from interest sensitive products credited to policyholders' account balances.. 52,675 56,403 Return of policyholders' account balances on interest sensitive products .............. (109,233) (160,622) Other, net ............................................................................ 4,961 1,982 --------- --------- Net cash used by financing activities ............................................ (51,597) (102,237) --------- --------- Increase (decrease) in cash ...................................................... 29,388 (17,929) Cash (overdraft) at beginning of year or acquisition date................................... (14,901) 3,028 --------- --------- Cash (overdraft) at end of year or acquisition date......................................... $ 14,487 $ (14,901) ========= ========= Supplemental disclosures: Income taxes paid ..................................................................... $ -- $ 2,797 Interest paid ......................................................................... 439 2,392 Historical basis of accounting ------------------------------ Year Ended December 31, ---------------------- 1995 1994 --------- --------- (dollars in thousands) Cash flows from operating activities: Net income .............................................................................. $ 8,035 $ 5,886 Adjustments to reconcile net income to net cash provided by operating activities: Capitalization of deferred policy acquisition costs ................................... (11,947) (21,947) Amortization of intangibles, depreciation and accretion, net .......................... 13,159 13,528 Decrease in policy liabilities and accruals and other policyholder funds .............. 71,048 59,860 Purchases of trading securities ....................................................... (442) (919) Sales of trading securities ........................................................... 541 232 Other, net ............................................................................ 8,017 5,974 --------- --------- Net cash provided by operating activities ........................................ 88,411 62,614 --------- --------- Cash flows from investing activities: Purchases of securities available for sale ............................................ (136,503) (300,384) Maturities of securities held for investment .......................................... 1,940 2,270 Maturities of securities available for sale ........................................... 51,000 76,778 Acquisitions and originations of mortgage loans ....................................... (1,208,195) (901,898) Sales of securities available for sale ................................................ 25,185 7,363 Sales of mortgage loans ............................................................... 1,111,636 940,099 Principal payments on mortgage loans .................................................. 71,294 94,084 Decrease (increase) in short-term investments, net (including changes in amounts due to broker) ................................................................... 31,860 (17,813) Other, net ............................................................................ (180) (630) --------- --------- Net cash used by investing activities ............................................ (51,963) (100,131) --------- --------- Cash flows from financing activities: Receipts from interest sensitive products credited to policyholders' account balances.. 135,325 249,738 Return of policyholders' account balances on interest sensitive products .............. (222,791) (191,812) Other, net ............................................................................ 40,877 (29,956) --------- --------- Net cash used by financing activities.... ........................................ (46,589) 27,970 --------- --------- Increase (decrease) in cash ...................................................... (10,141) (9,547) Cash at beginning of year .................................................................. 13,169 22,716 --------- --------- Cash at end of year ........................................................................ $ 3,028 $ 13,169 ========= ========= Supplemental disclosures: Income taxes paid ..................................................................... $ 4,655 $ 1,399 Interest paid ......................................................................... 3,362 1,987
See accompanying notes to consolidated financial statements. 23 25 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 -------------- -------------- --------------- --------------- ------------ (dollars in thousands) HISTORICAL BASIS OF ACCOUNTING: Balance, December 31, 1993................... $ 8,401 $28,980 $105,746 $ -- $143,127 Net income................................... -- -- 5,886 -- 5,886 Cumulative effect of accounting change, net.. -- -- -- (46.834) (46,834) ------ -------- -------- -------- -------- Balance, December 31, 1994................... 8,401 28,980 111,632 (46,834) 102,179 Net income................................... -- -- 8,035 -- 8,035 Change in net unrealized gains (losses) on securities, net......................... -- -- -- 76,311 76,311 ------ -------- -------- -------- -------- Balance, December 31, 1995................... 8,401 28,980 119,667 29,477 186,525 Net income................................... -- -- 1,412 -- 1,412 Change in net unrealized gains (losses) on securities, net......................... -- -- -- (31,665) (31,665) Distribution to stockholder.................. -- -- (58,334) -- (58,334) ------ -------- -------- -------- -------- Balance, July 23, 1996.................. $8,401 $ 28,980 $ 62,745 $(2,188) $ 97,938 ====== ======== ======== ======== ======== PURCHASE BASIS OF ACCOUNTING: Balance, July 24, 1996....................... $8,401 $101,655 $ -- $ -- $110,056 Net income................................... -- -- 6,076 -- 6,076 Capital contribution......................... -- 57,258 -- -- 57,258 Change in net unrealized gains (losses) on securities, net......................... -- -- -- 4,017 4,017 ------ -------- -------- -------- -------- Balance, December 31, 1996.............. $8,401 $158,913 $ 6,076 $ 4,017 $177,407 ====== ======== ======== ======== ========
See accompanying notes to consolidated financial statements. 24 26 UNITED COMPANIES LIFE INSURANCE COMPANY AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994 1. SUMMARY OF SIGNIFICANT 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" or "UC Life") is a wholly-owned subsidiary of Pacific Life and Accident Insurance Company ("PLAIC"), a wholly-owned subsidiary of PennCorp Financial Group, Inc. ("PennCorp"). (See note 2 to Notes to Consolidated Financial Statements.) PennCorp is an insurance holding company which offers, through its wholly-owned subsidiaries, a broad range of life insurance, annuity and accident and sickness products. 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 Basis of Presentation. The accompanying financial statements have been prepared in accordance with generally accepted accounting principals ("GAAP") on a historical cost basis of accounting through the date of acquisition and on a purchase GAAP push-down basis of accounting ("purchase GAAP") from the date of acquisition to the end of the period. The comparability of the financial condition and the operating results for the post-acquisition period and the pre-acquisition periods are affected by the mark to market valuation of assets and liabilities under purchase accounting which became the new cost basis. The preparation of financial statements in conformity with GAAP requires management to make certain estimates and assumptions that affect the reported amounts of assets and liabilities and the reported amounts of revenues and expenses during the reporting period. Accounts that the Company deems to be acutely sensitive to changes in estimates include deferred policy acquisition costs, future policy benefits, policy and contract claims and present value of insurance in force. In addition, the Company must determine requirements for disclosure of contingent assets and liabilities as of the date of the financial statements based upon estimates. In all instances, actual results could differ from these estimates. 1.4 Investments. 1.4(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 ("SFAS") No. 115, which revised the method of accounting for certain of the Company's investments. Prior to adoption of SFAS No. 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 No. 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 No. 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 "other income" in the statement of income. 25 27 1.4(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. 1.4(c) Investment Real Estate. The Company's investments in real estate are comprised of properties received in settlement of loans ("foreclosed properties"). The Company records foreclosed properties at the lower of their fair value less estimated costs to sell ("fair value") 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 fair value and cost. Fair value is determined by property appraisals performed either by its former affiliate, United Companies Lending Corporation ("UC Lending"), or independent appraisers. The related adjustments are included in the Company's provision for losses. Depreciation is computed on the straight-line method over the estimated useful lives of the underlying property. In conjunction with the sale of the Company (see note 2 to Notes to Consolidated Financial Statements) all of the Company's investment real estate was distributed to its former parent. 1.4(d) Policy Loans. Policy loans are reported at unpaid principal balance. 1.4(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. 1.4(f) Short-term Investments. At December 31, 1996, short-term investments totaled $467,000 bearing interest rates ranging from 4.9% to 5.3% per annum. 1.4(g) Realized Investment Gains and Losses. Realized investment gains and losses and declines in value which are other than temporary, determined on the basis of specific identification, are included in net income. 1.5 Present Value of Insurance In Force. The present value of insurance in force represents the anticipated gross profits to be realized from future revenues on insurance in force at the date the Company was purchased, discounted to provide an appropriate rate of return and amortized, with interest, over the years that such profits are anticipated to be received in proportion to the estimated gross profits. 1.6 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 Costs in Excess of Net Assets Acquired. Costs in excess of the fair value of net assets acquired are amortized on a straight-line basis over 20 years. Accumulated amortization was $675,000 at December 31, 1996. The Company continuously monitors the value of costs in excess of net assets acquired based upon estimates of future earnings. Any amounts deemed to be impaired are charged, in the period in which such impairment was determined, as an expense against earnings. For the periods presented there was no charge to earnings for the impairment of costs in excess of net assets acquired. 1.8 Other Assets. Property is stated at cost less accumulated depreciation and is included in "Other assets." Depreciation is computed on the straight-line and accelerated methods over the estimated useful lives of the assets. 1.9 Policy 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. Subsequent to the purchase, the Company utilizes statutory reserves as a reasonable approximation of GAAP reserves for all non-interest sensitive products. 26 28 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. 1.10 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 bore interest at 5.70% and 5.74% and matured in January, 1996. There were no repurchase agreements at December 31, 1996. 1.11 Income Taxes. The Company accounts for income taxes under the provisions of SFAS No. 109, "Accounting for Income Taxes." Under the asset and liability method of SFAS 109, deferred tax assets and liabilities are recognized for the future tax consequences attributable to (i) temporary differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases, and (ii) operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which the temporary differences are expected to be recovered or settled. Under SFAS No. 109, the effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. Prior to the date of the sale, the Company filed a consolidated federal income tax return with its former parent and other former affiliated companies. The former parent allocated 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. Subsequent to the purchase, the Company files a consolidated return with PLAIC whereby the Company's proportionate share of the consolidated tax liability is allocated based upon separate return calculations. 1.12 Insurance Revenues. 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. Revenues for interest sensitive annuity contracts represent charges assessed against the policyholders' account balance, primarily for the surrenders. 1.13 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 $1.3 million, $1.7 million and $2.1 million in 1996, 1995 and 1994, respectively. Reserve credit taken under reinsurance agreements totaled $33.9 million, $32.9 million and $34.0 million at December 31, 1996, 1995 and 1994, respectively. 27 29 The Company has a receivable at December 31, 1996 of approximately $32.7 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.
Purchase basis of accounting Historical basis of accounting ---------- -------------------------------------- Period from Period from Jul 24 to Jan 1 to Dec 31, Jul 23, Years ended December 31, ---------- ---------- ------------------------ 1996 1996 1995 1994 ---------- ---------- ---------- ---------- (dollars in thousands) Direct premiums ................. $ 2,704 $ 3,148 $ 7,659 $ 10,537 Reinsurance assumed ............. 1,214 1,461 2,589 2,966 Reinsurance ceded ............... (435) (877) (1,740) (2,130) ---------- ---------- ---------- ---------- Net insurance premiums ..... $ 3,483 $ 3,732 $ 8,508 $ 11,373 ========== ========== ========== ==========
1.14 Participating Policies. Direct participating business, primarily related to the Company's pre-need funeral policies, represented 9%, 8.2% and 7.2% of the life insurance in force as of December 31, 1996, 1995 and 1994, respectively. The amount of dividends paid on participating policies is based on published dividend scales and totaled $1.4 million, $1.2 million and $1.0 million for the years ended December 31, 1996, 1995 and 1994, respectively. 1.15 Reclassifications. Certain amounts from prior periods have been reclassified to conform with the current year presentation. Such reclassifications had no effect on net income. 2. SALE OF THE COMPANY On July 24, 1996, PLAIC consummated the acquisition of the Company from United Companies Financial Corporation ("UC Financial"). Pursuant to an Amended and Restated Stock Purchase Agreement (the "Agreement") dated as of July 24, 1996, PLAIC acquired 100% of the outstanding capital stock of UC Life (the "UC Life Common Stock") for $110.1 million in cash including expenses incurred of $9.7 million as part of the acquisition. Immediately following the acquisition of UC Life, PLAIC contributed $57.3 million in cash to UC Life, which represented the market value of certain real estate and other assets distributed to UC Financial immediately prior to the consummation of the acquisition. The Company's acquisition has been accounted for using the purchase method of accounting. The total purchase price of the acquisition was allocated to the tangible and intangible assets and liabilities acquired based upon their respective fair values as of the date of acquisition. Based upon such respective fair values, the value of the net assets acquired was $76.0 million, resulting in costs in excess of net assets acquired at the date of acquisition of $34.1 million. 28 30 3. INVESTMENTS 3.1 Fixed Maturity Securities. The Company's portfolio of fixed maturity securities consisted of the following:
December 31, 1996 ------------------------------------------------- Amortized Unrealized Unrealized Cost Gains Losses Fair Value ---------- ---------- ---------- ---------- (dollars in thousands) Available for Sale: U.S. Government ....... $ 9,029 $ 93 $ -- $ 9,122 Municipal ............. 5,434 1 48 5,387 Foreign ............... 10,920 185 -- 11,105 Corporate ............. 414,551 5,944 1,064 419,431 Mortgage-backed ....... 687,916 11,210 6 699,120 ---------- ---------- ---------- ---------- Total ............ $1,127,850 $ 17,433 $ 1,118 $1,144,165 ========== ========== ========== ========== Held for Investment: Corporate ............. $ 13,927 $ 124 $ 2 $ 14,049 Mortgage-backed ....... 34,546 2,307 -- 36,853 ---------- ---------- ---------- ---------- Total ............ $ 48,473 $ 2,431 $ 2 $ 50,902 ========== ========== ========== ==========
December 31, 1995 ------------------------------------------------- Amortized Unrealized Unrealized Cost Gains Losses Fair Value ---------- ---------- ---------- ---------- (dollars 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 for Investment: Corporate ............. $ 16,692 $ 550 $ 281 $ 16,961 Mortgage-backed ....... 44,227 1,414 3,272 42,369 ---------- ---------- ---------- ---------- Total ............ $ 60,919 $ 1,964 $ 3,553 $ 59,330 ========== ========== ========== ==========
The cost and estimated fair value of fixed maturity securities by contractual maturity at December 31, 1996 are shown below.
Available for Sale Held for Investment ----------------------- ----------------------- Amortized Fair Amortized Fair Cost Value Cost Value ---------- ---------- ---------- ---------- (dollars in thousands) 1 year or less .................... $ 14,605 $ 14,637 $ -- $ -- Over 1 year through 5 years ....... 87,224 87,973 8,507 8,568 Over 5 years through 10 years ..... 319,480 323,733 5,420 5,481 After 10 years .................... 18,625 18,702 -- -- Mortgage-backed securities ........ 687,916 699,120 34,546 36,853 ---------- ---------- ---------- ---------- Total ........................ $1,127,850 $1,144,165 $ 48,473 $ 50,902 ========== ========== ========== ==========
29 31 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. 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 for investment fixed maturity securities are investments in the two REMIC's of approximately $34 million at December 31, 1996, and $44.2 million at December 31, 1995. A summary of the Company's investment at December 31, 1996, in the REMIC's is as follows:
Remaining Date of Principal Carrying Interest Maturity Issue Balance Value Rate Date ------------ ------------ ----------- ----- ------------- (dollars in thousands) United Companies Life REMIC Series 90-1, Class B-1........... Mar 29, 1990 $ 10,574 $ 7,263 10.05% Sep 25, 2009 Series 90-2, Class A-3........... Dec 18, 1990 14,688 14,965 9.88% May 25, 2000 Series 90-2, Class B-1........... Dec 18, 1990 14,339 11,750 9.88% Jan 25, 2009 ------------ ----------- $ 39,601 $ 33,978 ============ ===========
At December 31, 1996, securities with a cost of $9.3 million were on deposit with insurance regulatory authorities. 30 32 3.2 Equity Securities. The net unrealized capital gains and losses on common stocks included as "Other invested assets" are as follows:
December 31, 1996 ------------------------------------------------- Unrealized Unrealized Fair Cost Gains Losses Value ---------- ---------- ---------- ---------- (dollars in thousands) Trading .................... $ 765 $ 169 $ 34 $ 900 Available for sale ......... 78 -- 72 6 ---------- ---------- ---------- ---------- Total .................. $ 843 $ 169 $ 106 $ 906 ========== ========== ========== ==========
December 31, 1995 ------------------------------------------------- Unrealized Unrealized Fair Cost Gains Losses Value ---------- ---------- ---------- ---------- (dollars in thousands) Trading .................... $ 545 $ 215 $ 8 $ 752 Available for sale ......... 467 -- 425 42 ---------- ---------- ---------- ---------- Total ................. $ 1,012 $ 215 $ 433 $ 794 ========== ========== ========== ==========
3.3 Mortgage Loans on Real Estate. The following schedule summarizes the composition of mortgage loans on real estate:
December 31, ------------------------ 1996 1995 ---------- ---------- (dollars in thousands) Residential ................... $ 61,911 $ 169,175 Allowance for loan losses ..... (7,734) -- Unearned loan charges ......... (266) (301) ---------- ---------- Residential, net .............. 53,911 168,874 ---------- ---------- Commercial .................... 186,281 169,512 Allowance for loan losses ..... (4,211) (2,117) ---------- ---------- Commercial, net ............... 182,070 167,395 ---------- ---------- Total .................... $ 235,981 $ 336,269 ========== ==========
Included in the loans owned at December 31, 1996 and 1995 were nonaccrual loans of $1.4 million and $2.4 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:
Purchase basis of accounting Historical basis of accounting --------------------- ------------------------------------------------------------------------ Period from Period from Jul 24 to Dec 31, Jan 1 to Jul 23, Years ended Dec 31, 1996 1996 1995 1994 --------------------- ---------------------- ---------------------- ---------------------- Commercial Residential Commercial Residential Commercial Residential Commercial Residential --------- --------- --------- --------- --------- --------- --------- --------- (dollars in thousands) Balance at beginning of year . $ 4,211 $ 8,450 $ 2,117 $ -- $ 1,778 $ -- $ 2,639 $ -- Loans charged to allowance ... -- (716) (771) -- (194) -- (1,510) -- Loan loss provision .......... -- -- 478 -- 533 -- 649 -- --------- --------- --------- --------- --------- --------- --------- --------- Balance at end of year ....... $ 4,211 $ 7,734 $ 1,824 $ -- $ 2,117 $ -- $ 1,778 $ -- ========= ========= ========= ========= ========= ========= ========= ========= Specific reserves ............ $ 706 $ 7,734 $ 824 $ -- $ 1,117 $ -- 752 $ -- Unallocated reserves ......... 3,505 -- 1,000 -- 1,000 -- 1,026 -- --------- --------- --------- --------- --------- --------- --------- --------- Total reserves .......... $ 4,211 $ 7,734 $ 1,824 $ -- $ 2,117 $ -- $ 1,778 $ -- ========= ========= ========= ========= ========= ========= ========= =========
31 33 To the date of the sale of the Company on July 23, 1996, the Company assumed no credit risk on the residential loans portfolio whose principal and interest was guaranteed by UCFC. Therefore, residential loan loss reserves were established on the portfolio in conjunction with determining the acquisition value of the residential loans. 3.4 Investment Real Estate. Immediately prior to closing, the Company distributed all of its real estate to its former parent. (See note 2 to Notes to Consolidated Financial Statements.) 3.5 Investment In Limited Partnerships. Immediately prior to closing, the Company distributed a limited partnership investment to its former parent. (See note 2 to Notes to Consolidated Financial Statements.) Following is an analysis of the Company's investment in limited partnerships:
Purchase basis of accounting Historical basis of accounting ---------- ---------------------------------------- Period from Period from Jul 24 to Jan 1 to Dec 31, Jul 23, Year Ended December 31, ---------- ---------- ---------- ---------- 1996 1996 1995 1994 ---------- ---------- ---------- ---------- (dollars in thousands) Balance, beginning of period............. $ 6,041 $ 25,594 $ 26,672 $ 26,698 Contributions and capitalized costs ..... 43 620 9,869 5,168 Net partnership income .................. 948 1,061 6,279 1,480 Distributions ........................... (1,328) (3,451) (17,226) (6,674) Distribution of partnerships ............ -- (17,783) -- -- ---------- ---------- ---------- ---------- Balance, end of period.............. $ 5,704 $ 6,041 $ 25,594 $ 26,672 ========== ========== ========== ==========
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. 3.6 Investment Income. Investment income by type that exceeds five percent of total investment income was as follows:
Purchase basis of accounting Historical basis of accounting ---------- ------------------------------------ Period from Period from Jul 24 to Jan 1 to Dec 31, Jul 23, Years ended December 31, ---------- ---------- ----------------------- 1996 1996 1995 1994 ---------- ---------- ---------- ---------- (dollars in thousands) Fixed maturity securities ......... $ 37,140 $ 47,606 $ 85,852 $ 74,443 Mortgage loans on real estate ..... 11,192 20,331 35,056 42,763 Other investments ................. 3,281 4,067 14,386 8,925 ---------- ---------- ---------- ---------- Cross investment income ...... 51,613 72,004 135,294 126,131 Less: Investment expenses ......... 1,572 5,583 9,703 9,026 ---------- ---------- ---------- ---------- Net investment income ........ $ 50,041 $ 66,421 $ 125,591 $ 117,105 ========== ========== ========== ==========
32 34 3.7 Realized, and Changes in Unrealized, Investment Gains (Losses). Net realized, and changes in unrealized, investment gains (losses) were as follows:
Purchase basis of accounting Historical basis of accounting ---------- -------------------------------------- Period from Period from Jul 24 to Jan 1 to Dec 31, Jul 23, Years ended December 31, ---------- ---------- ---------- ---------- 1996 1996 1995 1994 ---------- ---------- ---------- ---------- (dollars in thousands) Fixed maturity securities: Gross gains ...................................... $ -- $ 42 $ 524 $ 303 Gross losses ..................................... (157) (1,388) (1,807) (3,373) Loss provision ................................... -- 477 (350) 1,198 ---------- ---------- ---------- ---------- Net losses on fixed maturity securities ..... (157) (869) (1,633) (1,872) ---------- ---------- ---------- ---------- Mortgage loans on real estate: Losses on sale ................................... -- (771) (194) -- Loss provision ................................... 716 293 (339) 861 ---------- ---------- ---------- ---------- Net gains (losses) on mortgage loans on real estate ............................... 716 (478) (533) 861 ---------- ---------- ---------- ---------- Investment real estate: Losses on sale ................................... -- (1,098) (2,638) (2,840) Loss provision ................................... -- 853 1,134 (952) ---------- ---------- ---------- ---------- Net losses on investment real estate ........ -- (245) (1,504) (3,792) ---------- ---------- ---------- ---------- Realized investment gains (losses) ..... $ 559 $ (1,592) $ (3,670) $ (4,803) ========== ========== ========== ========== Changes in unrealized gains (losses): Securities held for investment................... $ 2,429 $ (2,789) $ 681 $ (1,989) Securities available for sale.................... 16,243 (48,716) 117,404 (72,054) ---------- ---------- ---------- ---------- Net change in unrealized gains (losses)..... $ 18,672 $ (51,505) $ 118,085 $ (74,043) ========== ========== ========== ========== Trading portfolio: Net gains (losses) from sales.................... $ (20) $ 37 $ (12) $ (31) Net change in unrealized gains (losses).......... 135 (26) 184 23 ---------- ---------- ---------- ---------- Total trading gains (losses)........... $ 115 $ 11 $ 172 $ (8) ========== ========== ========== ==========
3.8 Individually Significant Investments. The following investments, other than obligations of the U.S. Government or agencies thereof, individually exceeded 10% of total stockholder's equity:
December 31,1996 ----------------------- Amortized Fair Cost Value ---------- ---------- (Dollars in thousands) United Companies Life REMIC 1990-2 ..... $ 26,715 $ 27,595 FNMA Pool #161648 ...................... 25,568 25,729 ---------- ---------- $ 52,283 $ 53,324 ========== ==========
December 31,1995 ----------------------- Amortized Fair Cost Value ---------- ---------- (Dollars in thousands) United Companies Life REMIC 1990-2 ..... $ 33,931 $ 35,488 FNMA Pool #161648 ...................... 30,370 31,112 FNMA Pool #124447 ...................... 18,263 18,366 CIGNA Mezzanine Partners III L.P. ...... 17,233 17,233 ---------- ---------- $ 99,797 $ 102,199 ========== ==========
33 35 4. INCOME TAXES The provision (benefit) for income taxes attributable to operations is as follows:
Purchase basis of accounting Historical basis of accounting ----------- ----------------------------------------- Period from Period from Jul 24 to Jan 1 to Dec 31, Jul 23, Years ended December 31, ----------- ----------- -------------------------- 1996 1996 1995 1994 ----------- ----------- ----------- ----------- (dollars in thousands) Current .................... $ 2,427 $ 1,139 $ 5,259 $ 5,915 Deferred ................... 1,201 (370) (1,194) (2,721) ----------- ----------- ----------- ----------- Total ............ $ 3,628 $ 769 $ 4,065 $ 3,194 =========== =========== =========== ===========
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:
Purchase basis of accounting Historical basis of accounting ---------- ------------------------------------- Period from Period from Jul 24 to Jan 1 to Dec 31, Jul 23, Years ended December 31, ---------- ---------- ------------------------ 1996 1996 1995 1994 ---------- ---------- ---------- ---------- (dollars in thousands) Federal income tax (benefit) at statutory rate ..... $ 3,396 $ 763 $ 4,235 $ 3,178 Differences resulting from: Miscellaneous.................................. 232 6 (170) 16 ---------- ---------- ---------- ---------- Reported income tax provision benefit .............. $ 3,628 $ 769 $ 4,065 $ 3,194 ========== ========== ========== ==========
The significant components of the Company's net deferred income tax benefit and liability are as follows:
1996 1995 --------------------------- -------------------------- Deferred Deferred Deferred Deferred Tax Tax Tax Tax Assets Liabilities Assets Liabilities ------ ----------- -------- ----------- (dollars in thousands) Mortgage loans on real estate ....................... $ -- $ -- $ -- $ 2,319 Deferred policy acquisition costs ................... -- 1,477 -- 29,475 Present value of insurance in force ................. -- 5,062 -- -- Unrealized gain on investment securities ............ -- 2,163 -- 12,495 Policy reserves ..................................... 19,319 -- 21,530 -- Other ............................................... 972 -- -- 11 ------- ------ ------- ------- $20,291 $8,702 $21,530 $44,300 ======= ====== ======= =======
In assessing the realization of deferred taxes, management considers whether it is more likely than not that some portion or all of the deferred tax assets will be realized. The ultimate realization of deferred tax assets is dependent on the generation of future taxable income during the periods in which those temporary differences become deductible. Management considers the scheduled reversal of deferred tax liabilities, projected future taxable income and tax planning strategies in making this assessment. Based upon those considerations, management believes it is more likely than not that the Company will realize the benefits of these deductible differences as of December 31, 1996. Payments made for income taxes, net of refunds received, during the years ended December 31, 1996, 1995 and 1994 were $2.8 million, $4.6 million and $1.4 million, respectively. The Company's approximately $5.2 million of "Policyholders' Surplus" at December 31, 1995 became taxable income to its former parent in conjunction with the sale of the Company in 1996 and was therefore, extinguished. 34 36 The Company had a current income tax payable, which is included in "Other liabilities," in the amount of $3 million at December 31, 1996, and $2.3 million at December 31, 1995. 5. TRANSACTIONS WITH AFFILIATES In conjunction with the sale of the Company, Knightsbridge Management LLC ("Knightsbridge"), an affiliate, accrued transaction fees of $2.5 million, which were capitalized as costs in excess of net assets acquired. The Company received $57.3 million in cash from PLAIC as replacement for assets distributed to its former parent in conjunction with the sale of the Company. (See note 2 to Notes to Consolidated Financial Statements.) Knightsbridge provides management consulting services to the Company for an annualized fee of $1 million. For the period from July 24, 1996 through December 31, 1996, the accompanying financial statements include $.4 million for these fees. The Company was allocated certain costs from UCFC and its affiliates under a cost sharing agreement totaling $ - million, $2.1 million, $4.1 million and $3.3 million, for the periods from July 24, 1996 to December 31, 1996 and January 1, 1996 to July 23, 1996 and years ended December 31, 1995 and 1994, respectively. Knightsbridge also provides investment management consulting services to the Company for a fee based upon the average dollar amount of the related investments. For the period from July 24, 1996 to December 31, 1996, the Company incurred $.6 million in such fees. UC Mortgage, an affiliate, services commercial loans for the Company for a fee of three-eights of one percent of the principal balances. For the period from July 24, 1996 to December 31, 1996, the Company paid UC Mortgage $.4 million for mortgage servicing fees. In addition, the Company provides employees to UC Mortgage and is reimbursed for salary and salary related expenses for those employees. The total amount of reimbursed employee expenses for the period from July 24, 1996 to December 31, 1996 was $.3 million. As of December 31, 1996, 1995 and 1994, UC Lending, a former affiliate, serviced loans owned by the Company having aggregate unpaid principal balances of approximately $62.6 million, $338.4 million, and $296.9 million, respectively. The Company paid servicing fees relative to these loans of approximately $ - million, $.5 million, $.9 million, and $1.1 million for the periods from July 24, 1996 to December 31, 1996 and January 1, 1996 to July 23, 1996 and the years ended December 31, 1995 and 1994, respectively. The Company has an agreement with UC Lending to purchase qualifying residential home equity mortgage loans originated or purchased and underwritten by UC Lending. (See note 10 to Notes to Consolidated Financial Statements.) These loans are usually held three to six months until resold to UC Lending for sale by UC Lending in loan securitizations. Also, under an agreement applicable to the period from January 1, 1996 to July 23, 1996, and the years ended December 31, 1995 and 1994, UC Lending was obligated to repurchase these home equity loans previously sold to the Company at the time of foreclosure. At December 31, 1996 and 1995, $61 million and $166.5 million, respectively, of home equity loans originated by UC Lending were owned by the Company. During the periods from July 24, 1996 to December 31, 1996, January 1, 1996 to July 23, 1996 and the years ended December 31, 1995 and 1994, the Company purchased home equity loans for approximately $75.2 million, $656 million, $1,169 million and $893 million, respectively, from UC Lending. Sales of these home equity loans to UC Lending by the Company were $51.4 million, $679.2 million, $1.112 billion and $932.7 million for the periods from July 24, 1996 to December 31, 1996 and January 1, 1996 to July 23, 1996 and the years ended December 31, 1995 and 1994, respectively. No gain or loss was recorded by the Company in these transactions. The Company formerly leased home office space to UCFC and other former affiliates. Rent income attributable to these affiliates was approximately $ - million and $1 million for the periods from July 24, 1996 to December 31, 1996, and each of the periods from January 1, 1996 to July 23, 1996 and the years ended December 31, 1995 and 1994, respectively. United Companies Realty & Development Co., Inc. ("UCRD"), a former affiliate, managed the home office buildings leased by the Company to UCFC and other third party tenants under a real estate management contract for the period from January 1, 1996 to July 23, 1996, and for the years ended December 31, 1995 and 1994. The Company paid approximately $.2 million, $.4 million and $.3 million to UCRD in management fees for the period January 1, 1996 to July 23, 1996, and the years ended December 31, 1995 and 1994, respectively. The Company owned at December 31, 1996 and 1995 three subordinated debentures purchased in May 1993, from UC Lending. Listed below is summarized information on the subordinated debentures that were issued by UC Lending:
Date of Principal Interest Maturity Series Issue Balance Rate Date ---------------- ------------ --------- -------- ------------- (dollars in thousands) A-1 May 14, 1993 $ 3,000 6.05% May 20, 1998 B May 14, 1993 3,000 6.64% May 20, 2000 C May 14, 1993 4,000 7.18% May 20, 2003 -------- Total $ 10,000 ========
Interest income received from UC Lending with respect to those subordinated debentures totaled approximately $.33 million in each of the periods from July 24 to December 31, 1996, and January 1 to July 23, 1996, and $.67 million in each of the years ended December 31, 1995 and 1994. All principal is paid upon maturity. 6. DEFERRED POLICY ACQUISITION COSTS AND PRESENT VALUE OF INSURANCE IN FORCE Deferred policy acquisition costs represent commissions, premium taxes and certain other acquisition expenses, including underwriting and issue costs. Information relating to these costs is as follows:
Purchase basis of accounting Historical basis of accounting ---------- -------------------------------------- Period from Period from Jul 24 to Jan 1 to Dec 31, Jul 23, Years ended December 31, ---------- ---------- ------------------------ 1996 1996 1995 1994 ---------- ---------- ---------- ---------- (dollars in thousands) Unamortized deferred policy acquisition costs at beginning of period.. $ -- $ 90,703 $ 91,915 $ 83,495 Policy acquisition costs deferred: Commissions ............................. 4,298 4,531 11,283 20,743 Underwriting and issue costs ............ 874 266 664 1,205 Policy acquisition costs amortized ......... (8) (9,699) (13,159) (13,528) Unrealized investment gain adjustment ...... (977) -- -- -- ---------- ---------- ---------- ---------- Unamortized deferred policy acquisition costs at end of period .... $ 4,187 $ 85,801 $ 90,703 $ 91,915 ========== ========== ========== ==========
The methods used by the Company to value the fixed benefit, life, and accumulation products purchased are consistent with the valuation methods used most commonly to value blocks of insurance business. It is also consistent with the basic methodology generally used to value insurance assets. The method used by the Company includes identifying the future cash flows from the acquired business, the risks inherent in realizing those cash flows, the rate of return the Company believes it must earn in order to accept the risks inherent in realizing the cash flows, and determining the value of the insurance asset by discounting the expected future cash flows by the discount rate the Company requires. 35 37 The discount rate used to determine such values is the rate of return required in order to invest in the business being acquired. In selecting the rate of return, the Company considered the magnitude of the risks associated with actuarial factors described in the following paragraph, cost of capital available to the Company to fund the acquisition, compatibility with other Company activities that may favorably affect future profits, and the complexity of the acquired Company. Expected future cash flows used in determining such values are based on actuarial determination of future premium collection, mortality, surrenders, operating expenses and yields on assets held to back policy liabilities as well as other factors. Variances from original projections, whether positive or negative, are included in income as they occur. To the extent that these variances indicate that future cash flows will differ from those included in the original scheduled amortization of the value of the insurance in force, current and future amortization may be adjusted. Recoverability of the value of insurance in force is evaluated annually and appropriate adjustments are then determined and reflected in the financial statements for the applicable period. Information related to the present value of insurance in force is as follows:
Purchase basis of accounting ---------- Period from Jul 24 to Dec 31, ---------- 1996 ---------- (dollars in thousands) Balance at the beginning of the period ..... $ -- Addition due to acquisition ................ 69,077 Accretion of interest ...................... 1,633 Amortization ............................... (6,693) Unrealized investment gain adjustment ...... (9,086) ---------- Balance at end of period ................... $ 54,931 ==========
Expected gross amortization, based upon current assumptions and accretion of interest at a policy or contract rates ranging from 5.36% to 5.43% for the next five years of the present value of insurance in force is as follows:
Beginning Gross Accretion Net Balance Amortization of Interest Amortization - ------------------------------------------------------------------------------------------- (dollars in thousands) 1997 $54,931 $13,287 $3,451 $9,836 1998 45,095 11,386 2,941 8,445 1999 36,650 10,058 2,465 7,593 2000 29,057 8,546 2,044 6,502 2001 22,555 7,082 1,696 5,386
7. RETIREMENT AND PROFIT SHARING PLANS Eligible employees may elect to participate in PennCorp's defined contribution 401(K) retirement plan. Contributions to the Plan are made pursuant to salary deferral elections by participants in an amount equal to 1% to 15% of their annual compensation. In addition, the Company makes matching contributions in an amount equal to 50% of each participant's salary deferral to a maximum of 3% of annual compensation. The defined contribution plan also provides for a discretionary employer profit sharing contribution, which is determined annually by the Board of Directors for the succeeding plan year. Profit sharing contributions are credited to participant's accounts on the basis of their respective compensation in accordance with a formula that provides a higher percentage contribution for compensation in excess of the federal Social Security wage base. Salary deferral contribution accounts are at all times fully vested, while matching contribution accounts vest ratably from one to two years of service, and profit sharing contribution accounts vest ratably from one to five years of service. All participant accounts are fully vested at death, disability or attainment of age 65. Payment of vested benefits under the defined contribution plan may be elected by a participant in a variety of forms of payment. The Company's funding policy is to contribute annually an amount that can be deducted for federal income tax 36 38 purposes. Expenses related to this plan for the period from July 24, 1996, to December 31, 1996, was $78,000 compared to costs associated with employee benefit plans of the Company's former parent of $184,600, $414,000 and $327,500 for the period from January 1, 1996, through July 23, 1996, and the years ended December 31, 1995 and 1994, respectively. 8. STATUTORY 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 statutory accounting basis as of December 31, 1996 and 1995, was $103.1 million and $99.9 million, respectively. On a statutory accounting basis, net gain from operations for the years ended December 31, 1996, 1995 and 1994, was $10.1 million, $12.8 million and $9.7 million, respectively. Net income on a statutory accounting basis, which includes realized capital gains and losses, was $6.8 million, $10 million and $5.8 million for the years ended December 31, 1996, 1995 and 1994, respectively. Under the current statutory requirements in Louisiana, the Company has the capacity to pay dividends of $9.4 million in 1997. Extraordinary dividends, with a statutory value of $62.6 million, consisting of real estate, an investment in a limited partnership and $10 million cash, were distributed to the Company's former parent immediately prior to the closing of the sale of the Company. Immediately after the closing, PLAIC contributed $57.3 million cash to the Company as a replacement for the distributed assets. (See note 2 to Notes to Consolidated Financial Statements.) No dividends were paid during 1994 or 1995. As part of its July 1996 approval of PLAIC's acquisition of the Company, the Louisiana Insurance Commissioner approved a dividend plan for the Company pursuant to which the Company may pay a specified amount of dividends for each of the five years following the acquisition, beginning in 1997, amounting to the lesser of the pro forma dividend amounts in such plan or the actual earnings of the Company, and conditioned on the Company's maintaining a risk-based capital of at least 300 percent of the Authorized Control Level. 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, 1996, statutory surplus was increased by approximately $6.3 million as a result of this permitted practice. 9. DISCLOSURE ABOUT FINANCIAL INSTRUMENTS The carrying value and fair value of the Company's financial assets and liabilities were as follows:
December 31, 1996 December 31, 1995 ----------------------- ----------------------- Purchase basis Historical basis of accounting of accounting ----------------------- ----------------------- Carrying Fair Carrying Fair Value Value Value Value ---------- ---------- ---------- ---------- (dollars in thousands) Financial assets: Investments: Fixed maturity securities: Available for sale .................. $1,144,165 $1,144,165 $1,140,160 $1,140,160 Held to maturity .................... 48,473 50,902 60,919 59,330 Mortgage loans on real estate ......... 235,981 235,981 336,269 335,157 Investment real estate ................ -- -- 32,423 38,978 Policy loans .......................... 21,536 21,536 20,291 20,291 Investment in limited partnership ..... 5,704 5,704 25,594 25,594 Short-term investments ................ 467 467 22,804 22,804 Other invested assets ................. 1,491 1,491 3,263 3,263 Cash .................................. 14,487 14,487 3,028 3,028 Financial liabilities: Annuity reserves ...................... 1,330,100 1,271,346 1,417,803 1,350,626 Repurchase agreements ................. -- -- 40,857 40,857
37 39 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. The fair value of delinquent loans was estimated by the Company's using estimated recoveries 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 Invested Assets. The fair value of the Company's investment in other invested assets approximates 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 No. 97. SFAS No. 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. 10. COMMITMENTS AND CONTINGENCIES The Company is obligated under operating leases, including office space, computer equipment and automobiles. Rent expense was $.6 million, $.7 million, and $.5 million in 1996, 1995 and 1994 respectively. Minimum annual commitments under noncancellable operating leases are as follows (in thousands of dollars): 1997 $ 553 1998 533 1999 44 ------- Total minimum payments required $ 1,130 =======
38 40 In connection with the sale of the Company, the Company entered into an agreement with UC Financial which will provide for the Company's purchase of up to $300 million, at any one time outstanding, of first mortgage residential loans originated by UC Financial. The agreement provides that UC Financial will have the right for a limited time to repurchase certain loans which are eligible for securitization by UC Financial. The agreement also has a sublimit of $150 million for loans that are not eligible for securitization by UC Financial. In conjunction with the sale of the Company, and in accordance with past practices, historical basis deferred acquisition cost assumptions were adjusted to reflect actual experience to July 24, 1996, the acquisition date. This adjustment resulted in a $2.9 million increase in amortization of deferred acquisition costs associated with certain annuity plans, primarily as a result of revised surrender estimates. As a result of the purchase price adjustment provision contained in the Agreement, and the adjustment noted immediately above, the final aggregate purchase price paid for the Company is yet to be determined, although UC Life does not expect the final aggregate purchase price to vary materially from estimates utilized in the preparation of these financial statements. 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 data is as follows:
Historical basis Purchase basis of accounting of accounting ------------------------------------ ----------------------- Three Three Period Period Three Months Months from from Months Ended Ended Jul 1 to Jul 24 to Ended Mar 31 Jun 30 July 23, Sep 30, Dec 31, ---------- ---------- ---------- ---------- ---------- (dollars in thousands) 1996: Total revenues .................... $ 32,216 $ 31,239 $ 6,579 $ 23,820 $ 32,218 Income (loss) from operations before income taxes ............. 2,661 2,516 (2,996) 4,095 5,609 Net income (loss) ................. 1,730 1,622 (1,940) 2,569 3,507
Historical basis of accounting ------------------------------------------------- Three Months Ended ------------------------------------------------- Mar 31 Jun 30 Sep 30 Dec 31 ---------- ---------- ---------- ---------- (dollars in thousands) 1995: Total revenues .................................. $ 33,151 $ 35,146 $ 32,874 $ 31,379 Income from operations before income taxes ............................ 3,170 4,563 2,671 1,696 Net income ...................................... 2,266 2,963 1,732 1,074
39 41 Item 9. Changes In and Disagreements With Accountants on Accounting and Financial Disclosure None PART III Item 10. Directors and Executive Officers of the Registrant The directors and executive officers of the Company as of March 15, 1997 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 - ------------------------------------------------------------------------------- C. Paul Patsis Mr. Patsis is President, Chief Executive Officer and (Age 49) director of the Company. Mr. Patsis joined the Company on on February 18, 1997. Mr. Patsis also serves as President of UC Mortgage and President, CEO and Director of United Variable Services,Inc., affiliated companies. In addition, Mr.Patsis serves as Chairman of the Board and Chief Executive Officer of Marketing One, Inc. of Portland, Oregon, an affiliate. Joel S. Kaplan Mr. Kaplan is Executive Vice President, Financial and Legal (Age 42) Services of the Company. Mr. Kaplan joined the Company on February 18, 1997. Mr. Kaplan also serves as Executive Vice President, Financial and Legal Services, for affiliates UC Mortgage and United Variable Services, Inc. of Baton Rouge, Louisiana, and Marketing, One, Inc. of Portland, Oregon. Prior to joining Marketing One in June 1994, Mr. Kaplan was a partner in the Portland law firm of Tonkon, Torp, Galen, Marmaduke & Booth. John H. Lancaster Mr. Lancaster is Executive Vice President and Chief (Age 49) Marketing Officer and a director of the Company. Mr. Lancaster joined the Company in 1995. Prior to his employment with the Company, he served as Executive Vice President of Annuities for National Health Insurance Company of Dallas, Texas. Kitty S. Kennedy Ms. Kennedy has served as Executive Vice President, Chief (Age 48) Actuary and Chief Administrative Officer since 1993. Ms. Kennedy is also a director of the Company. Ms. Kennedy joined the Company in 1984, was named Senior Vice President in 1991 and has served in various management positions within the Company. James P. McDermott Mr. McDermott is a director of the Company and a Senior (Age 35) Vice President of PennCorp Financial Group, Inc. ("PennCorp"), the Company's ultimate parent. Prior to joining PennCorp, Mr. McDermott was a Senior Manager with KPMG Peat Marwick LLP. Michael J. Prager Mr. Prager is a director of the Company and a Senior Vice (Age 37) President of PennCorp. Prior to joining PennCorp, Mr. Prager was a Manager with KPMG Peat Marwick LLP.
40 42
Principal Business Occupation Name During Last Five Years - ------------------------------------------------------------------------------- Scott D. Silverman Mr. Silverman is a director of the Company and a Senior Vice (Age 38) President of PennCorp. Prior to joining PennCorp, Mr. Silverman served as Vice President (Legal) and Secretary with Independence Holding Company and Vice President, Counsel and Secretary with Standard Security Life Insurance Company of New York. Donald M. Woodard Mr. Woodard is Senior Vice President and Controller of the (Age 48) 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, Information Services, (Age 50) of the Company. He transferred to the Company in August 1993 from the Company's former parent, which he joined in 1989, and where he served as a Senior Vice President. R. Andrew Davidson, III Mr. Davidson is Senior Vice President of Investments for the (Age 44) 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. JoAnna Cotaya Ms. Cotaya is a Senior Vice President of the Company and (Age 39) a Senior Vice President of UC Mortgage Company, an affiliate since 1996. Prior to joining the Company she served as Vice President of United Companies Lending Corporation, a former affiliate. James W. Lillie, Jr. Mr. Lillie has served as the Corporate Secretary since 1996. (Age 66) In addition, he serves as Vice President, Associate General Counsel and Secretary of PennCorp. Prior to joining the Company, he was a Partner with the firm of Morgan, Lewis, & Bockius LLP.
41 43 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, 1996, 1995 and 1994. The salary and bonus of each of the executive officers were paid by the Company.
Long-Term Summary Compensation Table Annual Compensation Compensation Awards ---------------------------------------------------- ------------------------- Other Annual Restricted Name and Compensation Stock Awards Options/ All Other Principal Position Year Salary Bonus ($)(1) ($)(2) ($)(3) SARs(%) Compensation(2) - --------------------------------- ------- ----------- --------------- -------------- --------------- --------- ----------------- Robert B. Thomas, Jr............. 1996 $220,500 $395,818 $ -- -- -- $566,956 Chairman of the Board and 1995 219,625 395,818 -- 160,000 -- 20,505 President 1994 209,366 168,116 -- -- -- 21,882 (Resigned February 18, 1997) Kitty S. Kennedy................. 1996 124,115 49,988 -- -- -- 124,282 Executive Vice President, 1995 108,970 49,988 -- -- -- 16,015 Chief Actuary and 1994 100,320 40,800 -- -- -- 15,280 Chief Administrative Officer Gary L. Warrington 1996 90,089 71,541 -- -- -- 219,821 Executive Vice President 1995 158,980 71,541 -- -- -- 18,047 (Retired July 23, 1996) 1994 158,980 63,592 -- -- -- 21,939 Lindsay C. Seals 1996 66,057 48,204 -- -- -- 91,226 Executive Vice President -- Marketing 1995 106,600 48,204 -- -- -- 17,443 (Retired July 23, 1996) 1994 103,333 41,600 -- -- -- 16,474 Francis G. Miller 1996 98,950 42,750 -- -- -- 115,592 Senior Vice President -- 1995 94,333 36,400 -- -- -- -- Information Services 1994 90,399 7,866 -- -- -- --
- -------------- NOTES: (1) Amounts awarded under the United Companies Financial Corporation Management Incentive Plan (plan of former parent) for the respective years, even if deferred. (2) Amount reported include amounts contributed or accrued for 1996, 1995, and 1994 for the named officers under the United Companies Financial Corporation Employee Stock Ownership Plan ("ESOP") and Employees' Savings Plan and Trust (plan or former parent). (3) Reflects the value of the shares of restricted stock based upon the closing price of UCFC's Common Stock reported on the National Association of Securities Dealers Quotations 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. 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 Pacific Life and Accident Insurance Company, a wholly-owned subsidiary of PennCorp. Item 12. Security Ownership of Certain Beneficial Owners and Management All of the Company's issued and outstanding common stock is owned by Pacific Life and Accident Insurance Company, a wholly-owned subsidiary of PennCorp. Item 13. Certain Relationships and Related Transactions None 42 44 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 Auditors' Reports Page 20-21 December 31, 1996 and 1995 Consolidated Balance Sheets Page 22 For the three years ended December 31, 1996 Consolidated Statements of Operations Page 23 Consolidated Statements of Cash Flows Page 24 Consolidated Statements of Stockholder's Equity Page 25 Notes to Consolidated Financial Statements Pages 26-40
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, 1996, the registrant was primarily an operating company and its subsidiary is wholly owned. Schedule I Summary of Investments at December 31, 1996. Page 47. Schedule III Supplementary Insurance Information, for the three years ended December 31, 1996. Page 48. Schedule IV Reinsurance, for the three years ended December 31, 1996. Page 49. Schedule V Valuation and Qualifying Accounts, for the three years ended December 31, 1996. Page 50. 43 45 Exhibits Exhibit No. Description of Document - ----------- ----------------------- 21.1(1) Subsidiary of the Company 23.1(1) Consent of KPMG Peat Marwick LLP 23.2(1) Consent of Deloitte & Touche LLP 27.1(1) Financial Data Schedule (1) Filed herewith Exhibit No. 21.1 - Page 51 Exhibit No. 23.1 - Page 52 Exhibit No. 23.2 - Page 53 Exhibit No. 27.1 - Page 54 Reports on Form 8K On August 14, 1996, the Company filed a current report on Form 8-K, stating that on July 24, 1996, United Companies Financial Corporation and Pacific Life and Accident Insurance Company, a wholly-owned subsidiary of PennCorp Financial Group, Inc. consummated the sale of UC Financial's wholly-owned subsidiary, United Companies Life Insurance Company. On October 21, 1996, the Company filed a current report on form 8-K that as a result of the transaction described above and reported on August 14, 1996, the Company's Board of Directors had approved the engagement of KPMG Peat Marwick LLP as its certifying accountants, effective October 17, 1996. KPMG Peat Marwick currently serves PennCorp and its subsidiaries as its certifying accountants. The Company previously utilized the services of Deloitte and Touche LLP, the certifying accountants used by its former parent, United Companies Financial Corporation. 44 46 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 17, 1997 UNITED COMPANIES LIFE INSURANCE COMPANY BY: /S/ C. PAUL PATSIS --------------------------------------- C. Paul Patsis President and Chief Executive Officer 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 17, 1997. /s/ C. PAUL PATSIS President, Chief Executive Officer and Director - ---------------------------------------- (Principal Executive Officer) C. Paul Patsis /s/ JOEL S. KAPLAN Executive Vice President, Financial and Legal Services - ---------------------------------------- (Principal Executive Officer) Joel S. Kaplan /s/ KITTY S. KENNEDY Executive Vice President, Chief Actuary, Chief Administrative - ---------------------------------------- Officer and Director Kitty S. Kennedy (Principal Executive Officer) /s/ JOHN H. LANCASTER Executive Vice President, Chief Marketing Officer and - ---------------------------------------- Director John H. Lancaster (Principal Executive Officer /s/ DONALD M. WOODARD Senior Vice President and Controller - ---------------------------------------- (Principal Accounting Officer) Donald M. Woodard /s/ JAMES P. McDERMOTT Director - ---------------------------------------- James P. McDermott /s/ MICHAEL J. PRAGER Director - ---------------------------------------- Michael J. Prager /s/ SCOTT D. SILVERMAN Director - ---------------------------------------- Scott D. Silverman
45 47 SCHEDULE I UNITED COMPANIES LIFE INSURANCE COMPANY AND SUBSIDIARY SUMMARY OF INVESTMENTS
Amount Shown Type of Investment Cost Value on Balance Sheet - ------------------------------------------------------------------ ------------ ------------ ----------------- (dollars in thousands) Fixed maturity securities available for sale: U.S. Government and agencies and authorities ................... $ 644,795 $ 655,077 $ 655,077 Municipal ...................................................... 5,434 5,387 5,387 Foreign ........................................................ 10,920 11,105 11,105 Public utilities ............................................... 12,695 12,852 12,852 All other corporate bonds ...................................... 454,006 459,744 459,744 ------------ ------------ ------------ Total fixed maturity securities available for sale ..... 1,127,850 1,144,165 1,144,165 ------------ ------------ ------------ Fixed maturity securities held to maturity: All other corporate bonds ...................................... 48,473 50,902 48,473 ------------ ------------ ------------ Total fixed maturity securities ........................ 1,176,323 1,195,067 1,192,638 ------------ ------------ ------------ Mortgage loans on real estate .................................... 235,981 XXXXXX 235,981 Policy loans ..................................................... 21,536 XXXXXX 21,536 Investment in limited partnerships ............................... 5,704 XXXXXX 5,704 Short-term investments ........................................... 467 XXXXXX 467 Other long-term investments ...................................... 1,491 XXXXXX 1,491 ------------ ------------ Total investments ...................................... $ 1,441,502 $ 1,457,817 ============ ============
46 48 SCHEDULE III UNITED COMPANIES LIFE INSURANCE COMPANY AND SUBSIDIARY SUPPLEMENTARY INSURANCE INFORMATION
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN F COLUMN G COLUMN H COLUMN I & J - ------------------------------- ----------- ----------- ----------- ----------- ----------- ----------- ---------------- Deferred Policy Acquisition Cost Deferred Amortization Policy Net Benefits, and Acquisition Future Policy Unearned Premium Investment Claims Other Operating Costs Benefits(1) Premiums Revenues(3) Income Losses, Etc. Expenses ----------- ----------- ----------- ----------- ----------- ----------- --------------- (dollars in thousands) PURCHASE BASIS OF ACCOUNTING: Period from July 24 through December 31, 1996 $ 4,187 $ 1,441,307 $ 275 $ 3,483 $ 50,041 $ 3,836 $ 4,741 HISTORICAL BASIS OF ACCOUNTING: Period from January 1 through July 23, 1996 $ 85,801 $ 1,463,230 $ 1,074 $ 3,732 $ 66,421 $ 5,967 $ 19,452 Year ended December 31, 1995 $ 90,703 $ 1,529,012 $ 1,793 $ 8,508 $ 125,591 $ 9,930 $ 29,485 Year ended December 31, 1994 $ 91,915 $ 1,542,474 $ 4,491 $ 11,373 $ 117,105 $ 12,654 $ 28,868
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. 47 49 SCHEDULE IV UNITED COMPANIES LIFE INSURANCE COMPANY AND SUBSIDIARY REINSURANCE
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 ---------- ---------- ---------- ---------- -------------- (dollars in thousands) Period from July 24, 1996 to December 31, 1996 Life insurance in force at end of period ................. $ 468,284 $ 131,816 $ 891,694 $1,228,162 72.6% ========== ========== ========== ========== Premiums Life insurance .................... $ 2,496 $ 481 $ 1,214 $ 3,229 37.6 Accident and health insurance ..... 208 (46) -- 254 -- ---------- ---------- ---------- ---------- Total premiums ............... $ 2,704 $ 435 $ 1,214 $ 3,483 34.9 ========== ========== ========== ========== Period from January 1, 1996 to July 23, 1996 Life insurance in force at end of period ................. $ 498,662 $ 141,816 $ 992,672 $1,350,148 73.5 ========== ========== ========== ========== Premiums Life insurance .................... $ 2,719 $ 341 $ 877 $ 3,255 26.9 Accident and health insurance ..... 429 (48) -- 477 -- ---------- ---------- ---------- ---------- $ 3,148 $ 293 $ 877 $ 3,732 23.5 ========== ========== ========== ========== Years ended December 31, 1995 Life insurance in force at end of period .................. $ 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 ========== ========== ========== ========== Years ended December 31, 1994 Life insurance in force at end of period ................. $ 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 ========== ========== ========== ==========
48 50 SCHEDULE V UNITED COMPANIES LIFE INSURANCE COMPANY AND SUBSIDIARY VALUATION AND QUALIFYING ACCOUNTS
COLUMN 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 Period Expenses Accounts(1) of Period --------- --------- ----------- --------- --------- (dollars in thousands) Purchase basis of accounting: - ----------------------------- Period from July 24, 1996 to December 31, 1996 Allowance for loan losses ............ $ 12,661 $ -- $ -- $ 716 $ 11,945 Allowance for real estate losses ..... -- -- -- -- -- Allowance for bond losses ............ 189 -- -- -- 189 Unearned loan charges ................ 284 -- -- 18 266 --------- --------- --------- --------- --------- Total ....................... $ 13,134 $ -- $ -- $ 734 $ 12,400 ========= ========= ========= ========= ========= Historical basis of accounting: - ----------------------------- Period from January 1, 1996 to July 23, 1996 Allowance for loan losses ............ $ 2,117 $ 478 $ -- $ 771 $ 1,824 Allowance for real estate losses ..... 3,987 (1,098) -- 2,889 -- Allowance for bond losses ............ 666 884 -- 1,361 189 Unearned loan charges ................ 301 -- -- 17 284 --------- --------- --------- --------- --------- Total ....................... $ 7,071 $ 264 $ -- $ 5,038 $ 2,297 ========= ========= ========= ========= ========= Year ended 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 $ -- $ 4,614 $ 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 ========= ========= ========= ========= =========
- --------------------- 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. 49 51 EXHIBIT INDEX
EXHIBIT NUMBER DESCRIPTION - -------- --------------- 21.1 Subsidiary of the Company 23.1 Consent of KPMG Peat Marwick LLP 23.2 Consent of Deloitte & Touche LLP 27.1 Financial Data Schedule
EX-21.1 2 SUBSIDIARIES OF THE REGISTRANT 1 EXHIBIT 21.1 UNITED COMPANIES LIFE INSURANCE COMPANY LIST OF SUBSIDIARIES December 31, 1996
State of Name Incorporation ---- ------------- United Variable Services, Inc................................. Louisiana
EX-23.1 3 CONSENT OF KPMG PEAT MARWICK LLP 1 EXHIBIT 23.1 INDEPENDENT AUDITORS' CONSENT The Board of Directors and Stockholder United Companies Life Insurance Company: We consent to incorporation by reference in the registration statements (Nos. 33-91362 and 33-05778) on Form N-4 of United Companies Life Insurance Company of our report dated February 28, 1997, relating to the consolidated balance sheets of United Companies Life Insurance Company and subsidiary as of December 31, 1996, and the related consolidated statements of operations, cash flows, and stockholder's equity for the periods from July 24, 1996 to December 31, 1996, and from January 1, 1996 to July 23, 1996, and all related schedules, which report appears in the December 31, 1996 annual report on Form 10-K of United Companies Life Insurance Company. KPMG PEAT MARWICK LLP Baton Rouge, Louisiana March 28, 1997 EX-23.2 4 CONSENT OF DELOITTE & TOUCHE LLP 1 EXHIBIT 23.2 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 in the following: Registration Statement Numbers 33-91362 and 33-05778 on Form N-4, pertaining to United Companies Life Insurance Company's variable annuity separate account, United Companies Separate Account One. /s/ DELOITTE & TOUCHE LLP Baton Rouge, Louisiana March 28, 1997 EX-27.1 5 FINANCIAL DATA SCHEDULE
7 1,000 12-MOS DEC-31-1996 JAN-01-1996 DEC-31-1996 1,144,165 48,473 50,902 930 235,981 0 1,457,817 14,487 34,923 4,187 1,653,796 1,441,307 275 0 0 0 0 0 8,401 177,407 1,653,796 7,215 116,462 559 907 9,803 14,767 14,486 11,885 4,397 7,488 0 0 0 7,488 1.78 1.78 0 0 0 0 0 0 0
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