UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
F O R M 10-K/A-1
AMENDMENT
TO
Annual Report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 -
For the fiscal year ended: DECEMBER 31, 1993
Commission file number: 0-12694.
USLICO CORPORATION
(Exact name of registrant as specified in its charter)
VIRGINIA 54-1278620
(State or other jurisdiction (IRS Employer
of incorporation or organization) Identification Number)
Registrant's telephone number, including area code: (703) 875-3600
Securities registered pursuant to Section 12(b) of the Act:
Title of each class: NONE.
Name of each exchange on which registered: NONE.
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK $1.00 PAR VALUE
(Title of class)
Indicate by check mark (X) 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 report), and (2) has
been subject to such filing requirements for the past 90 days.
Yes X No
Market value of stock held by non-affiliates was $186,957,050 as of
March 7, 1994.
Indicate the number of shares outstanding of each of the registrant's
classes of common stock, as of the latest practicable date:
COMMON STOCK - $1.00 PAR VALUE - 10,760,118 SHARES OUTSTANDING AS OF
MARCH 7, 1994.
<PAGE>
<PAGE>
This Amendment on Form 10-K/A is being filed for the purpose of amending
Items 7 and 8 of the Registrant's Annual Report on Form 10-K for the
year ended December 31, 1993 filed with the Securities and Exchange
Commission on March 30, 1994 (the "Form 10-K") to provide certain
additional information at March 30,1994. Since this Amendment is being
filed in December 1994, this Amendment and the Form 10-K should be read
in conjunction with the information subsequent to the Form 10-K contained
in the Registrant's quarterly reports on Form 10-Q filed for the periods
ended March 31, 1994; June 30, 1994; and September 30, 1994.
The following replaces Item 7 in its entirety.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
FINANCIAL REVIEW
We present below management's discussion and analysis of USLICO's
financial condition and results of operations as of and for the three
years ended December 31, 1993.
Results of Operations
Net Income (Loss). 1993 resulted in net income of $23.6 million or $2.04
per common share (fully diluted) compared to a net loss of $56.0 million
or $5.21 per common share in 1992 and net income of $11.2 million or
$1.04 per common share in 1991. A number of significant items that do
not represent regular, recurring operations affected these results.
Summary Financial Information
(in millions)
1993 1992 1991
Life insurance operations
(pre-tax) $28.0 $(36.5) $33.5
Realized investment gains* 8.3 1.4 1.4
Interest expense (8.0) (8.1) (8.1)
Federal income tax (9.8) 9.0 (8.7)
---- ---- ----
18.5 (34.2) 18.1
Other items (net of tax):
Accounting changes - (9.8) -
Discontinued operations - (10.0) 21.7
Liberian investment and ship
registry business 11.8 - (7.2)
Group health business (5.1) (2.0) (21.4)
Tax rate increase (1.6) - -
---- ----- -----
Net Income (Loss) $23.6 $(56.0) $11.2
* Net of deferred acquisition cost amortization and amortization of
present value of future profits of $6.4 million, $4 million and $1
million, respectively.
Excluding the other items listed above, 1993 earnings improved to $18.5
million compared to a loss of $34.2 million in 1992. As discussed
more fully below, the 1992 loss resulted primarily from certain one-time,
non-cash charges consisting of $19.4 million to write off goodwill and $30.2
million to reduce the balance of deferred policy acquisition costs. 1992
results from life insurance operations (pre-tax) also were affected
adversely by higher costs associated with severance benefits, new computer
systems development, and mortality; reduced deferral of acquisition costs;
and additional reserves for participating policies and for future guaranty
fund assessments.
Other Items
Accounting Changes. Effective January 1, 1992, the company adopted
Statement of Financial Accounting Standards No. 109, a new accounting
standard for deferred income taxes. The cumulative effect of changing to
the new accounting standard was $9.5 million of additional income tax
expense in 1992. See Note 4 of Notes to Consolidated Financial
Statements for additional information regarding this item.
Additionally, the company adopted Financial Accounting Standards Board
Statement 106 (Accounting for Postretirement Benefits other than
Pensions) effective January 1, 1992, which resulted in a charge of $0.3
million (net of tax).
Discontinued Operations. In 1992, the company wrote off its remaining
investment in The Northeastern Insurance Company of Hartford, which
amounted to $15 million ($10 million net of tax). Northeastern was a
property-casualty reinsurer that had been a discontinued operation in
reserve run-off since 1986. Based on developments in late 1992,
actuarial estimates of the ultimate claim costs and length of the payout
period for the run-off of Northeastern's environmental and asbestosis
claims worsened. While management believed that Northeastern had
sufficient assets to meet its liabilities as they came due over time, it
was probable that the investment in Northeastern would not be recoverable
after taking into account uncertainties regarding future investment rates
of return, loss payment patterns and possible regulatory action. The
company had provided $12 million (net of tax) in 1991 for adverse
development in Northeastern's loss reserves.
In 1993, the company concluded the voluntary commutation of substantially
all of the reinsurance liabilities assumed by Northeastern. In this
connection, Northeastern distributed substantially all of its assets to
the insurance companies from whom it had assumed business in return for
agreements from those companies to release Northeastern from its
obligations to them. As of December 31, 1993, Northeastern's capital and
surplus amounted to approximately $0.3 million, and it surrendered its
insurance licenses and charter in early 1994. This transaction produced
no gain or loss for USLICO.
The company sold its three primary property-casualty insurance
subsidiaries in 1991 for a net after-tax gain of $34.6 million. These
subsidiaries contributed a net loss of $0.9 million in 1991, prior to
their sale.
Liberian Investment and Ship Registry Business. USLICO owned the
majority shareholder of The International Trust Company of Liberia (ITC)
from 1985 to 1993. ITC operates a banking business in Liberia and
administers Liberia's maritime program. In 1988, as a result of
uncertainty regarding control of ITC and the ultimate realization of
further profits from Liberia, USLICO suspended recognition of earnings
from ITC and affiliated subsidiaries, and USLICO's investment in ITC was
recorded on a deconsolidated, cost basis. Civil war broke out in Liberia
during 1989, and the country's political situation has been unstable ever
since.
During 1991, the political situation evolved into a stalemate condition
with no substantial prospects for settlement in the foreseeable future.
Given that development, the company reassessed the net recoverable value
of its investment and determined, as a result of this further uncertainty
regarding Liberia, that it would be prudent to write off the net
remaining carrying value of $7.2 million.
In 1993, USLICO sold ITC, the ship registry and maritime services
business, and the related offshore corporate formation and registry
business. The company realized an after-tax gain of approximately $10.9
million or $1.01 per share on the sale. The gain was comprised of $2.1
million of net proceeds from the sale in excess of net book value and
$8.8 million of previously unrecognized tax benefits arising from prior
years' operations that will be realized as a result of the sale. In
addition to the gain on sale, income of $0.9 million, net of tax, was
recognized prior to the sale, representing a dividend from the ship
registry subsidiary.
Group Health Business. The company incurred a net after-tax loss of $5.1
million in 1993, $2.0 million in 1992 and $21.4 million in 1991 from
group health insurance business sold and administered by an independent
third-party administrator. The total 1991 loss recognized on this
business, which was canceled in early 1992, included a provision for
management's estimate of probable future losses and expenses related to
termination and claims run-off. $2.0 million (net of tax) was added to
the loss reserve in 1992, and $5.1 million was added in 1993. Both of
these additional provisions were primarily to cover legal fees and other
litigation costs that were incurred during those years, including the
establishment of reserves for the estimated costs of concluding the
litigation remaining open at the end of 1993.
Life Insurance Operations
Premiums and Other Considerations (insurance policy income) totaled $191
million in 1993, $177 million in 1992, and $208 million in 1991. The
primary reason for the increase from 1992 to 1993 was the increase in
total life insurance and annuity business in force. The primary reason
for the decrease from 1991 to 1992 was the changing status of the group
health business referred to above. Total accident and health premiums,
included in Premiums and Other Considerations, decreased from $56 million
in 1991 to $19 million in 1992 and $14 million in 1993.
As discussed in previous reports, the third-party group health business
was 100 percent reinsured through December 31, 1990, which meant that
USLICO reported no net premium from this block of business. Effective
January 1, 1991, USLICO assumed the underwriting risk on 74 percent of
the business and, therefore, reported the related premium income. The
company canceled this business in early 1992, causing the decrease in
reported premium for 1992 as compared to 1991.
Net Investment Income, which represents the gross interest and other
income earned on invested assets minus investment expenses, totaled $198
million in 1993, $188 million in 1992 and $174 million in 1991. Growth
in total invested assets has produced increased net investment income
despite declining gross investment yields. Total invested assets have
increased from $1.7 billion at year-end 1990 to $2.1 billion at year-end
1991, $2.3 billion at December 31, 1992, and $2.5 billion at December 31,
1993, while gross investment yield has declined from 9.29 percent in 1991
to 8.71 percent for 1992 and 8.35 percent for 1993. A substantial
portion of the investment income earned by the company is subsequently
credited to the account values of life insurance and annuity policies, as
discussed below. More information regarding the company's investments is
contained later in the Financial Condition and Liquidity section of this
report.
Realized Investment Gains represent the net gains and losses realized on
the sale or call of fixed maturity and equity investments, as well as
loan loss reserves provided on mortgage loans. The effect of realized
gains on net income is shown in the following table (in millions):
1993 1992 1991
Realized investment gains $14.7 $5.4 $2.4
Amortization of deferred
acquisition costs and present
value of future profits (6.4) (4.0) (1.0)
Net 8.3 1.4 1.4
Federal income tax (2.9) (0.5) (0.5)
Net realized investment gains $5.4 $0.9 $0.9
The realized gains on the first line above are the gains reported in the
Consolidated Statements of Income. Most of the gains represent
accelerated recognition of part of the future profits on in-force
business. As a result, amortization of deferred acquisition costs and
present value of future profits is accelerated accordingly.
Other Income, which totaled $12 million in 1993, $8 million in 1992 and
$9 million in 1991, consists primarily of commissions and allowances on
ceded reinsurance and miscellaneous commission income earned by USLICO's
broker-dealer and insurance agency.
Death, Surrender and Other Benefits totaled $139 million in 1993, $143
million in 1992 and $176 million in 1991. Total benefits decreased by
$33 million from 1991 to 1992 because of a decrease of $39 million in
group health benefits, resulting from cancellation of the health business
described above. Death claims increased $5 million from 1991 to 1992 and
increased $15 million from 1992 to 1993. The increase for both years
occurred in the group and individual life lines of business.
For the years 1993, 1992 and 1991, death claims resulting from AIDS as a
percentage of total incurred death claims (statutory basis) were 4.9
percent, 4.3 percent, and 5.3 percent, respectively. In 1992, in
response to this AIDS-related mortality experience, the company lowered
the level of life insurance it would provide without requiring a blood
test for the HIV virus.
Increase in Policy Reserves, which represents primarily the fund interest
credited to the cash values of universal life-type policies, totaled $122
million in 1993, $118 million in 1992 and $107 million in 1991. Total
fund interest was $110 million in 1993, $108 million in 1992 and $98
million in 1991. The reserve increases for 1992 and 1991 include extra
reserves for mortality on term conversions in the amount of $3.2 million
and $1 million, respectively, with no similar extra reserves in 1993.
Amortization of Deferred Policy Acquisition Costs totaled $41 million
in 1993, $61 million in 1992, and $20 million in 1991. This amortization
represents the income statement recognition of a portion of the costs
related to the sale of new business. Sales expenses, primarily
commissions and marketing costs, are capitalized as part of Deferred
Policy Acquisition Costs in the year of the sale and are amortized
against the income produced by the insurance policies subsequent to their
sale.
Deferred acquisition costs are reviewed regularly to determine that
the unamortized portion of such costs does not exceed recoverable amounts.
During 1992, the company increased the number of separate product lines used
for recoverability testing to be consistent with a new market focus
instituted by management at the end of 1992. This method is preferable in
the circumstances because the recoverability tests will be consistent with
the way the company now measures the profitability of its insurance products.
In addition, certain actuarial assumptions regarding future experience
were modified to reflect the results of product profitability studies
completed in the latter part of 1992. Both of these changes resulted in
nonrecoverable deferred costs and amortization adjustments for certain
product lines in the amount of $30.2 million pre-tax.
The amortization in 1993 and 1992 also includes additional amortization
due to realized gains on the sales and calls of bonds of $3 million and
$2.6 million, respectively, compared to prior years. The level of
amortization for all three years also is affected primarily by growth
of the business in force.
Interest Expense, which totaled $8 million in each of the years 1993,
1992 and 1991, consists of the interest incurred on the 8 percent
debentures sold in 1986 and the 8-1/2 percent debentures sold in 1989.
General Expenses totaled $52 million in 1993, $44 million in 1992 and $37
million in 1991. The increase of $8 million in general expenses from
1992 to 1993 resulted primarily from an increase of $4.4 million in legal
fees related to the group health business described above and from a
decrease of $4 million in expenses deferred as policy acquisition costs.
The increase of $7 million in general expenses from 1991 to 1992 resulted
primarily from severance pay and related benefits totaling $1.8 million;
increased software amortization totaling $1.2 million; increased expenses
of $1.1 million associated with computer system development; and a
decrease of $4 million in expenses that were deferred as policy
acquisition costs.
Commissions, Premium Taxes and Fees, which consist primarily of premium
taxes and commissions that are not deferred as acquisition costs, totaled
$31 million in 1993, $31 million in 1992 and $50 million in 1991. The
change from 1991 to 1992 resulted primarily from the group health
business, for which commissions decreased by $19 million from 1991 to
1992, due to cancellation of the business.
Goodwill Write-off. In 1992, the company wrote off all remaining
goodwill, in the amount of $19.4 million, related to the acquisitions of
United Olympic Life Insurance Company (UOL) and Provident Life Insurance
Company (PLI), which were acquired in 1984 and 1982, respectively. Both
of these companies merged into USL during 1992. For many years after
acquisition, PLI and UOL operated as autonomous subsidiaries, continuing
to follow their former business strategies. As the 1980's were coming to
a close, it was apparent that USLICO's life insurance business was not
achieving satisfactory profitability, in part due to the intensively
competitive environment that had developed during the 1980's. To counter
these trends, management began a process of consolidating various functions
among USLICO's life insurance subsidiaries in an effort to improve
efficiency and reduce costs. In late 1991, the company consolidated the
agent support and new business processing functions of UOL and PLI in
Arlington in furtherance of its cost reduction goals. These changes were
accompanied by the introduction of new products and computer processing
systems that were further aimed at the growing need to improve profitability.
However, these steps had the opposite of their intended effect.
Independent agents became increasingly unhappy with the company's service,
and during 1992 began to shift much of their new business production to
other life insurance companies. This was particularly true for the former
agents from PLI and UOL. As a result, it is management's opinion that the
goodwill had no continuing value due to the elimination of the separate
insurance company products, charters, licenses and independent status.
Income Taxes (Benefit) totaled $0.2 million, $(8.9) million and $(2.3)
million for 1993, 1992 and 1991, respectively. The taxes or benefit
relate to the pre-tax operating income or loss for each year as described
in Note 4 of Notes to Consolidated Financial Statements. Taxes were
minimal in 1993 due to an $8.8 million tax benefit realized on the sale
of the Liberian ship registry.
Financial Condition and Liquidity
Premiums from insurance products and investment income earned on the
invested asset base provide the primary source of liquidity at the
operating company level. Consolidated funds provided by operating
activities for 1993, 1992 and 1991 were $201 million, $189 million and
$283 million, respectively. Funds provided by operations decreased from
1991 to 1992 primarily because annuity premiums collected decreased by
$78 million from 1991 to 1992. The changes from 1992 to 1993 reflect
improved earnings and a further decline in annuity premiums. Cash and
short-term investments are maintained to meet operating expense needs and
to pay policyholder benefits. All significant amounts of cash,
short-term cash equivalents and long-term invested assets are held at the
operating company level.
The ability of life insurance companies to pay benefits under the
financial contracts made with their policyholders is directly related to
the integrity, credit quality and liquidity of their assets. USLICO's
investment policies have consistently emphasized diversification of risk,
creditworthiness and adequate liquidity to meet all operating
requirements.
The holding company's recurring source of funds is primarily dependent
upon dividends and management fees from the operating companies.
Additionally, proceeds from the sale of the company's three primary
property-casualty subsidiaries in the third quarter of 1991 provided
$96.5 million to the holding company, of which $85 million remained after
taxes and related expenses. The holding company in turn contributed $65
million to the life insurance subsidiaries to support their future
growth. Dividends from United Services Life amounting to $9.0 million
and $4.5 million, respectively, provided the other major sources of funds
at the holding company during 1992 and 1991.
The life subsidiaries experienced low statutory earnings levels during
1992, which restricted their capacity to pay dividends to the holding
company during 1993. In recognition of reduced availability of funds at
the holding company and of the insurance companies' need to retain
capital to support growth, the board of directors reduced the dividend to
shareholders from a $1.00 annual rate to a $0.24 annual rate in January
1993. At the new shareholder dividend rate, the holding company's annual
use of funds was reduced by $8.2 million.
During 1993, United Services Life paid no dividends to the holding
company. Its primary sources of funds consisted of management fees,
dividends from non-insurance subsidiaries and proceeds from the sale of
the maritime services businesses. The primary uses of funds were
interest expense, dividends to shareholders and the full payment of
USLICO Corporation's note payable amounting to $10.5 million to
Northeastern. At December 31, 1993, the holding company had net working
capital of $5.9 million.
Projections for the next several years indicate that USLICO Corporation's
sources of funds other than dividends from its life insurance
subsidiaries will be sufficient to meet its needs. To provide
flexibility in managing variations in the timing of cash flows, the
holding company arranged a $10 million line of credit in the first
quarter of 1994.
At the operating company level, invested assets are of high quality and
have not suffered from the credit problems experienced by some insurance
companies. USLICO's commitment to quality and the diversification and
performance of the bond and commercial mortgage portfolios are described
below.
Investment Income and Assets
Net investment income increased 5.2 percent to $198 million for 1993
versus $188 million for 1992. Gross pre-tax yield on an annualized basis
was 8.35 percent for 1993 down from 8.71 percent in 1992. The continued
decline in interest rates has resulted in new money and proceeds from
bonds called being reinvested at lower rates. Credited rates on
interest-sensitive insurance products have been reduced with the decline
in portfolio rates to enhance profitability from these products.
Bonds
Bonds represent 79 percent of the total consolidated investment asset
base. At year-end 1993, 97.7 percent of the bond portfolio carried
investment grade ratings. Holdings in below investment-grade bonds
totaled $46 million or only 2.3 percent. This is well within the
company's 5 percent investment guideline and continues to represent
corporate bonds of quality superior to that of the high-yield market as
a whole. At year-end 1993, all holdings were current as to principal and
interest payments. The market value of the long-term portfolios stood at
106 percent of amortized cost for a net unrealized gain of $129 million.
All fixed income investments are managed internally and sales are
executed primarily to remove deteriorating credits or to adjust for
changes in asset duration, which impact asset-liability management
objectives. As described in Note 1 of Notes to Consolidated Financial
Statements, the company plans to change its method of accounting for
fixed maturity investments effective January 1, 1994, in accordance with
new Statement of Financial Accounting Standards No. 115. As a result,
certain fixed maturity investments will be classified as available for
sale and carried at current market value. Changes in carrying value for
such securities will be reflected in shareholders' equity, net of
related income taxes and other adjustments.
During 1993 and 1992, interest rates declined to levels that offered
mortgage holders and bond issuers an opportunity to refinance their high
coupon debt. As a result, $298 million in 1993 and $187 million in 1992
were called for redemption, producing realized gains of $8.8 million in
1993 and $7 million in 1992.
In order to increase future call protection, funds were reinvested to a
greater degree in non-callable corporate bonds and structured
collateralized mortgage obligations without sacrificing quality and
liquidity. This will lessen overall interest-rate sensitivity, thereby
fostering more predictable levels of investment income.
Mortgages and Real Estate
On a consolidated basis, mortgage loans committed during 1993 totaled $36
million as compared to $23 million in 1992. Rates on commercial mortgage
loans are higher than those available in the public bond market and
USLICO's investment strategy continues to include mortgage loans in the
portfolios to increase the overall yield on life company assets. Another
attractive characteristic is that a significant number of USLICO's
mortgage loans have prepayment penalties. Since mortgages represent only
14 percent of the investment portfolio, yield enhancement is achieved
without materially affecting overall portfolio liquidity. The mortgage
portfolios of the life companies have an estimated fair value
approximately $27 million in excess of carrying value at year-end 1993.
As a matter of policy, mortgage loans are held until maturity.
Therefore, future yields in the mortgage portfolio are not expected to be
materially different from historical average yields. More than 65
percent of mortgage loans are on property located in California, Oregon
and Washington; more than 29 percent of mortgages are on property located
in Maryland and Virginia; and the remainder are on property located in 20
other states. Approximately 55 percent of outstanding loan balances are
on warehouse properties and 30 percent are on office buildings. The
average commercial mortgage loan balance is $1.1 million.
USLICO's conservative loan underwriting policies have resulted in
mortgage delinquency rates that have been on average 74 percent below the
industry rates during the past five years. Stated as a dollar
percentage, USLICO's 60-day delinquency rate at the end of 1993 was 2.89
percent compared to the most recently published life insurance industry
average of 4.38 percent.
During 1993, 1992 and 1991, $1.6 million, $1.8 million and $0.5 million,
respectively, of mortgage loans (net of reserves) were foreclosed and
added to investment in real estate. The book value of all real estate
acquired through foreclosure at year-end 1993 was $2.8 million. In
keeping with USLICO's conservative approach, the company has established
specific loan loss reserves of $4.8 million, and general loan loss
reserves of $4 million. This represents 2.5 percent of the consolidated
mortgage loan portfolio, and 36 percent of loans delinquent more than 60
days plus restructured loans.
USLICO's direct real estate holdings represent less than 1 percent of the
total invested asset base. The largest real estate assets are two home
office buildings, substantially all of which are occupied by its life
insurance subsidiaries.
Asset/Liability Matching
The operating companies sell many interest-sensitive products that
contain surrender charges which are designed to lengthen the expected
life of the liabilities related to these products. Approximately $2.1
billion, or 70 percent, of the consolidated life company liabilities are
of this nature.
The company's investment management practices give consideration not only
to investment quality, diversification, return and liquidity but also
recognize appropriate cash flow characteristics of assets purchased, and
match them as closely as possible with the structure of the
interest-sensitive liabilities. A continuous review process ensures that
asset maturity and duration are rebalanced as the related liabilities
change. Short-term liquidity is monitored daily for each of the
operating companies, and the consolidated position at year-end 1993
totaled $37.8 million in cash and short-term investments. Management
believes that the asset/liability matching practices and review process
protect the companies from most of the adverse results associated with
changes in interest rates. As a part of this discipline, the company
conducts computer simulations which model its fixed-maturity assets and
liabilities under stress-test interest rate scenarios. Based on
assumptions as to future interest rates and expenses, the company seeks
to achieve a desired spread between what it earns on assets and what it
pays on liabilities. These procedures, in combination with available
cash and short-term investments and the excellent marketability of the
bond portfolios, provide sufficient liquidity to meet all policyholder
obligations under the various insurance contracts when due.
Common Stock Repurchases
In 1987, USLICO's board approved the repurchase of up to 10 percent of
the then outstanding common stock, which represented a maximum buy-back
of 1,125,000 shares. Through 1991, a total of 722,981 shares had been
repurchased at an average cost per share of $21.33. No repurchases were
made during 1992 and 1993, and USLICO's management does not foresee
making additional stock repurchases in the near future.
<PAGE>
<PAGE>
The following Consolidated Statements of Income, Note 1 and Note 10
replace the corresponding financial statements and notes in Item 8.
<TABLE>
CONSOLIDATED STATEMENTS OF INCOME
Year Ended December 31
(In thousands)
1993 1992 1991
<S> <C> <C> <C>
Revenues
Premiums and other considerations $191,239 $177,124 $208,381
Net investment income (Note 3) 197,891 188,063 173,642
Realized investment gains (Note 3) 14,717 5,432 2,376
Other income 11,577 8,168 8,906
Gain on ship registry sale 2,114 - -
------- ------- -------
Total revenues 417,538 378,787 393,305
Benefits and Expenses
Death, surrender and other benefits 138,858 143,199 176,321
Increase in policy reserves 121,908 117,992 107,013
Amortization of deferred policy
acquisition costs 41,131 60,693 20,438
Interest expense 8,017 8,103 8,129
General expenses 52,380 43,746 36,948
Commissions, premium taxes and fees 31,473 30,754 50,039
Goodwill write-off (Note 10) - 19,439 -
------- ------- ------
Total benefits and expenses 393,767 423,926 398,888
OPERATING INCOME (LOSS) BEFORE
INCOME TAXES 23,771 (45,139) (5,583)
Income taxes (benefit) (Note 4) 191 (8,908) (2,288)
------ ------ -----
Income (loss) after income taxes 23,580 (36,231) (3,295)
Write-down of foreign investment
(Note 2) - - (7,189)
------ ------ ------
Operating income (loss) before
discontinued operations and
cumulative effect of accounting
changes 23,580 (36,231) (10,484)
Discontinued property and casualty
operations (Note 2):
Subsidiaries sold in 1991:
Loss prior to sale, net of tax - - (916)
Gain on sale, net of tax - - 34,636
Write-down of investment in reinsurance
business, net of tax - (9,954) (12,000)
------ ------ ------
Income (loss) before cumulative effect
of accounting changes 23,580 (46,185) 11,236
Cumulative effect of accounting changes
(Notes 1 and 4) - (9,828) -
------ ------ ------
NET INCOME (LOSS) $23,580 $(56,013) $11,236
Net Income Per Share
Primary
Operating income (loss) $2.19 $(3.37) $(0.98)
Discontinued operations - (.93) 2.02
Cumulative effect of accounting
changes - (.91) -
---- ---- ----
Net income (loss) $2.19 $(5.21) $1.04
Fully Diluted
Operating income (loss) $2.04 $(3.37) $(0.98)
Discontinued operations - (.93) 2.02
Cumulative effect of accounting
changes - (.91) -
---- ---- ----
Net income (loss) $2.04 $(5.21) $1.04
<FN>
See accompanying notes to consolidated financial statements.
</TABLE>
<PAGE>
<PAGE>
Note 1 - Significant Accounting Policies
Basis of Presentation. The consolidated financial statements are
prepared in accordance with generally accepted accounting principles
(GAAP) and include USLICO Corporation and its subsidiaries (USLICO).
USLICO's insurance subsidiaries file financial statements with state
regulatory authorities using statutory accounting practices, which differ
from GAAP. The combined statutory net income and shareholders' equity of
the life insurance subsidiaries are as follows:
1993 1992 1991
(in thousands)
Net income (loss) $11,036 $(3,672) $(4,386)
Shareholders' equity $126,060 $116,776 $143,240
The excess of the shareholders' equity of the insurance subsidiaries on
a GAAP basis over that determined on a statutory basis is not available
for distribution to shareholders.
Principles of Consolidation. The financial statements include the
accounts of USLICO on a consolidated basis. Discontinued property and
casualty operations are carried on a one-line basis (Note 2). The
results of all significant intercompany transactions have been
eliminated. Certain reclassifications have been made to prior-year
financial statements to conform to the 1993 presentation.
Recognition of Policy Revenue and Related Expenses varies depending upon
the type of insurance product. For traditional life products with fixed
and guaranteed premiums and benefits, such as whole life and term
insurance policies, premiums are recognized when due. Benefits and other
expenses for these products are associated with earned premiums and other
sources of earnings so as to result in recognition of profits over the
premium-paying period of the contracts. This association is accomplished
by means of the provision for liabilities for future benefits (policy
reserves), the deferral and amortization of policy acquisition costs and
the recognition of unearned premiums and unpaid claims.
Universal life-type products consist of universal life, other
interest-sensitive life insurance policies and annuities. Each of these
products has a stated account balance that is credited with policyholder
premiums and interest. Assessments are made against the account balance
for mortality charges, surrender charges and expenses. The amounts
credited to and assessed against the account balance generally are not
fixed but may be subject to certain limits.
Premiums collected on universal life-type policies are reported as
deposits to the policyholder account balance and not as revenue to
USLICO. Revenue to USLICO consists of the assessments for mortality
costs, surrenders and expenses, which are reported in the Consolidated
Statements of Income as premiums and other considerations. Additionally,
the excess of earned investment income over the interest credited to the
policyholder account balances is a significant source of income to
USLICO.
Benefits and other expenses for universal life-type policies are
recognized over the period of time during which income is earned on the
policies. This matching of expenses with income is accomplished by means
of the deferral and amortization of policy acquisition costs and deferred
revenues.
Policy Reserves. The liability for policy reserves on traditional
products has been computed primarily on the net level premium method
using estimated future investment yields, withdrawals, mortality and
other assumptions based upon USLICO's experience as adjusted to provide
for risk of possible adverse deviation from the assumptions where
appropriate. Reserves for universal life-type products are based on the
accumulated contract values. Interest rate assumptions for all products
ranged from 2.5 percent to 9.25 percent at December 31, 1993.
Deferred Revenue Liability consists of the unamortized portion of
front-end loads associated with certain universal life-type policies.
These amounts represent compensation to USLICO for services to be
provided in future periods and are recognized in income over the period
during which income is earned on the policies. This recognition is
determined using the same assumptions that are used in the amortization
of deferred policy acquisition costs.
Deferred Policy Acquisition Costs. The costs of acquiring new business
(principally sales commissions and marketing expenses), which vary with
and are directly related to the production of new business, have not been
charged to expense when incurred.
For traditional life products, such expenses have been deferred and are
amortized over the premium-paying period of the related policies in
proportion to the ratio of annual premium revenue to total anticipated
premium revenue, using the same assumptions that are used to compute
policy reserves.
For universal life-type products, the deferred expenses are amortized in
proportion to the ratio of USLICO's annual earnings on the contracts
(including realized investment gains) to total anticipated contract
earnings. Amortization is determined using assumptions as to investment
spread, withdrawals, mortality and expenses based on USLICO's experience.
If it is determined that future experience will likely differ
significantly from that which was previously assumed, the estimates are
revised.
Deferred acquisition costs are reviewed regularly to determine that the
unamortized portion of such costs does not exceed recoverable amounts.
During 1992, the company increased the number of separate product lines
used for recoverability testing to be consistent with a new market focus
instituted by management at the end of 1992. This method is preferable
in the circumstances because recoverability tests will be consistent with
the way the company now measures the profitability of its insurance
products. In addition, certain actuarial assumptions regarding future
experience were modified to reflect the results of product profitability
studies completed in the latter part of 1992. Both of these changes resulted
in nonrecoverable deferred costs and amortization adjustments for certain
product lines in the amount of $30.2 million pre-tax.
The balance of deferred policy acquisition costs includes the unamortized
value of purchased in-force insurance business at December 31, 1993 and
1992, which was $6.5 million and $11.7 million, respectively.
Amortization of this value, included with the amortization of deferred
policy acquisition costs, for the years ended December 31, 1993, 1992 and
1991, respectively, was $5.2 million, $2.3 million and $2.6 million.
Foreign Currency Translation Adjustments. All assets and liabilities of
foreign operations are translated into U.S. dollars at year-end exchange
rates, and revenue and expenses at average rates for the year. The
resulting translation adjustment is reflected as a separate component of
shareholders' equity.
Investments. Fixed maturity investments, primarily consisting of
publicly traded bonds, are classified at the time of purchase. If USLICO
has the intent and ability at the time of purchase to hold securities
until maturity, they are classified as held-to-maturity investments and
carried at cost adjusted for accrual of discount and amortization of
premium. At December 31, 1993, all fixed maturity investments were
classified as held-to-maturity and carried at amortized cost.
Effective January 1, 1994, in accordance with Statement of Financial
Accounting Standards No. 115, Accounting for Certain Investments in Debt
and Equity Securities, fixed maturity investments that may not be held to
maturity will be classified as available for sale and carried at current
market value. Financial statements for prior periods will not be
restated. Changes in carrying value for such securities will be
reflected in shareholders' equity, net of related income taxes and other
adjustments. Securities available for sale will include securities that
management may sell as part of its asset/liability management strategy,
or that may be sold in response to changes in interest rates and other
factors. The company has not yet determined the effect of this new
accounting standard on its financial statements.
Equity securities, consisting primarily of nonredeemable preferred
stocks, are carried at current market value. The market value of
publicly traded issues is based upon quoted market prices on the balance
sheet date. Market value of issues not publicly traded represents
estimated fair value as determined by management. Changes in carrying
value of equity securities are reflected in shareholders' equity, net of
applicable income taxes.
Mortgage loans and policy loans are carried at their aggregate unpaid
balances, and mortgage loans are carried net of an allowance for
potential uncollectible balances of $8.8 million and $8.4 million as of
December 31, 1993, and 1992, respectively. The carrying value of
impaired loans is based on the estimated fair value of the loan
collateral.
Statement of Financial Accounting Standards No. 114, issued in May 1993,
establishes new standards for accounting by creditors for impairment of
certain loans, effective for fiscal years beginning after December 15,
1994. It applies to uncollateralized as well as collateralized loans,
and to all loans that are restructured in a troubled debt restructuring
involving a modification of terms. The standard requires that impaired
loans that are within the scope of the statement be measured based on the
present value of expected future cash flows discounted at the loan's
effective interest rate or, as a practical expedient, at the loan's
observable market price or the fair value of the collateral if the loan
is collateral dependent. The company has not yet adopted this new
standard, and has not yet determined the effect of this new
accounting standard on its financial statements.
Realized investment gains and losses are recorded by the specific
identification method.
Fair Values of Financial Instruments. The following methods and
assumptions were used by the company in estimating its fair value
disclosures for financial instruments:
Investment securities: Fair values for fixed maturity securities are
based on quoted market prices, where available. For fixed maturity
securities not actively traded, fair values are estimated using values
obtained from independent pricing services. The fair values for equity
securities are based on quoted market prices, when available, or
estimates determined by management. USLICO's equity securities consist
primarily of nonredeemable preferred stocks.
Mortgage loans and policy loans: The fair values for mortgage loans and
policy loans are estimated using discounted cash flow analyses, based
on interest rates currently being offered for similar loans to borrowers
with similar credit ratings. Loans with similar characteristics are
aggregated for purposes of the calculations. The fair values of these
loans may not represent the amounts that would be realized upon sale.
Long-term debt: The fair value of USLICO's convertible subordinated
debentures is based on quoted market prices.
Cash, short-term investments, and certain other assets and liabilities
of the company, which also constitute financial instruments, have fair
values that approximate their carrying values.
Participating Policies. Approximately 8.5 percent and 7.4 percent of the
life insurance in force as of December 31, 1993 and 1992, respectively,
and 14.0 percent, 12.7 percent and 12.7 percent of life premium income
(statutory basis) in 1993, 1992 and 1991, respectively, was participating
business, which provides for an annual dividend at the end of each policy
year. Dividends to participating policyholders for the years ended
December 31, 1993, 1992 and 1991 were $5.9 million, $6.8 million and $7.2
million, respectively.
Separate Accounts. The separate account assets and liabilities
represent: (1) funds that are separately administered for variable life
and variable annuity contracts for which the owner of the contract bears
the investment risk; and (2) the assets of USLICO's qualified pension
plan.
Income Taxes. USLICO and its subsidiaries file a consolidated federal
income tax return. Deferred income taxes are provided for temporary
differences between financial statement and tax return bases, using the
asset and liability method. This method was adopted as of January 1,
1992, in accordance with Statement of Financial Accounting Standards No.
109, Accounting for Income Taxes. Financial statements for prior periods
have not been restated.
Pursuant to the deferred method under APB Opinion 11, which was applied
in 1991 and prior years, deferred income taxes are recognized for income
and expense items that are reported in different years for financial
reporting purposes and income tax purposes using the tax rate applicable
in the year of the calculation. Under the deferred method, deferred
taxes are not adjusted for subsequent changes in tax rates (see Note 4).
Earnings Per Share. Weighted average shares outstanding used in the
computation of primary earnings per share for 1993, 1992 and 1991,
respectively, are 10,755,652, 10,755,701 and 10,776,748. Earnings per
share on a fully diluted basis reflect conversion of the convertible
subordinated debentures to shares of common stock and elimination of the
interest expense on the debentures.
Postretirement Benefits Other Than Pensions. Statement of Financial
Accounting Standards No. 106, issued in December 1990, established new
accounting standards for recognizing the cost of postretirement benefits
other than pensions. It significantly changed the prevalent practice of
accounting for postretirement benefits other than pensions on a
pay-as-you-go (cash) basis by requiring accrual, during the years that an
employee renders the necessary service, of the expected cost of providing
those benefits to an employee. USLICO adopted the new accounting
standard in 1992, and the cumulative effect of the accounting change was
$0.3 million (net of tax).
Postemployment Benefits. Statement of Financial Accounting Standards No.
112, issued in November 1992, established new accounting standards for
employers who provide benefits to former or inactive employees after
employment but before retirement, effective for fiscal years beginning
after December 15, 1993. This new standard, adopted by the company in
1993, has no effect on USLICO's financial statements.
Note 10 - Goodwill Write-off
In 1992 USLICO wrote off $19.4 million of goodwill related to two former
life insurance subsidiaries that were merged into United Services Life
Insurance Company, USLICO's primary subsidiary. The two subsidiaries
had been purchased in 1982 and 1984. For many years after acquisition,
the two subsidiaries operated autonomously, continuing to follow their
former business stategies. As the 1980's were coming to a close, it
was apparent that USLICO's life insurance business was not achieving
satisfactory profitability, in part due to the intensively competitive
environment that had developed during the 1980's. To counter these
trends, management began a process of consolidating various functions
among USLICO's life insurance subsidiaries in an effort to improve
efficiency and reduce costs. In late 1991, the company consolidated
the agent support and new business processing functions of the two
subsidiaries in Arlington in furtherance of its cost reduction goals.
These changes were accompanied by the introduction of new products and
computer processing systems that were further aimed at the growing need
to improve profitability. However, these steps had the opposite of
their intended effect. Independent agents became increasingly unhappy
with the company's service, and during 1992 began to shift much of their
new business production to other life insurance companies. This was
particularly true for the former agents from the two subsidiaries. As a
result of these developments, it is management's opinion that the goodwill
had no continuing value due to the elimination of the separate insurance
company products, licenses and independent status.
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
Amendment to be signed on its behalf by the undersigned, thereunto
duly authorized.
USLICO CORPORATION
(Registrant)
GLENN H. GETTIER, JR.
GLENN H. GETTIER, JR.
EXECUTIVE VICE PRESIDENT
CHIEF FINANCIAL OFFICER AND DIRECTOR
DECEMBER 1, 1994
(Date)
