UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
F O R M 10-K
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.
DOCUMENTS INCORPORATED BY REFERENCE
List hereunder the following documents if incorporated by reference and the
part of the Form 10-K into which the document is incorporated:
Document Part
Annual Report to Shareholders II
Proxy Statement filed March 29, 1994 I, III<PAGE>
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CONTENTS
PART I
Item 1. Business of USLICO..................................1
Item 2. Properties..........................................5
Item 3. Legal Proceedings...................................5
Item 4. Submission of Matters to a Vote of Security Holders.6
PART II
Item 5. Market for Registrant's Common Stock
and Related Stockholder Matters....................7
Item 6. Selected Financial Data.............................7
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operation.................7
Item 8. Financial Statements and Supplementary Data.........7
Item 9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure.............7
PART III
Item 10. Directors and Executive Officers of the Registrant..7
Item 11. Executive Compensation..............................7
Item 12. Security Ownership of Certain Beneficial Owners
and Management.....................................7
Item 13. Certain Relationships and Related Transactions......8
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.
(a) 1. Financial Statements - USLICO Corporation
and Subsidiaries..............................8
2. Financial Statement Schedules -
USLICO Corporation and Subsidiaries...........8
3. Index to Exhibits..............................8
(b) 1. Reports on Form 8-K............................8
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PART I
ITEM 1. BUSINESS OF USLICO
USLICO Corporation (USLICO) is an insurance holding company incorporated
under the laws of Virginia in 1983. In 1984, USLICO became the parent
company of the United Services Life group of companies upon the conversion
and exchange of the common stock of United Services Life for USLICO common
stock on a one-for-one basis. USLICO owns two life insurance companies and
several smaller subsidiaries that provide such services as investment
management and sale of insurance and other financial products.
LIFE INSURANCE COMPANIES
USLICO's subsidiary life insurance companies are authorized to write all
forms of life insurance, annuities (including variable annuities) and
accident and health insurance. The life companies, which collectively
write business in all U.S. jurisdictions, Europe, and the Far East, are
individually licensed in the following jurisdictions:
- United Services Life Insurance Company ("United Services"), the
predecessor of which was formed in 1937, is licensed in all states,
except New York (where it is an accredited reinsurer), and in the
District of Columbia, Guam, and Japan.
- Bankers Security Life Insurance Society ("Bankers Security"), acquired
in 1979, is licensed in all states, the District of Columbia, and the
Dominican Republic.
- Two other life insurance subsidiaries were merged into United Services
in 1992: Provident Life Insurance Company, which was acquired in 1982,
and United Olympic Life Insurance Company, which was acquired in 1984.
The life insurance subsidiaries sell three major product lines: (1)
individual life insurance, (2) payroll deduction and group life, and (3)
individual annuities. See the accompanying 1993 Annual Report for further
information regarding the business of USLICO.
Underwriting
The life insurance companies offer ordinary life, universal life, variable
life, and term insurance with accidental death and waiver of premium
benefits. The life companies also offer group term life insurance and
group association life insurance. As of December 31, 1993, the life
companies had $31.3 million of variable life separate account assets.
Accident and health policies include group medical, long-term disability,
and accidental death and dismemberment coverages. The life companies also
sell individual fixed and variable annuities on both a tax-qualified and
non tax-qualified basis. As of December 31, 1993, as a result of variable
annuity sales, the life companies had $198.4 million under management in
variable annuity separate accounts.
1<PAGE>
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Depending upon the age and classification of the risk, the life companies
retain varying amounts of insurance up to a maximum ranging between $10,000
and $400,000 on any one life. As of December 31, 1993, the aggregate
amount of reinsurance ceded was $10.4 billion and the life companies had
accepted $5.0 billion of SGLI (Servicemen's Group Life Insurance)
reinsurance.
For individual life insurance, medical examinations may be required for any
ages or amounts if information received indicates a need for examination.
Approximately 50% of individual applications are issued without requiring
a full medical examination. Blood testing is required for all proposed
insureds ages 25 through 45 for amounts greater than $100,000.
For life policies issued to individuals in payroll deduction cases, the
life companies have a guaranteed issue program for groups of 50 or more
participants. Beyond guaranteed issue amounts, some limited underwriting
is performed.
Underwriting with respect to annuities is minimal. Profitability is
determined primarily by the investment spread earned on annuity assets.
The individual annuities sold by the life companies have no bail-out
provisions (with the exception of one annuity form sold in immaterial
amounts in certain states).
Competition and Regulation
The life insurance industry is highly competitive. There are more than
2,000 legal reserve life insurance companies in the United States, many of
which compete with subsidiaries of USLICO in one or more jurisdictions in
which they are authorized to transact business. Competition in the
insurance field is based upon price, product design, and services rendered
to policyholders and agents.
The insurance subsidiaries are subject to regulation and supervision by
their states of incorporation and by other states in which they do
business, including regulations governing rates, standards of solvency and
business conduct, and rehabilitation and liquidation of insurance
companies. In addition, the states generally require the licensing of
insurers and their agents and approval of policy forms, prescribe the form
and content of statutory financial statements, and restrict the type and
concentration of investments. USLICO also is subject to the laws of
several states regulating insurance holding companies. These laws
generally impose reporting requirements on such companies and require that
any subsidiary insurance company's surplus be reasonable in relation to its
liabilities and adequate for its financial needs following any
distributions with respect to capital stock made to affiliated companies.
In addition, state laws generally provide for a ceiling on dividends which
a holding company's operating insurance subsidiaries can pay without prior
approval by state regulatory authorities. United Services must obtain
prior regulatory approval, from the Virginia Bureau of Insurance, for any
dividend if the amount of such dividend, together with all other dividends
paid in the preceding 12 calendar months, exceeds the lesser of (a) 10% of
the statutory policyholders surplus or (b) the net gain from operations as
of the end of the prior calendar year. Bankers Security, as a New York
domiciled company, must obtain prior approval of the New York Insurance
Department for any dividend. Such approval generally is granted if
2<PAGE>
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dividends paid in the 12 most recent calendar months do not exceed the
lesser of (1) 50% of the net gain from operations for the prior calendar
year or (2) the increase in surplus for the prior calendar year.
State insurance regulators monitor the capital adequacy of life insurance
companies by means of Risk-Based Capital (RBC) ratios that relate each
insurer's actual statutory capital and surplus to a calculated level of
capital needed to support different types of risk inherent in the assets
and liabilities of the company. RBC ratios below certain levels call for
various forms of regulatory intervention. The ratios at December 31, 1993,
for both United Services and Bankers Security were more than double the
highest level that would require even the most minimal level of regulatory
action.
Insurance Ratings
A. M. Best Company is the acknowledged statistical reporter on the
financial condition, history and operating results of insurance companies.
Best's ratings are classified in gradations from A++ (Superior) through C-
(Marginal). The rating reflects the relative financial strength of the
company in comparison to industry performance in such areas as
underwriting, control of expenses, reserve adequacy and asset quality.
United Services and Bankers Security each received A (Excellent) ratings
in 1993. Ratings for 1994 had not been assigned by the date this report
was filed. It should be noted that Best's ratings are published for the
benefit of policyholders and not for the benefit of shareholders.
Standard & Poor's (S&P) rates the claims-paying ability of insurance
companies from the highest level of AAA (Superior) to the lowest levels of
CCC (Extremely vulnerable) and R (Regulatory action). United Services and
Bankers Security each had ratings of A+ (Good financial security) as of the
date of this Annual Report.
Ownership of USLICO Common Stock
United Services owned 300,000 shares of USLICO common stock at December 31,
1993, and the USLICO retirement plan held 273,446 shares of USLICO common
stock.
Personnel
The life companies employ approximately 685 full-time employees, none of
whom is represented by a union.
PROPERTY AND CASUALTY INSURANCE COMPANIES
USLICO carried out property and casualty insurance operations through three
wholly-owned insurance subsidiaries which were sold in July of 1991. A
fourth subsidiary, The Northeastern Insurance Company of Hartford
("Northeastern"), was a property and casualty reinsurer. Northeastern
ceased writing new business during 1986, commuted substantially all
reinsurance liabilities effective December, 1993, and surrendered its
insurance licenses in early 1994. See the discussion of discontinued
operations in the Financial Review section on page of the accompanying
1993 Annual Report to Shareholders incorporated by reference herein for
further information regarding Northeastern.
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OTHER BUSINESSES
USLICO owned The International Trust Company of Liberia, Monrovia, Liberia
until August 1993, when it was sold. See Note 2 to Consolidated Financial
Statements of the accompanying 1993 Annual Report to Shareholders
incorporated by reference herein.
USLICO owns International Risks, an insurance agency that sells multiple
lines of insurance products, including property and casualty insurance and
life and health coverages. The agency markets individual, group and
payroll deduction products underwritten by approximately fifteen insurance
companies. International Risks employs 16 full-time employees, none of
whom is represented by a union.
USLICO owns a broker-dealer, USLICO Securities, which is a distributor for
the fixed and variable annuities marketed by United Services and Bankers
Security and which offers mutual funds through its registered
representatives. USLICO Securities employs a full-time staff of 11, none
of whom is represented by a union.
INVESTMENTS OF USLICO
For information regarding USLICO's investment portfolio, see Note 3 to
Consolidated Financial Statements of USLICO Corporation in the accompanying
1993 Annual Report to Shareholders incorporated by reference in this Form
10-K as Exhibit 13.
Management actively monitors its commercial mortgage loan portfolios.
Commercial properties are inspected on a yearly basis and inspection
reports are documented in each file. Particular emphasis is placed upon
loans that have one or more of the following conditions:
1. Past due principal and interest payment
2. Past due real estate tax payment
3. Past due hazard insurance premium payment
4. High vacancy rate in subject building (less than breakeven occupancy)
5. High vacancy rate and/or declining property values in neighborhood
of subject building
6. Substantive number of leases expiring prior to loan maturity
7. Higher than market rental rates of tenants in subject building
8. Bankruptcy or financial difficulty of borrower
9. Bankruptcy or financial difficulty of major tenants
10. Deferred maintenance
11. Potential environmental liability
On a loan by loan basis, management establishes a loan loss reserve for
those loans where there is a reasonable likelihood that a loss will be
incurred. The amount of the loss reserve for each loan is determined by
estimating the difference between the outstanding loan balance and the
estimated market value of the property less foreclosure and selling costs.
The reserve calculation is also a function of the probability of ultimate
loss. These specific loss reserves totaled $4.8 million at December 31,
1993. A full narrative appraisal is prepared by an independent appraiser
at the time of foreclosure. In addition, the Company establishes aggregate
unspecified loss reserves based on overall loan portfolio factors. This
general reserve was $4 million at December 31, 1993.
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The following table sets forth information on nonaccrual, past due
(accruing loans more than 90 days delinquent) and restructured mortgage
loans on real estate:
<TABLE>
NonAccrual Past Due Restructured
<S> <C> <C> <C>
12/31/93 principal balance $5,312,500 $0 $14,661,485
Gross income that would have been
reported in 1993 if the loans had
been current $ 651,641 0 $ 1,771,622
Interest income that was included
in net income in 1993 423,284 0 1,562,904
Excluded income $ 228,357 $ 208,718
</TABLE>
USLICO's policy is to stop the accrual of income on mortgage loans more
than 90 days delinquent. All mortgage loans on real estate are located
within the United States. Approximately 54% of the loans are on warehouse
properties and 30% are on office buildings.
As of December 31, 1993, 18 mortgage loans on real estate totaling $24.3
million are considered to be potential problem loans, not reported above,
based on knowledge about possible credit problems of borrowers. Of these
loans, 17 were current and one was 30 days delinquent. A loss reserve of
$350,000 was established at 12/31/93 against one of these loans. The ratio
of net charge-offs during 1993 to average loans outstanding during 1993 was
0.4%.
ITEM 2. PROPERTIES
USLICO owns no real estate except through subsidiaries.
Bankers Security owns a 60,000 square foot office building, completed in
1980, at 950 North Glebe Road, Arlington, Virginia. USLICO's life
companies occupy 77% of this property.
United Services owns a 72,000 square foot office building at 316 North 5th
Street, Bismarck, North Dakota, completed in 1954, and occupies 54% of its
space.
At December 31, 1993, Bankers Security and United Services owned total
foreclosed properties of $3 million.
ITEM 3. LEGAL PROCEEDINGS
United Olympic Life Insurance Company ("UOL") and Bankers Security Life
Insurance Society ("BSL") are subsidiaries of USLICO (the "Company"). UOL
was merged into another subsidiary, United Services Life Insurance Company
("USL"), on October 1, 1992. In United Olympic Life Insurance Company, et.
al. v. The Delaware County Bank and Trust Company ("the Bank"), Case No.
C2-91-1076, in the United States District Court for the Southern District
of Ohio, Eastern Division, United Olympic Life Insurance Company, et. al.
v. Consultants and Administrators, Inc., Case No. C2-92-142, in the United
States District Court for the Southern District of Ohio, Eastern Division,
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and The Delaware County Bank and Trust Company vs. United Olympic Life
Insurance Company, et. al., Case No. 92CV-H-01-015, in the Court of Common
Pleas for Delaware County, Ohio, USL and BSL seek to recover approximately
$10 million in consequential damages and $20 million in punitive damages
from the Bank for the wrongful transfer by the Bank of premium trust funds
to satisfy indebtedness of Consultants and Administrators ("C&A"), a third
party administrator, and for the wrongful dishonoring by the Bank of checks
drawn on accounts at the Bank. The Bank has counterclaimed against USL,
BSL and C&A alleging a conspiracy to defraud the Bank and others and
tortious interference with the business relationship between the Bank and
C&A. The Bank seeks compensatory damages of $20 million and an unspecified
amount of punitive damages. C&A was also sued by USL and BSL and the Bank,
and C&A has in turn filed claims against the Bank, USL and BSL claiming
damages for alleged breach of contract, wrongful attachment,
intentional/negligent interference, fraud, abuse of process and malicious
prosecution. C&A alleges damages of $15 million, requests punitive damages
of $40 million plus consequential damages in an amount to be determined.
In United Olympic Life Insurance Company, et. al. v. Consultants and
Administrators, Inc. et. al. Case No. C2-92-150, in the United States
District Court for the Southern District of Ohio, Eastern Division, USL and
BSL have filed a declaratory judgment action to determine proper allocation
of approximately $200,000 in commissions. After the Court issued an
opinion effectively ruling that C&A had a right to direct how commissions
which were due should be paid, USL paid all but approximately $10,000 of
the commissions and is now waiting for further communication from C&A on
further payment. USL and BSL also have sued Paul Bargnesi, President of
C&A, individually for approximately $300,000 for breach of contract. Mr.
Bargnesi has counterclaimed for unspecified compensatory and punitive
damages arising from alleged severe emotional distress and damage to
reputation. C&A has also filed counterclaims in this action essentially
identical to those described in the second case (Case No. C2-92-142) above.
The Company believes its subsidiaries have substantial defenses to all of
the claims asserted by C&A, the Bank and Mr. Bargnesi in all cases.
The Company, including its subsidiaries, is engaged in other litigation in
the ordinary course of business. In the opinion of management, the
litigation is not material.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The information required in answer to this item is incorporated by
reference to USLICO Corporation's definitive proxy statement filed March
29, 1994, for use in connection with the Annual Meeting of Shareholders to
be held on April 29, 1994.
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER
MATTERS
The common stock and dividend information appearing on page of the
accompanying 1993 Annual Report to Shareholders is incorporated by
reference in this Form 10-K Annual Report as Exhibit 13.
ITEM 6. SELECTED FINANCIAL DATA
The five-year financial data appearing on page of the accompanying 1993
Annual Report to Shareholders is incorporated by reference in this Form 10-
K Annual Report as Exhibit 13.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATION
The information required in answer to this item appears on pages through
of the accompanying 1993 Annual Report to Shareholders incorporated by
reference in this Form 10-K Annual Report as Exhibit 13.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Consolidated Financial Statements, Notes to Consolidated Financial
Statements, and Report of Independent Auditors appearing on pages
through of the accompanying 1993 Annual Report to Shareholders are
incorporated by reference in this Form 10-K Annual Report as Exhibit 13.
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
Information regarding directors and executive officers of the Registrant
is incorporated by reference to USLICO Corporation's definitive proxy
statement filed March 29, 1994, for use in connection with the Annual
Meeting of Shareholders to be held on April 29, 1994.
ITEM 11. EXECUTIVE COMPENSATION
Information regarding executive compensation is incorporated by reference
to USLICO Corporation's definitive proxy statement filed March 29, 1994,
for use in connection with the Annual Meeting of Shareholders to be held
on April 29, 1994.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information regarding beneficial ownership of USLICO Corporation's voting
securities by directors, officers, and persons who, to the best knowledge
of USLICO Corporation, are known to be beneficial owners of more than five
percent of USLICO Corporation's voting securities as of March 1, 1994, is
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incorporated by reference to USLICO Corporation's definitive proxy
statement filed March 29, 1994, for use in connection with the Annual
Meeting of Shareholders to be held on April 29, 1994.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
None.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(A) 1. FINANCIAL STATEMENTS - USLICO CORPORATION AND SUBSIDIARIES.
The following financial statements of USLICO Corporation and
Subsidiaries, together with the report of independent auditors
thereon, are included in Part II of this report by incorporation
by reference.
Consolidated Balance Sheets at December 31, 1993 and 1992
Consolidated Statements of Income for the three years ended
December 31, 1993
Consolidated Statements of Cash Flows for the three years ended
December 31, 1993
Notes to Consolidated Financial Statements
Report of Independent Auditors
2. FINANCIAL STATEMENT SCHEDULES - USLICO CORPORATION AND
SUBSIDIARIES
The following schedules of USLICO Corporation and subsidiaries
together with the applicable report of independent auditors
thereon, are submitted herewith.
Independent Auditors' Report on
Financial Statement Schedules 9
Schedule I - Summary of Investments at
December 31, 1993 10
Schedule III - Condensed Financial Information of
Parent Company 11
Schedule VI - Reinsurance 16
Schedule IX - Short-Term Borrowings 17
Other schedules are omitted because of the absence of conditions
under which they are required or because the required information
is given in the consolidated financial statements or notes.
3. INDEX TO EXHIBITS 18
(B) 1. REPORTS ON FORM 8-K
None.
8<PAGE>
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INDEPENDENT AUDITORS' REPORT ON FINANCIAL STATEMENT SCHEDULES
TO: The Board of Directors and Shareholders of USLICO Corporation
Under date of February 23, 1994, we reported on the consolidated balance
sheets of USLICO Corporation and subsidiaries as of December 31, 1993 and
1992, and the related consolidated statements of income and cash flows for
each of the years in the three-year period ended December 31, 1993, as
contained in the 1993 Annual Report to Shareholders. These consolidated
financial statements and our report thereon are incorporated by reference
in the Annual Report on Form 10-K for the year 1993. In connection with
our audits of the aforementioned consolidated financial statements, we also
have audited the related financial statement schedules as listed in the
accompanying index. These financial statement schedules are the
responsibility of the Company's management. Our responsibility is to
express an opinion on the financial statement schedules based on our
audits.
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.
As discussed in Notes 1 and 4 to the consolidated financial statements, the
Company changed its method of accounting for income taxes by adopting the
provisions of the Financial Accounting Standards Board's Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes" in
1992. As discussed in Note 1 to the consolidated financial statements, the
Company also adopted the provisions of the Financial Accounting Standards
Board's Statement of Financial Accounting Standards No. 106, "Employers'
Accounting for Postretirement Benefits Other than Pensions" in 1992.
KPMG Peat Marwick
Washington, D.C.
February 23, 1994
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<TABLE>
SCHEDULE I
USLICO CORPORATION
SUMMARY OF INVESTMENTS AT DECEMBER 31, 1993
Amount at which
Market Shown in the
Type of Investment Cost Value Balance Sheet
(in thousands)
<S> <C> <C> <C>
Fixed maturities
Bonds
U.S. government and government agencies
and authorities...................... $ 410,062 $ 430,057 $ 410,062
States, municipalities and political
subdivisions......................... 7,379 7,610 7,379
Foreign governments...................... 13,306 14,731 13,306
Public utilities......................... 422,128 451,313 422,128
All other corporate...................... 1,138,808 1,217,011 1,138,808
Redeemable preferred stock............... 3,251 3,253 3,251
--------- --------- ---------
Total fixed maturities............... 1,994,934 2,123,975 1,994,934
Equity securities
Common Stocks
Industrial and miscellaneous............. 198 153 153
Nonredeemable preferred stocks............ 5,449 5,470 5,470
----- ----- -----
Total equity securities.............. 5,647 5,623 5,623
Mortgage loans on real estate.............. 341,713 341,713
Real estate investment properties.......... 3,351 3,351
Real estate acquired in satisfaction
of debt................................... 2,980 2,980
Policy loans............................... 129,152 129,152
Short-term investments..................... 31,108 31,108
Other invested assets...................... 12,755 14,092
--------- ---------
Total investments.................... $2,521,640 $2,522,953
</TABLE>
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<TABLE>
SCHEDULE III
USLICO CORPORATION
CONDENSED FINANCIAL INFORMATION OF PARENT COMPANY
Balance Sheets
Parent Company
as of December 31
1993 1992
(in thousands)
ASSETS
<S> <C> <C>
Cash and bank deposits.................... $ 145 $ 103
Short-term investments,
at cost (which approximates market)..... 5,708 11,188
Other assets.............................. 20,459 18,841
Investments in subsidiaries............... 351,805 326,510
------- -------
Total Assets........................ $ 378,117 $ 356,642
LIABILITIES AND SHAREHOLDERS' EQUITY
Convertible subordinated debentures....... $ 97,750 $ 97,750
Other liabilities......................... 4,545 4,945
------- -------
Total Liabilities................... 102,295 102,695
Shareholders' equity:
Common stock............................. 14,460 14,455
Additional paid-in capital............... 266,659 266,586
Net unrealized investment gains on
marketable equity securities held
by subsidiaries......................... 8,477 7,728
Foreign currency translation adjustments. (1,600) (1,650)
Retained earnings........................ 76,938 55,940
Treasury stock, at cost.................. (89,112) (89,112)
------- -------
Total Shareholders' Equity.......... 275,822 253,947
------- -------
Total Liabilities and Shareholders'
Equity............................ $ 378,117 $ 356,642
<FN>
See accompanying note to condensed financial information.
</TABLE>
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<TABLE>
SCHEDULE III
(cont.)
USLICO CORPORATION
CONDENSED FINANCIAL INFORMATION OF PARENT COMPANY (cont.)
Income Statements
Parent Company
Years ended December 31
1993 1992 1991
(in thousands)
INCOME
<S> <C> <C> <C>
Equity in earnings (loss) of subsidiaries*.. $ 27,461 $(49,277) $ 49,907
Management fees............................. 4,081 3,965 2,817
Interest income............................. 472 560 1,564
Other income................................ 1,398 2 13
Realized investment gains (losses).......... 351 - (32,695)
------ ------ ------
Total income (loss)................... 33,763 (44,750) 21,606
EXPENSES
General expenses............................ 2,076 3,069 2,151
Interest expense............................ 8,107 8,194 8,219
------ ------ ------
Total expenses........................ 10,183 11,263 10,370
------ ------ ------
Net income (loss)..................... $ 23,580 $(56,013) $ 11,236
<FN>
See accompanying note to condensed financial information.
Cash dividends of $9.9 million, $9.8 million and $5.4 million for the years ended December 31, 1993, 1992 and 1991,
respectively, were paid to the parent company by its subsidiaries.
* Includes the effects of discontinued operations and accounting changes as reported in the Consolidated Statements of
Income of USLICO Corporation and Subsidiaries.
</TABLE>
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<TABLE>
USLICO CORPORATION
CONDENSED FINANCIAL INFORMATION OF PARENT COMPANY (cont.)
Statements of Changes in Shareholders' Equity
Parent Company
Years ended December 31
(Amounts in thousands)
Net Foreign
Additional Unrealized Currency
Common Paid-In Investment Retained Translation Treasury
Stock Capital Gains Earnings Adjustment Stock Totals
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1990 $ 14,458 $266,540 $ 4,346 $122,252 $ (1,564) $(88,511) $317,521
1991
Net income................ -- -- -- 11,236 -- -- 11,236
Increase in unrealized gains
on investments........... -- -- 3,333 -- -- -- 3,333
Cash dividends to unaffiliated
shareholders, $1.00
per share................ -- -- -- (10,779) -- -- (10,779)
Stock repurchases......... (30) (523) -- -- -- -- (553)
Shares issued as collateral 28 573 -- -- -- (601) --
Foreign currency translation
adjustment............... -- -- -- -- (221) -- (221)
------ ------- ----- ------- ----- ------ -------
Balance, December 31, 1991 14,456 266,590 7,679 122,709 (1,785) (89,112) 320,537
1992
Net loss.................. -- -- -- (56,013) -- -- (56,013)
Increase in unrealized gains
on investments........... -- -- 49 -- -- -- 49
Cash dividends to unaffiliated
shareholders, $1.00
per share................ -- -- -- (10,756) -- -- (10,756)
Stock repurchases......... (1) (4) -- -- -- -- (5)
Foreign currency translation
adjustment............... -- -- -- -- 135 -- 135
------ ------- ----- ------ ----- ------ -------
Balance, December 31, 1992 14,455 266,586 7,728 55,940 (1,650) (89,112) 253,947
1993
Net income............... -- -- -- 23,580 -- -- 23,580
Increase in unrealized gains on
investments............. -- -- 749 -- -- -- 749
Cash dividends to unaffiliated
shareholders, $.24
per share............... -- -- -- (2,582) -- -- (2,582)
Stock repurchases........ -- (4) -- -- -- -- (4)
Stock grants issued...... 5 77 -- -- -- -- 82
Foreign currency translation
adjustment.............. -- -- -- -- 50 -- 50
------ ------- ----- ------ ----- ------ -------
Balance, December 31, 1993 $ 14,460 $266,659 $ 8,477 $ 76,938 $ (1,600) $(89,112) $275,822
<FN>
See accompanying note to condensed financial information.
</TABLE>
13<PAGE>
<PAGE>
<TABLE>
SCHEDULE III
(cont.)
USLICO CORPORATION
CONDENSED FINANCIAL INFORMATION OF PARENT COMPANY (cont.)
Statements of Cash Flows
Parent Company
Years ended December 31
1993 1992 1991
(in thousands)
<S> <C> <C> <C>
Operating Activities:
Net income (loss)............................ $ 23,580 $(56,013) $ 11,236
Add (deduct) items not affecting cash:
Undistributed earnings (loss)
of subsidiaries........................... (17,520) 59,047 (44,482)
Other...................................... (7,150) 6,493 22,791
----- ----- ------
Net cash provided by (used in) operating
activities................................ (1,090) 9,527 (10,455)
Investing Activities:
Sale of equity securities.................... 5,200 -- --
Maturity of long-term investments............ -- 7,742 --
Return of capital from subsidiaries.......... -- -- 97,960
Purchases of long-term investments........... -- -- (67,440)
Dividends and other payments
to subsidiaries............................. (10,559) (2,637) (2,593)
Sale of subsidiary........................... 3,587 -- 5,000
----- ----- ------
Net cash provided by (used in) investing
activities................................ (1,772) 5,105 32,927
Financing Activities:
Decrease in notes payable.................... -- -- (3,200)
Cash dividends to stockholders............... (2,654) (11,056) (11,328)
Stock grants................................. 82 -- --
Stock repurchases............................ (4) (5) (553)
----- ------ ------
Net cash used in financing activities...... (2,576) (11,061) (15,081)
----- ------ ------
Net increase (decrease) in cash and cash
equivalents................................. (5,438) 3,571 7,391
Balance of cash and cash equivalents
Balance at beginning of year:
Cash....................................... 103 171 329
Cash equivalents........................... 11,188 7,549 --
------ ----- ----
11,291 7,720 329
Balance at end of year:
Cash....................................... 145 103 171
Cash equivalents........................... 5,708 11,188 7,549
----- ------ -----
$ 5,853 $ 11,291 $ 7,720
Amount of interest paid during year $ 8,107 $ 8,107 $ 8,233
<FN>
See accompanying note to condensed financial information.
</TABLE>
14<PAGE>
<PAGE>
SCHEDULE III
(cont.)
USLICO CORPORATION
NOTE TO CONDENSED FINANCIAL INFORMATION OF PARENT COMPANY
December 31, 1993
The condensed financial information of parent company should be read in
conjunction with Notes to Consolidated Financial Statements included in
the Annual Report to Shareholders incorporated by reference herein.
15<PAGE>
<PAGE>
<TABLE>
SCHEDULE VI
USLICO CORPORATION
REINSURANCE
As of and for the three years ended December 31, 1993
(in thousands)
Column A Column B Column C Column D Column E Column F
Ceded Assumed
Gross to other from other Net % of Amount
Amount Companies Companies Amount Assumed to Net
<S> <C> <C> <C> <C> <C>
1993
Life insurance
in force 48,604,912 10,376,615 4,984,127 43,212,424 11.5%
Premiums
Life, annuity and
other policy
considerations $ 190,656 $ 24,758 $ 11,556 $ 177,454 6.5%
Accident & health 26,021 12,236 - 13,785 -
------- ------ ------ -------
$ 216,677 $ 36,994 $ 11,556 $ 191,239
1992
Life insurance
in force 48,888,526 11,087,427 3,418,202 41,219,301 8.3%
Premiums
Life, annuity and
other policy
considerations $ 167,262 $ 24,425 $ 15,750 $ 158,587 9.9%
Accident & health 41,585 23,048 - 18,537 -
------- ------ ------ -------
$ 208,847 $ 47,473 $ 15,750 $ 177,124
1991
Life insurance
in force 49,581,815 13,183,075 2,374,160 38,772,900 5.7%
Premiums
Life, annuity and
other policy
considerations $ 169,345 $ 24,094 $ 7,101 $ 152,352 4.7%
Accident & health 109,569 53,540 - 56,029 -
------- ------ ----- -------
$ 278,914 $ 77,634 $ 7,101 $ 208,381
</TABLE>
16<PAGE>
<PAGE>
<TABLE>
SCHEDULE IX
USLICO CORPORATION
Short-Term Borrowings
As of and for the Years Ended December 31, 1993, 1992, 1991
Maximum Average Weighted
Category of Weighted Amount Amount Average
Aggregate Balance Average Outstanding Outstanding Interest Rate
Short-Term at end of Interest During the During the During the
Borrowing (1) Period Rate Period Period (2) Period (2)
(in thousands)
<S> <C> <C> <C> <C> <C>
1993
Bank line
of credit $-0- 0% $-0- $-0- 0%
1992
Bank line
of credit $-0- 0% $-0- $-0- 0%
1991
Bank line
of credit $-0- 8.48% $4,700 $2,997 9.08%
<FN>
(1) During 1991, the Company had one bank line of credit in the amount of $20 million
which was completely paid and cancelled on August 5, 1991.
(2) The Average was computed as a weighted average based on the actual number of days
that balances were outstanding on the line of credit.
</TABLE>
17<PAGE>
<PAGE>
INDEX TO EXHIBITS
The following exhibits are filed herewith or incorporated by reference
where indicated:
Exhibit
Number
2 Plan of acquisition, reorganization, arrangement,
liquidation, or succession (not applicable).
3.1 Articles of Incorporation as amended (dated April 27, 1990)
(Incorporated by reference to Item 14, Exhibit 3.1 of
USLICO's Form 10-K, filed March 27, 1991, File No. 0-12694).
3.2 By-laws, as amended (dated February 23, 1990).
(Incorporated by reference to Item 14, Exhibit 3.2 of
USLICO's Form 10-K, filed March 25, 1992, file No. 0-12694).
4.1 Form of Indenture between USLICO Corporation and American
Security Bank, including Form of Debenture, dated as of
January 15, 1986 for the 8% Convertible Subordinated
Debentures due 2011. (Incorporated by reference to Exhibit
4 of USLICO's Registration on Form S-2, Registration No. 33-
1925.)
4.2 Form of Rights Agreement between USLICO and Crestar Bank,
including form of Rights Certificate, dated as of February
26, 1988 (Incorporated by reference to Item 7(c) exhibit of
USLICO's Form 8-K filed March 10, 1988).
4.3 Form of Indenture between USLICO Corporation and Security
Trust Company, N.A., including Form of Debenture, dated as
of November 8, 1989, amendment #1 filed December 13, 1989,
for the 8.5% Convertible Subordinated Debentures due 2014
(Incorporated by reference to Exhibit 4 of USLICO's
Registration on Form S-3, Registration No. 33-31871).
9.0 Voting trust agreement (not applicable).
*10.1 USLICO Corporation Stock Option Plan (Incorporated by
reference to USLICO's Proxy Statement dated March 27, 1991).
*10.2 Supplemental Retirement Benefits are described and
incorporated by reference to USLICO's Proxy Statement dated
March 25, 1992, at page 10.
*10.3 Employment Agreements dated October, 1992, between the
Registrant and Messrs. Callahan, Roe, and Gettier.
(Incorporated by reference to Item 14, Exhibit 10.3 of
USLICO's Form 10-K, filed March 31, 1993, File No. 0-12694).
*10.4 Form of Executive Severance Benefit Agreement between the
Registrant and executive officers. (Incorporated by
reference to Item 14, Exhibit 10.4 of USLICO's Form 10-K,
filed March 31, 1993, File No. 0-12694).
18<PAGE>
<PAGE>
*10.5 USLICO Management Incentive Compensation Plan.
(Incorporated by reference to Item 14, Exhibit 10.5 of
USLICO's Form 10-K, filed March 31, 1993, File No. 0-12694).
*/**10.6 Directors' Retirement Plan.
**11 Statement regarding: Computation of Per Share Earnings.
12 Statements regarding: Computation of ratios (not
applicable).
**13 1993 Annual Report of USLICO to security holders.
18 Letter regarding: Change in accounting principles (not
applicable).
19 Previously unfiled documents (not applicable).
**21 Subsidiaries to Registrant.
22 Published report regarding matters submitted to vote of
security holders (not applicable).
23 Consents of experts and counsel (not applicable).
24 Power of attorney (not applicable).
27 Financial Data Schedule (not applicable).
28 Information from reports furnished to State insurance
regulatory authorities (not applicable).
99 Additional Exhibits (not applicable).
* Management contract or Compensatory Plan
** Filed herein
19<PAGE>
<PAGE>
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.
USLICO CORPORATION
(Registrant)
DANIEL J. CALLAHAN, III
DANIEL J. CALLAHAN, III
CHAIRMAN AND CHIEF EXECUTIVE OFFICER
MARCH 29, 1994
(Date)
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report is signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
DANIEL J. CALLAHAN, III DAVID H. ROE
DANIEL J. CALLAHAN, III DAVID H. ROE
CHAIRMAN OF THE BOARD, PRESIDENT, CHIEF OPERATING CHIEF EXECUTIVE
OFFICER OFFICER AND DIRECTOR
AND DIRECTOR
ROBERT E. BUCHANAN ELI WEINBERG
ROBERT E. BUCHANAN ELI WEINBERG
DIRECTOR DIRECTOR
ROBERT F. COCKLIN DAVID W. KARSTEN
ROBERT F. COCKLIN DAVID W. KARSTEN
DIRECTOR SENIOR VICE PRESIDENT
AND CONTROLLER
GLENN H. GETTIER, JR.
GLENN H. GETTIER, JR.
EXECUTIVE VICE PRESIDENT,
CHIEF FINANCIAL OFFICER
AND DIRECTOR
MARCH 29, 1994
EXHIBIT 10.6
USLICO CORPORATION DIRECTORS' RETIREMENT PLAN
1. Purpose and Scope of Plan. The purposes of this Plan are
to reward non-employee members of the Board of Directors for their
services as Board members, to provide these Board members with
additional retirement income after completion of their service to
USLICO, and to remain competitive in director compensation by
providing a special retirement benefit to non- employee directors.
This Plan is not intended to be a qualified retirement Plan under
ERISA or the Internal Revenue Code.
2. Definitions. Unless otherwise required by the context,
the following terms shall have the meaning set forth below.
2.1 "Annual Retainer" shall mean the amount paid to
Directors for service on the Board and its committees, exclusive of
attendance fees, chairman's fees, expense reimbursement, and
payments of a similar nature; provided, any stock grants which when
authorized are designated as being paid as part of the annual
retainer, whether in lieu of an increase in the annual retainer or
otherwise, shall be included in the "Annual Retainer."
2.2 "Board" shall mean the Board of Directors of USLICO.
2.3 "Director" shall mean a member of the Board who is not an
employee of USLICO or any of its affiliates or subsidiaries.
2.4 "Participant" shall mean a Director who has five (5)
continuous Years of Service on the Board. Years of Service
(including fractional Years of Service) on the Board of Directors
of United Services Life Insurance Company or Bankers Security Life
Insurance Society, or either of them, which immediately precede
service on the Board shall be included in this calculation of a
Director's Years of Service.
2.5 "Plan" shall mean this USLICO Corporation Directors'
Retirement Plan.
2.6 "USLICO" shall mean USLICO Corporation, a Virginia
Corporation, or any successor to in ownership of substantially all
of its assets, whether by merger, consolidation or otherwise.
2.7 "Year of Service" shall mean twelve (12) consecutive
months.
<PAGE>
<PAGE>
3. Benefit. A Participant shall be entitled to the following
benefit upon retirement from the Board:
3.1 Earliest Payment Date. Except as provided under Sections
4 and 5 of this Plan, the first benefit shall be payable upon the
later of the Participant's attaining age 65 or the Participant's
retirement from the Board.
3.2 Payments. The benefit provided for herein shall be paid
in equal monthly installments, payable in advance, for a period of
one hundred and twenty (120) months with the first payment payable
on the first day of the month immediately following the Earliest
Payment Date. USLICO shall have no obligation to commute or
accelerate the payment of any benefit under this Plan.
3.3 Amount of Benefit. A Participant shall be entitled to an
annual benefit of fifty (50) percent of the Annual Retainer in
effect on the day immediately prior to his last day of service
times the applicable percentage. The applicable percentage, based
on Years of Service, is as follows:
Years of Service Applicable Percentage
< 5 0%
5 - 6 50%
6 - 7 60%
7 - 8 70%
8 - 9 80%
9 - 10 0%
> 10 100%
4. Payment In Event of Death.
4.1 Death Prior to Commencement of Payment. In the event of the
Participant's death before payments begin under this Plan, the amount
provided for herein shall be paid to the person(s) designated in the
last beneficiary designation filed by the Participant with USLICO, and
in absence of any such designation, to the Participant's estate.
Payments shall begin on the first day of the month immediately
following the Participant's death.
4.2 Death After Commencement of Payment. In the event of the
Participant's death after payments have begun under this Plan but
before the full amount of the benefit is paid, the unpaid balance
shall be paid to the person(s) designated in the last beneficiary
designation filed by the Participant with USLICO, and in absence of
any such designation, to the Participant's estate.
<PAGE>
<PAGE>
5. Payment in the Event of Disability. In the event of the
Participant's disability before payments begin under this Plan, a
Participant who is disabled shall have a one time election,
exercisable within 90 days from the date of the Participant's
retirement from the Board for such disability, or the commencement of
the disability if the Participant is no longer a member of the Board,
to begin receiving the amounts provided for herein beginning on the
first day of the month immediately following the exercise of the
election. For purposes of this Plan disability shall mean the
Participant's inability for reasons of physical or mental impairment
to perform the usual and customary duties of a Director for 90
consecutive days. The Board's determination of whether a Participant
is disabled shall be conclusive.
6. Administration. This Plan shall be administered by the Board.
The interpretation and construction of any provision of this Plan by
the Board shall be final and conclusive. No member of the Board shall
be liable for any action or determination made by him in good faith.
7. Termination or Amendment of this Plan. The Board may at any time
terminate this Plan and may, from time to time, alter or amend this
Plan or any part thereof; provided however, unless otherwise required
by law, the rights of a Participant with respect to any benefit earned
prior to such termination, alteration or amendment shall not be
impaired without the consent of such Participant. For purposes of
this Plan a benefit is earned only after a Director becomes a
Participant.
8. Miscellaneous.
8.1 Termination for Cause. Any Participant who is removed from
the Board for cause shall not be entitled to any benefit under this
Plan.
8.2 No Right To Serve. Nothing in this Plan shall be deemed to
confer upon any Director the right to remain a Director or be
nominated for election as a Director.
8.3 No Assignment Of Benefits. No benefit payable under this
Plan shall, except as otherwise specifically provided by law, be
subject in any manner to anticipation, alienation, attachment, sale,
transfer, assignment, pledge, encumbrance or charge, and any attempt
to anticipate, alienate, attach, sell, transfer, assign, pledge,
encumber, or charge any such benefit shall be void, and any such
benefit shall not in any manner be liable for or subject to the debts,
contracts, liabilities, engagements or torts of any person who shall
be entitled to such benefit, nor shall it be subject to attachment or
legal process for or against such person. If any person entitled to
a benefit hereunder shall be adjudicated a bankrupt or shall attempt
to anticipate, alienate, attach, sell, transfer, assign, pledge,
encumber, or charge any such benefit, or if any attempt is made to
subject any such benefit to the debts, contracts, liabilities,
engagements or torts of any person entitled to such benefit, then such
benefit shall, in the discretion of the Board, cease and terminate,
and in that event the Board may cause such benefit, or any part
thereof, to be held or applied for the benefit of such person, his or
her spouse, children or other dependents, or any of them, in such
manner and in such proportion as the Board shall determine.
8.4 Governing Law. This Plan shall be governed by the law of
the Commonwealth of Virginia without regard to choice of law
principles.
8.5 Construction. Wherever any words are used herein in the
masculine gender they shall be construed as though they were also used
in the feminine gender in all cases where they would so apply, and
wherever any words herein are used in the singular for they shall be
construed as though they were also used in the plural form in all
cases where they would so apply. The captions are for ease of
reference only and shall not be used in the interpretation of this
Plan.
8.6 Other Plans. Nothing contained herein shall prevent USLICO
from adopting additional compensation plans or arrangements.
8.7 Effective Date. The effective date of this Plan shall be
December 10, 1993, provided that Directors shall be given credit for
Years of Service earned prior to the effective date.
8.8 Binding Effect. This Plan shall be binding upon and inure
to the benefit of any successor of USLICO, and any such successor
shall be deemed substituted for USLICO under the terms of this Plan.
As used in this Plan, the term "successor" shall include any person,
firm, corporation, or other business entity which at any time, whether
by merger, purchase, or otherwise, acquires all or substantially all
of the Corporation's assets or business.
<TABLE>
EXHIBIT 11
USLICO Corporation
Computation of Earnings Per Share
Years Ended December 31,
1993 1992 1991
(In thousands, except per share data)
<S> <C> <C> <C>
PRIMARY
Operating income (loss) $ 23,580 $ (36,231) $ (10,484)
Discontinued operations - (9,954) 21,720
Cumulative effect of accounting
changes - (9,828) -
------ ------ ------
Net income (loss) $ 23,580 $ (56,013) $ 11,236
Weighted average number of shares
outstanding 10,756 10,756 10,777
Net income (loss) per share
Operating income (loss) $ 2.19 $ (3.37) $ (0.98)
Discontinued operations - (0.93) 2.02
Cumulative effect of accounting
changes - (0.91) -
---- ---- ----
Net income (loss) $ 2.19 $ (5.21) $ 1.04
FULLY DILUTED
Operating income (loss) $ 23,580 $ (36,231) $ (10,484)
After tax interest expense
applicable to convertible
debentures 5,181 5,261 5,261
------ ------ -----
Net income (loss) from continuing
operations 28,761 (30,970) (5,223)
Discontinued operations - (9,954) 21,720
Cumulative effect of accounting
changes - (9,828) -
------ ------ ------
Net income (loss) $ 28,761 $ (50,752) $ 16,497
Weighted average number of shares
outstanding 10,756 10,756 10,777
Assuming conversion of convertible
subordinated debentures 3,360 3,360 3,360
------ ------ ------
Weighted average number of shares
outstanding as adjusted 14,116 14,116 14,137
Net income (loss) per share *
Operating income (loss) $ 2.04 $ (3.37) $ (0.98)
Discontinued operations - (0.93) 2.02
Cumulative effect of accounting
changes - (0.91) -
---- ---- ----
Net income (loss) $ 2.04 $ (5.21) $ 1.04
<FN>
* Note that antidilutive effects of the fully diluted calculation are not
reported for 1991 and 1992. Instead, the fully diluted income or loss per
share is set equal to the primary earnings or loss per share.
</TABLE>
<PAGE>
<PAGE>
<TABLE>
EXHIBIT 11
(cont.)
USLICO CORPORATION
COMPUTATION OF WEIGHTED AVERAGE
NUMBER OF SHARES (In thousands)
Years Ended December 31,
Number Weighted Number
of Shares Factor of Shares
Primary:
<S> <C> <C> <C>
December 31, 1990 Outstanding 10,786
Shares repurchased 30 112/365 (9)
1991 10,777
December 31, 1991 Outstanding 10,756
Shares repurchased *
1992 10,756
December 31, 1992 Outstanding 10,756
Shares repurchased * - *
Shares issued 5 11/365 *
1993 10,756
Fully Diluted:
1991 Primary 10,777
Conversion of convertible subordinated
debentures
$38,550,000 $31.35 (conversion price) 1,230
$57,500,000 $27.00 (conversion price) 2,130
14,137
1992 Primary 10,756
$38,550,000 $31.35 (conversion price) 1,230
$57,500,000 $27.00 (conversion price) 2,130
14,116
1993 Primary 10,756
$38,550,000 $31.35 (conversion price) 1,230
$57,500,000 $27.00 (conversion price) 2,130
14,116
<FN>
* Effect less than 1,000.
</TABLE>
USLICO CORPORATION
CONTENTS
Message to Our Shareholders
Individual Life
Individual Annuities
Payroll Deduction & Group Life
Financial Summary
Financial Review
Financial Statements
Board of Directors and Senior Officers
Shareholder Information
USLICO Corporation is a life insurance holding company headquartered in
Arlington, Virginia, serving customers through United Services Life (USL)
and Bankers Security Life (BSL). Both companies sell and service
individual life insurance and annuities through independent agents.
Additionally, USL specializes in serving members of the United States
armed forces through a career sales force. BSL specializes in providing
life insurance products in the workplace through payroll deduction.
Financial Highlights
(in millions, except per share amounts)
1993 1992 1991
Total revenues $17.5 $ 378.8 $393.3
Net income (loss) 23.6 (56.0) 11.2
Total assets 3,412.1 3,193.6 2,936.7
Shareholders' equity 275.8 253.9 320.5
Book value per share 25.63 23.61 29.80
Earnings (loss) per share 2.04 (5.21) 1.04
Closing stock price 16 5/8 18 18 1/2
Common shares outstanding 10.8 10.8 10.8
<PAGE>
<PAGE>
MESSAGE TO OUR SHAREHOLDERS
A little over a year ago, the current management team was put in place,
and we initiated a multi-year plan to improve the company's performance.
Throughout 1993, we made continuing progress toward that objective.
We concluded the year with net income of $23.6 million or $2.04 per
share. This compares to a net loss of $56 million ($5.21 per share) in
1992. Unusual items impacted both years significantly. The Financial
Review section of this report includes a complete discussion of these
results. While we are gratified by the improvement achieved in 1993,
earnings are significantly lower than that which we deem satisfactory.
1993 marks the beginning of USLICO Corporation's return to a pattern of
increasing profitability. In this year's report we will describe our
progress and plans for the future.
Concentrating on Core Life and Annuity Business
One of our main objectives in 1993 was to narrow the company's focus to
concentrate on our core life insurance and annuity businesses. As
previously reported, USLICO Corporation sold its ship registry and
corporate formation business in the third quarter, realizing an after-tax
gain of $10.9 million.
In the fourth quarter, we concluded the voluntary commutation of
substantially all of the reinsurance liabilities assumed by The
Northeastern Insurance Company of Hartford. In this connection,
Northeastern disbursed approximately $46 million in return for agreements
from ceding insurance companies releasing it from liability.
Northeastern had operated in a run-off mode since it stopped writing new
business in 1986, and it will cease operating as an insurance company as
a result of the commutation. These actions had no effect on USLICO's
1993 net income.
Thirdly, we settled several disputes with other insurance companies
acting as reinsurers of the group health business that the company
terminated in early 1992. Unfortunately, at this time we have been
unsuccessful in reaching agreement with the bank and the third-party
administrator who were involved with this business and expect to settle
our differences in a court of law during the first half of 1994.
Reserves were established in 1993 to provide for the estimated cost of
this litigation. Net income in 1993 was reduced by $5.1 million
after-tax due to these and other litigation costs related to claims
settlement matters on this business.
All of these actions were beneficial to our goal of reducing future risk
from USLICO Corporation's prior business activities that lie outside the
company's core business interests.
Enhancing Product Profitability
The management team and staff expended considerable effort analyzing the
profitability and market potential of all of the insurance and annuity
products sold by United Services Life and Bankers Security Life. The
results of these studies provide the foundation for plans to transition
our business to products and markets that offer greater profit potential.
Based on this information, we terminated or curtailed sales of several
products and introduced new ones, and we are currently working on a
number of new products to be introduced in 1994.
Overall, new business sales in 1993 were down slightly as compared to the
prior year. In light of the significant changes introduced in 1993
relating to product pricing, producer compensation and product mix, these
results met our expectations. The plan for the future is to grow
modestly at first, emphasizing the sale of new products that have more
favorable profit margins. The long lead time required to gain regulatory
approval for new products necessarily delays the bottom-line impact of
these changes. In the pages that follow, additional information
regarding each of our primary lines of business is presented.
Investing in the Future
We are emphasizing four long-term strategies to improve our competitive
capabilities: improving customer service, reducing expenses by
modernizing our computer systems environment, redesigning work processes
and increasing employee development. In the short term, these
initiatives have added to general expenses; however, we are confident
that in the longer run these steps will improve efficiency and increase
our ability to compete primarily on the basis of providing valuable
products and quality service to our policyholders and agents rather than
on the basis of having the lowest price. Currently, we process
substantially all annuities and individual universal life new business on
a new computer system, and are moving aggressively to convert all
in-force business to the new system in order to cease supporting a number
of old unwieldy systems that are currently in use. Employee teams
throughout the company are hard at work applying the principles of total
quality management to streamline our processes and provide value-added
service to our customers.
It also is important to reemphasize our commitment to maintain a
high-quality, conservative investment strategy and a strong capital
position. This commitment ensures that USLICO's insurance subsidiaries
will always be positioned to meet the promises made to their life
insurance and annuity contractholders. Over the past several years, the
general public became aware of the importance of financial strength and
stability and is increasingly taking this into account when making
insurance-buying decisions. Accordingly, to be competitive in this
changing marketplace, we must, and will, remain financially secure and
strong.
No less important is the need to provide an adequate return to
shareholders. In the recent past, USLICO has fallen short in this
regard. We continue to be optimistic that the strategic plan initiated
in late 1992 has begun to reverse this trend, and we look forward to
better financial results in the future. The long-term nature of our
businesses and the need to invest currently in service and quality
improvements limit how quickly these improvements can contribute to
higher earnings. However, our goal is to provide a foundation that
creates the opportunity for sustainable growth in profitability as we
seek to reach our long-term objective of a 15 percent return on equity.
Our progress in the past year results from the efforts of many dedicated
and hard-working employees. We should particularly take note of the very
active role played by the board of directors during this period of
transition. Glenn Gettier, USLICO's chief financial officer, joined the
board in 1993. Effective with the upcoming Annual Shareholders Meeting,
Robert Cocklin, Thomas Moorer and David Smith will retire from active
membership on the board, and we thank them for their many contributions
over the long period of their service.
We also thank you, our shareholders, for your support, and together we
look forward to a brighter future for USLICO Corporation.
Daniel J. Callahan, III
Chairman & Chief Executive Officer
David H. Roe
President & Chief Operating Officer
INDIVIDUAL LIFE
Recovery and stabilization were the themes for 1993, during which the
Individual Life Division enacted positive administrative changes designed
to support future sales growth. In terms of production, 1993 sales were
comparable to those of 1992. These results are in line with current
industry trends: Ordinary life industry sales were relatively flat - up
about 3 percent in 1993 - as reported by Life Insurance Marketing
Research Association (LIMRA).
1993 Results
Our Individual Life Division operates with three subdivisions, each
representing a separate distribution system. Our career field force
focuses its marketing activities primarily on active-duty and retired
military officers and noncommissioned officers and their families. Our
USL agency field force is comprised of agents and brokers who market to
middle and upper income families and small businesses in urban, suburban
and rural areas nationwide, with particular concentration in the
Midwestern, Western and Southern regions of the country. Our Bankers
Security Life field force has a makeup and sales focus similar to that of
the USL agency subdivision, but concentrates its sales activities in the
Northeastern corridor, with primary emphasis in New York state. The
breakdown of 1993 production by subdivision follows.
- - Our career field force produced sales of $6.8 million in issued and
paid premium in 1993, slightly below the level of sales for 1992.
This is largely the result of poor recruiting of new agents in 1992
due to the morale over service problems. With recruiting of new
agents up as we enter 1994, we expect sales to increase.
- - Our USL agency field force showed a significant sales increase in
1993 - 15 percent - with $5.5 million in issued and paid premium.
We attribute much of this growth to the new relationship we formed
with a large independent marketing organization.
- - Individual sales for the Bankers Security field force finished the
year substantially behind last year's figures - 24 percent - with
$3.2 million in new premium. Competition in the New York market and
the poor economy contributed to this downturn. Fortunately, sales
leveled off in the latter part of 1993, and we expect stabilization
and recovery in 1994, as a result of several new programs designed
to increase the level of support provided to this subdivision.
1994 Plans and Objectives
A major objective for the Individual Life Division is to increase the
profitability of all products. We continue to offer universal and
variable life, term, and simplified issue whole life. In 1993, we
developed Term 2000, which we will introduce into the USL term portfolio
in 1994. Term 2000 is an extremely flexible series of term products
which will allow each customer to design his/her own policy. We also
expect to expand our System 2000 series of products in 1994. Our
simplified issue whole life product serves the growing senior market and
has been enthusiastically received by both the USL career and agency
field forces. We plan to introduce this product to the Bankers Security
Life field force during the year.
Greater Emphasis on Recruiting & Sales Support
In 1994, we plan to work with more large independent marketing
organizations and will intensify recruiting efforts in the USL career
subdivision. We expect to add 50 field representatives to this
subdivision in 1994. In the latter part of 1993, we recruited several
large agencies in the central and upstate New York areas, and we will
increase our recruiting efforts in these areas in 1994.
Our newest sales support program - seminar selling - was well received by
the career field force. This program is now solidly established in that
subdivision and currently is being introduced as a sales support tool for
our USL agency and Bankers Security field forces. This selling strategy
complements our new recruiting plan and our new product line by providing
a forum for producers to offer complete family financial protection
services. Additionally, the seminar program creates an ongoing referral
system for new sales.
We also made great progress in improving our internal operations in 1993.
Quality improvement programs in both the eastern and central service
centers and automation of many functions have allowed us to increase our
productivity. Our service centers are committed to quality and will work
in 1994 to further streamline processes and procedures in an effort to
improve service and enhance our communications with the field. Their
efforts are crucial for the support of anticipated sales growth.
INDIVIDUAL ANNUITIES
The fixed and variable annuity lines of business made significant
contributions to USLICO's earnings in 1993. Earnings from these lines
are projected to show even better results over the next few years.
Earnings are closely related to the growth in annuities in force. Our
new products, which call for less upfront acquisition expense, will
enable us to put more emphasis on sales growth in the future,
particularly the variable annuity. In 1993 we restructured commissions,
which produced a temporary drag on sales; these changes were made in
order to reduce the level of investment needed when generating
substantial amounts of new business.
A low interest rate environment continued in 1993, which permitted us to
achieve our desired profit margins while still maintaining relatively
attractive interest rates for our fixed annuity policyholders. Variable
annuity policyholders enjoyed the benefits of further advances in stock
and bond values.
Fixed Annuities
New sales (first-year premium) for 1993 were $122.4 million for United
Services Life and Bankers Security Life, versus $152.8 million in 1992.
This decline occurred in the second half of the year and was due
primarily to the commission changes effected just prior to midyear. The
total collected premium, first-year new sales plus additions to existing
policies, amounted to $144 million, as compared to $176 million in 1992.
Total fixed annuity assets under management as of year-end 1993 were $1.6
billion. Steady growth in our asset base continues to be the objective
in 1994. With new products and new processing systems coming on-line in
1994, our plan incorporates more ambitious sales goals for the future.
Just over 80 percent of all 1993 fixed annuity deposits were made into
the flexible premium annuity, which has been our lead product since its
introduction in 1988. We anticipate a broader mix in 1994 with the
introduction of a new series of products. As previously mentioned, these
have lower acquisition expenses and, as a result, have shorter surrender
penalty periods.
We all continue our general strategy of marketing through financial
institutions and traditional insurance agents. Our in-house distributor,
USLICO Securities Corporation, will be an important contributor. Its
sales and service offices, located near large segments of our
policyholder base (Bellevue, Wash., Portland, Ore. and Minneapolis,
Minn.), are slated to play a more important role in our distribution
effort.
Variable Annuity
Sales soared in 1993 to $34.7 million, substantially exceeding 1992 sales
of $21.8 million and increasing total variable annuity assets under
management to $198 million.
Variable annuity sales in the industry have climbed dramatically in
recent years because of low interest rates and the relatively higher
total returns offered by investment in the stock market. Innovative
product designs have also contributed to sales growth.
Offered through Bankers Security Life, our variable annuity has been
enhanced in recent years by increasing the number of investment choices
and by adding a fixed rate account. Currently, we offer seven variable
accounts, five managed by Oppenheimer Management Corporation and two by
Alliance Capital Management, L.P.
The future of variable annuities at USLICO is centered on the planned
development in 1994 of a new product that will be issued as a United
Services Life policy. Our intent is to spread some of the upfront
commission expense over the life of the policy. Other product
enhancements are planned, including systematic withdrawal of income,
enhanced partial withdrawal capability and waiver of penalties for
hospital or nursing home confinement. It is generally considered
important to offer a wide range of investment choices, and with the new
Vantage annuity processing system in place in 1994, we will be able to
consider adding even more investment options.
Quality service to our field distribution and policyowners has long been
a key to successful sales and persistent relationships in our annuity
businesses. As we go forward, all associates involved in annuity sales
and service are committed to achieving continuous improvements in our
service levels.
PAYROLL DEDUCTION & GROUP LIFE
In 1993 we enjoyed continued success in the payroll deduction market and
reassessed our position in the group life arena. Payroll deduction sales
increased 19 percent as compared to 1992, accounting for $10.7 million in
new premium. This increase was largely due to the introduction of a new
marketing concept - Dimension - that combines our voluntary payroll
deduction program with traditional group insurance. We introduced the
Dimension program on a limited basis in the second quarter, enabling us
to refine administrative systems and marketing techniques before
releasing it nationwide. The favorable response that we received from
agents and clients suggests that the program will be extremely successful
in 1994 and will lead to continued growth of payroll deduction life
sales.
Payroll Deduction Line
Sales in our companion product lines, which include cancer supplements,
voluntary term life insurance and voluntary disability, increased
moderately in 1993. We will continue to use underwriting discretion with
these products and will maintain the appropriate ratio of new life
insurance premium to ancillary product premium. Since its introduction,
our ancillary product line has experienced satisfactory claims results.
More importantly, offering these products has bolstered our recruiting
efforts and generated increased payroll deduction life sales.
We are expanding our product portfolio in 1994 to include a participating
whole life product and an accidental death and dismemberment policy. Our
introduction of par whole life fills an important niche in the payroll
deduction market. While universal life is still the dominant product,
the declining interest rate environment has refocused our customers'
attention on the guarantees offered by whole life.
We completed detailed profit studies of all of our payroll deduction
products in 1993. Based on these studies, we have formulated a plan to
increase the company's profitability by modifying our current product
line and introducing simplified underwriting to some of our guaranteed
issue business. These changes are being implemented in 1994.
Group Line
In our group line, mortality experience continued to be higher than
expected. This poor experience is linked primarily to a disproportionate
percentage of older-aged employees that was not contemplated when certain
significant cases were priced. Two large cases with poor claims
experience elected to transfer their policies to other carriers rather
than face the substantial rate increases that we required. In addition,
we are raising premiums sharply where warranted by experience, have
terminated unprofitable cases, and are only soliciting new business in
cases that meet our profitability targets.
<PAGE>
Capitalizing on Existing Business
Our operations area has developed two innovative programs - Dollar Plus
and a new re-enrollment package - designed to significantly increase new
premium income with minimal administrative costs. Dollar Plus is a
program that allows clients to increase their coverage annually by a
dollar a week for a five-year period. This was our single most
successful program of 1993. Over 60 percent of the participants applied
for Dollar Plus at new enrollments and over 35 percent at re-enrollments.
Additionally, the operations area developed a re-enrollment program,
which will be available for use in 1994. This program notifies agents of
annual re-enrollments and provides them with a complete kit including a
letter, report, illustration software and a disk with census information.
These materials allow agents to produce new proposals quickly and easily
on an annual basis, and prompts clients to consider increasing coverage.
Both programs provide a source for new premium from our existing client
base and should stimulate sales growth in 1994.
Providing Excellent Service
As part of our quality management program, our staff constantly surveys
payroll centers, policyholders and agents to identify areas in need of
improvement. We have received a rating of "good" or "excellent" from 75
percent of the survey respondents, which is extremely gratifying.
Our broad-based product portfolio, strong marketing support programs and
excellent service in our operations areas form the foundation for this
division's strong position in the payroll deduction market. This
foundation will allow us to capitalize on this market's expected future
growth.<PAGE>
<TABLE>
FINANCIAL SUMMARY
(Amounts in thousands except per share data and percentages)
1993 1992 1991 1990 1989
<S> <C> <C> <C> <C> <C>
For the year ended December 31:
Premiums collected:
Life and health insurance $224,528 $216,064 $254,560 $196,001 $184,135
Annuities 192,818 208,931 275,423 191,867 163,914
Total premiums collected 417,346 424,995 529,983 387,868 348,049
Insurance policy income 191,239 177,124 208,381 150,416 144,245
Net investment income 197,891 188,063 173,642 149,617 129,654
Realized investment gains (1) 8,272 1,432 1,358 558 9,454
Total revenues 417,538 378,787 393,305 313,240 296,323
Income (loss) from continuing
operations (2) 23,580 (36,231) (10,484) 19,356 23,966
Net income (loss) 23,580 (56,013) 11,236 24,684 31,256
Annualized new premiums written:
Individual life insurance 26,178 25,335 30,125 35,035 34,002
Group life insurance 1,434 1,746 13,266 8,316 12,911
Gross investment yield 8.35% 8.71% 9.29% 9.32% 9.70%
Return on average equity 8.90% (18.10)% 3.50% 7.90% 10.60%
As of December 31:
Invested assets $2,522,953 $2,309,238 $2,099,758 $1,726,569 $1,543,354
Total assets 3,412,095 3,193,641 2,936,725 2,717,905 2,479,739
Long-term debt 96,050 96,050 96,050 96,050 97,750
Shareholders' equity 275,822 253,947 320,537 317,521 306,797
Life insurance in force 53,589,039 52,306,729 51,955,975 44,103,604 41,323,197
Average shares outstanding:
Primary 10,756 10,756 10,777 10,826 10,879
Fully diluted 14,116 14,116 14,137 14,224 12,227
Per common share:
Income (loss) from continuing
operations:
Primary $2.19 $(3.37) $(0.98) $1.79 $2.20
Fully diluted 2.04 (3.37) (0.98) 1.74 2.14
Net income (loss):
Primary 2.19 (5.21) 1.04 2.28 2.87
Fully diluted 2.04 (5.21) 1.04 2.11 2.74
Dividends paid 0.24 1.00 1.00 1.00 1.00
Book value 25.63 23.61 29.80 29.44 28.27
Closing stock price 16 5/8 18 18 1/2 15 7/8 23 5/8
<FN>
(1) Including the effect of accelerated amortization of deferred acquisition costs and present value of future
profits caused by realization of investment gains, in the amount of $6.4 million in 1993, $4 million in 1992,
$1 million in 1991 and zero for prior years, which amortization is included in the total reported amortization of
deferred acquisition costs.
(2) Before cumulative effect of accounting changes in 1992.
</TABLE>
<PAGE>
<PAGE>
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 $23.2 $33.5
Realized investment gains* 8.3 1.4 1.4
Interest expense (8.0) (8.1) (8.1)
Federal income tax (9.8) (4.8) (8.7)
18.5 11.7 18.1
Special items (net of tax):
Accounting changes - (9.8) -
Discontinued operations - (10.0) 21.7
Liberian investment and ship
registry business 11.8 - (7.2)
Restructuring and other charges - (45.9) -
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 special items, 1993 earnings improved 58 percent to $18.5
million compared to $11.7 million in 1992. As discussed more fully
below, the improved earnings resulted primarily from higher realized
investment gains and from increased investment spreads representing the
excess of net investment income over amounts credited to policyholders.
In 1992, earnings from life insurance operations (pre-tax) declined $10.3
million compared to 1991. As discussed below, the most significant
adverse items other than the special items listed above affecting 1992
earnings were higher costs associated with severance benefits, new
computer systems development, and mortality; reduced deferral of
acquisition costs; and increased amortization of previously deferred
acquisition costs.
Special 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.
Restructuring and Other Charges. In the fourth quarter of 1992,
management took restructuring and other charges totaling $45.9 million
(net of tax). These charges are comprised of write-off of goodwill,
$19.4 million; write-off of deferred acquisition costs, $19.9 million;
and other charges, $6.6 million.
The company wrote off all remaining goodwill related to the acquisitions
of United Olympic Life Insurance Company and Provident Life Insurance
Company, which were acquired in 1984 and 1982, respectively. Both of
these companies merged into United Services Life Insurance Company during
1992. As a result of the mergers, 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.
Reorganization and reassessment of the life insurance lines of business
resulted in a writedown of deferred policy acquisition costs of $30.2
million ($19.9 million net of tax). Consistent with a new internal
management structure and market focus instituted at the end of 1992, the
company employed an increased number of separate product lines for
deferred acquisition cost recoverability testing. In addition, certain
actuarial assumptions regarding future experience were modified to
reflect the results of product profitability studies completed during the
year. These changes resulted in amortization adjustments and
nonrecoverable deferred costs for certain product lines.
Other 1992 charges (net of tax) consisted of additional reserves for
participating policies of $3.3 million and for future guaranty fund
assessments of $2.5 million, and charges of $0.8 million due to changes
in the useful lives for amortization of computer software.
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, $31 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. The increase in amortization of $10 million in 1993 compared to
1992, and the increase of $11 million from 1991 to 1992 include
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.
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>
<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 30,552 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
Restructuring charges (Note 10) - 49,580 -
------- ------- ------
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>
<TABLE>
CONSOLIDATED BALANCE SHEETS
As of December 31
(In thousands)
1993 1992
<S> <C> <C>
Assets
Investments (Note 3):
Fixed maturities, at amortized cost
(market: 1993-$2,123,975 ; 1992-$1,798,061) $1,994,934 $1,711,500
Equity securities, at market
(cost: 1993-$5,647; 1992-$9,167) 5,623 8,638
Mortgage loans 341,713 370,507
Policy loans 129,152 128,351
Short-term investments 31,108 68,356
Other long-term investments 20,423 21,886
--------- ---------
Total investments 2,522,953 2,309,238
Cash 6,689 9,366
Premiums and accounts receivable 13,938 5,667
Due from reinsurers 51,139 56,037
Deferred policy acquisition costs 389,439 386,893
Real estate occupied by company 7,188 7,174
Accrued investment income 40,209 38,734
Federal income tax receivable 14,910 6,094
Other assets 33,632 48,518
Separate account assets 330,764 282,117
Discontinued property and casualty
operations (Note 2) 1,234 43,803
--------- ---------
Total assets $3,412,095 $3,193,641
Liabilities and Shareholders' Equity
Policy reserves $2,489,611 $2,287,483
Unpaid claims and other policyholder
liabilities 67,367 69,091
Deferred revenue liability 46,464 47,038
Other liabilities 55,356 69,425
Convertible subordinated debentures (Note 5) 96,050 96,050
Federal income taxes (Note 4) 55,696 50,799
Separate account liabilities 324,495 276,005
Discontinued property and casualty operations
(Note 2) 1,234 43,803
--------- ---------
Total liabilities 3,136,273 2,939,694<PAGE>
Commitments and contingencies (Notes 7 and 9)
Shareholders' Equity (Note 6):
Common stock 14,460 14,455
Additional paid-in capital 159,710 159,637
Net unrealized investment gains (Note 3) 2,544 1,795
Foreign currency translation adjustments (1,600) (1,650)
Retained earnings 196,499 175,501
Treasury stock (95,791) (95,791)
------- -------
Total shareholders' equity 275,822 253,947
--------- ---------
Total liabilities and shareholders' equity $3,412,095 $3,193,641
<FN>
See accompanying notes to consolidated financial statements.
</TABLE>
<PAGE>
<PAGE>
<TABLE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended December 31
(In thousands)
1993 1992 1991
<S> <C> <C> <C>
Operating Activities:
Net income (loss) $23,580 $(56,013) $11,236
Adjustments to reconcile net income to
net cash provided by operating activities:
Increase in policy reserves 202,128 244,272 313,675
Decrease (increase) in deferred
policy acquisition costs (2,546) 6,861 (44,077)
Other (22,222) (6,201) 1,842
------- ------- -------
Net cash provided by
operating activities 200,940 188,919 282,676
Investing Activities:
Sale of fixed maturities 51,135 115,874 103,261
Maturity and call of fixed maturities 442,502 299,685 84,600
Sale of equity securities 10,157 40,540 19,643
Sale of subsidiaries 3,787 250 96,500
Purchases of long-term investments (736,462) (643,399) (549,425)
Other 566 1,072 (4,275)
------- ------- -------
Net cash used in
investing activities (228,315) (185,978) (249,696)
Financing Activities:
Cash dividends to shareholders (2,582) (10,756) (10,779)
Other (9,699) (17) (3,753)
------ ------- -------
Net cash used in financing
activities (12,281) (10,773) (14,532)
Effect of exchange rate changes (269) (480) (1,106)
------ ----- ------
Net increase (decrease) in cash
and cash equivalents (39,925) (8,312) 17,342
Balance of Cash and Cash Equivalents:
Balance at beginning of year:
Cash 9,366 8,742 9,036
Short-term investments
purchased with maturities
of three months or less 68,356 77,292 59,656
------ ------ ------
77,722 86,034 68,692
Balance at end of year:
Cash 6,689 9,366 8,742
Short-term investments
purchased with maturities
of three months or less 31,108 68,356 77,292
------ ------ ------
$37,797 $77,722 $86,034
<FN>
See accompanying notes to consolidated financial statements.
</TABLE>
<PAGE>
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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.
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 2 - Divestitures and Discontinued Operations
In 1993, USLICO sold its subsidiaries that operated a ship registry and
corporate formation business, realizing an after-tax gain of $10.9
million. The gain consisted of $2.1 million of net proceeds from sale in
excess of carrying value and $8.8 million of tax benefits that will be
realized as a result of the sale. The subsidiaries that were sold
administer the maritime program for the Government of Liberia. Because
of uncertainty regarding the ultimate realization of profits from the
operations, USLICO suspended recognition of equity in earnings from its
investment in these subsidiaries in 1988. In 1991, the company wrote off
substantially all of its remaining carrying value of this operation in
the amount of $7.2 million.
In 1991, USLICO sold its three primary property-casualty insurance
subsidiaries for a net after-tax gain of $34.6 million. These
subsidiaries contributed a net loss of $916,000 in 1991, prior to their
sale. With the sale of these subsidiaries, USLICO ceased operations in
the property and casualty insurance business, though it still owned a
discontinued property and casualty reinsurance company. This company was
paying run-off claims under its prior reinsurance treaty obligations,
until late 1993, when the company concluded the voluntary commutation of
substantially all of its reinsurance liabilities. During 1992 and 1991,
respectively, the company wrote off $10 million and $12 million (after
income tax) of its investment in this subsidiary as a result of the
continuing adverse development in the run-off of its claims liabilities
and other impairments. No gain or loss was recognized on the commutation
transaction in 1993, and the company's insurance licenses were
surrendered in early 1994.
Note 3 - Investments
Net investment income consists of:
1993 1992 1991
(in thousands)
Investment income:
Fixed maturities $152,343 $139,291 $122,546
Equity securities 681 1,645 1,464
Mortgage loans 36,229 38,255 38,376
Policy loans 7,449 6,736 6,923
Short-term
investments 2,586 2,973 5,786
Other long-term
investments 2,576 3,130 2,547
------ ------- -------
Total investment
income 201,864 192,030 177,642
Investment expenses (3,973) (3,967) (4,000)
------- ------- -------
Net investment income $197,891 $188,063 $173,642
Realized investment gains (losses) are as follows:
1993 1992 1991
(in thousands)
Fixed maturities $15,156 $10,448 $3,283
Equity securities (127) (112) 1,041
Mortgage loans and other
invested assets (312) (4,904) (1,948)
------ ----- -----
Realized investment
gains $14,717 $5,432 $2,376
The cost and fair value of investments in fixed maturities at December
31, 1993 and 1992, are as follows:
<TABLE>
Gross Gross
Unrealized Unrealized Fair
Cost Gains Losses Value
(in thousands)
<S> <C> <C> <C> <C>
1993
U.S. Treasury securities and
obligations of U.S. government
corporations and agencies $118,382 $11,504 $(32) $129,854
Obligations of states and
political subdivisions 7,379 232 (1) 7,610
Debt securities issued by
foreign governments 13,306 1,450 (25) 14,731
Corporate securities 1,476,576 112,343 (4,999) 1,583,920
Mortgage-backed securities 379,291 12,043 (3,474) 387,860
--------- ------- ------ ---------
Totals $1,994,934 $137,572 $(8,531) $2,123,975
1992
U.S. Treasury securities and
obligations of U.S. government
corporations and agencies $125,023 $11,349 $(1) $136,371
Obligations of states and
political subdivisions 8,974 260 (66) 9,168
Debt securities issued by
foreign governments 17,697 1,173 (9) 18,861
Corporate securities 1,286,064 67,526 (4,191) 1,349,399
Mortgage-backed securities 273,742 11,496 (976) 284,262
--------- ------ ------ ---------
Totals $1,711,500 $91,804 $(5,243) $1,798,061
</TABLE>
Gross unrealized investment gains and losses on equity investments are as
follows:
1993 1992 1991
(in thousands)
Gross unrealized gains $6,987 $6,118 $5,941
Gross unrealized losses (3,631) (3,616) (3,560)
----- ----- -----
3,356 2,502 2,381
Income taxes (812) (707) (635)
----- ----- -----
Net unrealized investment gains $2,544 $1,795 $1,746
The cost and fair value of fixed maturities at December 31, 1993 and
1992, by contractual maturity, are shown below. Expected maturities will
differ from contractual maturities because borrowers may have the right
to call or prepay obligations with or without call or prepayment
penalties. Proceeds from sale of investments in fixed maturities during
1993 and 1992 were $51 million and $116 million, respectively. Gross
gains of $16 million and gross losses of $1 million were realized on
sales in 1993, and gross gains of $12 million and gross losses of $2
million were realized in 1992. Although the company has a diversified
portfolio of fixed maturity investments, approximately 21 percent of
these investments are debt securities issued by public utility companies.
Fair
Cost Value
(in thousands)
1993
Due in one year or less $23,001 $23,674
Due after one year through five years 267,005 291,322
Due after five years through 10 years 830,661 899,509
Due after 10 years 494,977 521,611
Mortgage-backed securities 379,290 387,859
--------- ---------
Totals $1,994,934 $2,123,975
Fair
Cost Value
(in thousands)
1992
Due in one year or less $11,458 $11,685
Due after one year through five years 192,851 204,331
Due after five years through 10 years 699,011 740,119
Due after 10 years 534,438 557,078
Mortgage-backed securities 273,742 284,848
--------- ---------
Totals $1,711,500 $1,798,061
The carrying amounts and fair values of mortgage loans and policy loans
are as follows at December 31, 1993 and 1992 (in thousands):
Carrying Fair
Amount Value
1993
Mortgage loans $341,713 $368,486
Policy loans 129,152 119,336
1992
Mortgage loans $370,507 $390,373
Policy loans 128,351 117,171
The development of the allowance for losses on mortgage loans is as
follows (in thousands):
1993 1992 1991
Balance at beginning of year $8,400 $1,450 $250
Loan foreclosure (1,100) (650) (150)
Addition to allowance 1,450 7,600 1,350
----- ----- -----
Balance at end of year $8,750 $8,400 $1,450
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.
Note 4 - Federal Income Taxes
Effective January 1, 1992, USLICO adopted Statement of Financial
Accounting Standards No. 109 (FAS 109), Accounting for Income Taxes. The
adoption of FAS 109 changed the method of accounting for income taxes
from the deferred method to an asset and liability approach. Previously,
the company deferred the past tax effects of timing differences between
financial reporting income and taxable income. The asset and liability
approach requires the recognition of deferred tax liabilities and assets
for the expected future tax consequences of temporary differences between
the financial statement carrying amounts and the tax bases of assets and
liabilities. Deferred tax assets and liabilities are measured using
enacted tax rates expected to apply to taxable income in the years in
which those temporary differences are expected to be recovered or
settled. Under FAS 109, the effect on deferred tax assets and
liabilities of a change in tax rates is recognized in income in the
period that included the enactment date. The tax rate increase from 34
percent to 35 percent in 1993 produced additional tax expense of $1.6
million.
The cumulative effect of the change in accounting method, which amounted
to $9.5 million, was reported as a change in accounting principle.
Financial statements for years prior to 1992 were not restated.
Total income taxes (benefit) are reflected in the Consolidated Statements
of Income as follows:
1993 1992 1991
(in thousands)
Income (loss) from continuing
operations $191 $(8,908) $(2,288)
Discontinued operations - (5,134) 10,528
Cumulative effect of accounting
changes - 9,348 -
--- ----- -----
$191 $(4,694) $8,240
The provision for income taxes charged to continuing operations consists
of the following components:
1993 1992 1991
(in thousands)
Current $2,156 $(589) $116
----- --- ---
Deferred:
Deferred policy acquisition costs (2,043) (5,328) 9,733
Policy reserve adjustments (1,773) (2,142) (7,011)
Deferred revenue liability 201 (1,491) (1,248)
Accrued expense reserve - (546) (4,046)
Tax rate increase 1,571 - -
Other, net 79 1,188 168
----- ----- -----
Total deferred (1,965) (8,319) (2,404)
----- ----- -----
$191 $(8,908) $(2,288)
<PAGE>
The provision for income taxes differs from the amount of income tax
determined by applying the U.S. statutory federal income tax rate to
operating income (loss) before income taxes as a result of the following
differences:
1993 1992 1991
(in thousands)
Income tax (benefit) at statutory
tax rate $8,320 $(15,347) $(1,898)
Goodwill write-off - 6,820 209
Tax credit from ship registry sale (8,805) - -
Tax rate increase 1,571 - -
Other (895) (381) (599)
--- ----- -----
$191 $(8,908) $(2,288)
Deferred tax liabilities (assets) are comprised of the following tax
effects of temporary differences at December 31 (in thousands):
1993 1992
Deferred policy acquisition costs $119,472 $118,043
Other 20,445 17,912
------- -------
Gross deferred tax liabilities 139,917 135,955
------- -------
Policy reserves (72,116) (68,332)
Deferred revenue liability (16,262) (15,993)
Unconsolidated subsidiary - (7,752)
Other (63) (831)
------ ------
Gross deferred tax assets (88,441) (92,908)
Deferred tax asset valuation
allowance - 7,752
------ ------
$51,476 $50,799
A valuation allowance is provided when it is more likely than not that
some portion of the deferred tax asset will not be realized. In 1992,
the company had established a valuation allowance for the total effect of
the deferred tax loss on its unconsolidated foreign subsidiary, which was
realized in 1993 upon its sale.
Shareholders' equity at December 31, 1993, included approximately $13.6
million which is defined as policyholders' surplus of the life
subsidiaries that may be subject to federal income tax at ordinary
corporate rates under certain future conditions, including distributions
to shareholders. At December 31, 1993, the amount of federal income tax
which would have been paid if policyholders' surplus were distributed was
approximately $7.4 million. USLICO does not intend to make any
significant taxable distributions from the life subsidiaries in the
foreseeable future and, accordingly, no provision for such future taxes
has been made in these financial statements. As of December 31, 1993,
approximately $71.7 million was available for payment of shareholder
dividends by the life insurance subsidiaries without incurring additional
tax liability.
Net cash paid by USLICO for federal income taxes was $4 million in 1993,
$0.4 million in 1992 and $12.3 million in 1991.
Note 5 - Convertible Subordinated Debentures
In December 1989, USLICO issued $57.5 million of 8.5 percent convertible
subordinated debentures due 2014 (the "1989 debentures"). In January
1986, USLICO issued $40.25 million of 8 percent convertible subordinated
debentures due 2011 (the "1986 debentures"). The debentures are
convertible into USLICO common stock at any time on or before December
15, 2014, and January 15, 2011, respectively, unless previously
redeemed, at a conversion price of $27 per share and $31.35 per share,
respectively, subject to adjustment in certain circumstances. The 1989
debentures are entitled to a sinking fund payment of $2.875 million
annually commencing in 1999 and the 1986 debentures to a payment of $1.75
million annually commencing in 1996. The debentures are redeemable, in
whole or in part, at the option of USLICO at any time commencing in
December 1993, as to the 1989 debentures, at stated redemption prices
declining ratably to par in 1999, and in January 1989, as to the 1986
debentures, at stated redemption prices declining ratably to par in 1996.
During 1990, USLICO repurchased $1.7 million of the 1986 debentures.
Amounts of interest paid on the debentures were $8 million per year in
1993, 1992 and 1991.
The carrying amounts and fair values of long-term debt consisted of the
following at December 31, 1993, and 1992 (amounts in thousands):
Carrying Fair
Amount Value
1993
1989 debentures $57,500 $59,800
1986 debentures 38,550 38,935
------ ------
Total $96,050 $98,735
1992
1989 debentures $57,500 $57,200
1986 debentures 38,550 35,850
------ ------
Total $96,050 $93,050
Note 6 - Shareholders' Equity
The company is authorized to issue 50 million shares of its $1.00 par
value common stock. At December 31, 1993, and December 31, 1992, there
were 10.8 million shares issued and outstanding. There also were 3.7
million shares owned by subsidiaries at both dates that are reported as
treasury shares.
Changes in shareholders' equity were as follows (in thousands):
1993 1992 1991
Common Stock:
Beginning balance $14,455 $14,456 $14,458
Stock grants 5 - -
Repurchases - (1) (30)
Shares issued as collateral - - 28
------ ------ ------
Ending balance $14,460 $14,455 $14,456
Additional Paid-in Capital:
Beginning balance $159,637 $159,641 $159,591
Excess over par values of shares:
Stock grants 77 - -
Repurchases (4) (4) (523)
Issued as collateral - - 573
------- ------- -------
Ending balance $159,710 $159,637 $159,641
Net Unrealized
Investment Gains (Losses):
Beginning balance $1,795 $1,746 $(1,587)
Change in market value
of equity securities 749 49 3,333
----- ----- -----
Ending balance $2,544 $1,795 $1,746
Foreign Currency
Translation Adjustments:
Beginning balance $(1,650) $(1,785) $(1,564)
Foreign currency translation
adjustment 50 135 (221)
----- ----- -----
Ending balance $(1,600) $(1,650) $(1,785)
Retained Earnings:
Beginning balance $175,501 $242,270 $241,813
Net income (loss) 23,580 (56,013) 11,236
Dividends (2,582) (10,756) (10,779)
------- ------- -------
Ending balance $196,499 $175,501 $242,270
Treasury Stock:
Beginning balance $(95,791) $(95,791) $(95,190)
Shares issued as collateral - - (601)
------ ------ ------
Ending balance $(95,791) $(95,791) $(95,791)
Insurance companies are restricted by statutory requirements of their
domiciliary states as to the amounts they may pay in dividends, loans or
advances to affiliates or invest in the capital stock of affiliates. At
December 31, 1993, $8.7 million was available for payment of dividends by
the insurance subsidiaries to USLICO without prior regulatory approval.
At December 31, 1993, 15.5 million shares of USLICO's unissued common
stock were restricted in accordance with a rights plan adopted in 1988,
under which rights become exercisable only in circumstances involving
substantial change in the ownership of USLICO common stock. These rights
become exercisable at 50 percent of the prevailing market value. In
addition, 500,000 shares were reserved for issuance in a stock option
program and remain unissued. At December 31, 1993, there were 423,500
shares under outstanding options at exercise prices ranging from $16.375
to $18.25 per share.
Note 7 - Reinsurance
USLICO's insurance subsidiaries routinely enter into reinsurance
transactions covering all lines of business. This reinsurance involves
either ceding certain risks to or assuming risks from other insurance
companies. The primary purpose of ceded reinsurance is to protect the
ceding company from potential losses in excess of levels that it is
prepared to accept. Ceded reinsurance is treated as the liability of the
company that accepted the risk; however, if the reinsurer could not meet
its obligations, the ceding company would have to assume the liability.
USLICO adopted Statement of Financial Accounting Standards No. 113, which
specifies the accounting for the reinsuring of insurance contracts, in
the first quarter of 1993. Prior year assets and liabilities were
restated to reflect the effect of this new standard, the effect of which
was immaterial. The standard had no effect on the company's net income.
Reinsurance on a statutory basis as of and for the years ended December
31 was as follows:
1993 1992 1991
(in thousands)
Premiums:
Assumed $11,556 $15,750 $7,101
Ceded 36,994 47,473 77,634
Reinsurance recoverable on:
Paid losses 8,847 20,516 29,812
Unpaid losses 8,364 9,610 4,999
Note 8 - Pension and Stock Ownership Plans
USLICO maintains a qualified non-contributory defined benefit pension
plan and a supplemental non-qualified excess plan covering substantially
all of its employees. The plans provide pension benefits that are based
on the employee's years of service and compensation during three
consecutive years in the last 10 years of employment preceding
retirement. The qualified plan assets consist principally of common
stocks and long-term U.S. Government and corporate bonds, and include
273,446 shares of USLICO common stock.
Net periodic pension cost for the qualified plan included the following
components:
1993 1992 1991
(in thousands)
Service cost - benefits
earned during the period $1,405 $1,402 $1,712
Interest cost on projected
benefit obligation 7,074 6,989 7,397
Actual return on assets (9,617) (5,651) (11,330)
Net amortization and deferral 148 (3,912) 1,099
--- ----- -----
Net periodic pension credit $(990) $(1,172) $(1,122)
Assumptions used in the accounting for this plan were primarily as
follows:
1993 1992 1991
Weighted average discount rate 7.00% 8.00% 8.00%
Weighted average rate of increase
in compensation level 5.00% 6.70% 7.20%
Expected long-term rate of return
on assets 9.00% 9.25% 9.25%
The following table sets forth the qualified plan's funded status and
amounts recognized in the Consolidated Balance Sheets (in thousands):
1993 1992
Actuarial present value of benefit
obligations:
Vested benefit obligation $97,167 $84,234
Accumulated benefit obligation $98,950 $85,493
Projected benefit obligation $103,166 $91,393
Plan assets at fair value 99,870 96,136
------ ------
Plan assets in excess of (less than)
projected benefit obligations (3,296) 4,743
Unrecognized net losses 20,977 13,318
Unrecognized net asset at January 1 (8,047) (9,435)
Unrecognized prior service cost at
January 1 (801) (783)
----- -----
Prepaid pension cost recognized in the
Consolidated Balance Sheets $8,833 $7,843
The supplemental, non-qualified excess retirement plan is funded by the
general account assets of USLICO. The liability recorded for this plan
was $2.5 million and $2.3 million at December 31, 1993 and 1992,
respectively. The annual expense of this plan was $0.4 million in 1993,
$1.3 million in 1992 and $1.1 million in 1991.
USLICO also has a contributory qualified salary savings profit sharing
plan for employees who meet certain service requirements. Employer
contributions are based on net earnings. Contributions to the plan by
USLICO were $271,000 for 1993, $97,000 for 1992 and $240,000 for 1991.
Note 9 - Commitments and Contingencies
Contingencies. USLICO and its subsidiaries are defendants in various
legal actions arising in the normal course of business. While the
outcome of such matters cannot be predicted with certainty, management
believes such matters will be resolved without material adverse impact on
the financial condition of USLICO.
Leases. USLICO has various non-cancelable lease commitments that expire
through 2000, which aggregate $12.6 million. Rent expense charged to
operations for 1993, 1992 and 1991 was $4.3 million, $4.2 million and
$4.0 million, respectively. Future minimum lease payments for the next
five years are as follows (in millions):
1994 $4.2
1995 $3.9
1996 $3.8
1997 $0.1
1998 $0.1
Note 10 - Restructuring Charges
In 1992 USLICO recognized certain one-time, noncash charges totaling
$49.6 million related to corporate restructuring. The charges consisted
of $19.4 million to write off goodwill and $30.2 million to reduce the
balance of deferred policy acquisition costs. The goodwill write-off
relates to two former life insurance subsidiaries that were merged into
United Services Life Insurance Company, USLICO's primary subsidiary,
during 1992.
Consistent with a new internal management structure and market focus
instituted at the end of 1992, an increased number of separate product
lines were used for recoverability testing. 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. These changes resulted in amortization adjustments
and non-recoverable deferred costs for certain product lines that were
recognized for reporting purposes by a reduction in deferred policy
acquisition costs in 1992.
Note 11 - Quarterly Financial Data (Unaudited)
Quarterly financial data for the years ended December 31, 1993, and 1992
follow (amounts in thousands, except per share data):
March June September December
1993
Net income $4,039 $1,430 $12,764 $5,347
Net income per share:
Primary $0.38 $0.13 $1.19 $0.50
Fully diluted 0.38 0.13 1.00 0.47
1992
Operating income (loss)
before discontinued
operations and cumulative
effect of accounting
changes $2,736 $6,285 $2,334 $(47,586)
Discontinued operations - - - (9,954)
Cumulative effect of
accounting changes (9,828) - - -
----- ----- ----- ------
Net income (loss) $(7,092) $6,285 $2,334 $(57,540)
Net income per share:
Primary
Operating income (loss) $0.25 $0.59 $0.22 $(4.42)
Discontinued operations - - - (0.93)
Accounting changes (0.91) - - -
---- ---- ---- ----
Net income (loss) $(0.66) $0.59 $0.22 $(5.35)
Fully diluted
Operating income (loss) $0.25 $0.53 $0.22 $(4.42)
Discontinued operations - - - (0.93)
Accounting changes (0.91) - - -
---- ---- ---- ----
Net income (loss) $(0.66) $0.53 $0.22 $(5.35)
The operating loss for the quarter ended December 31, 1992, resulted from
certain nonrecurring charges, primarily the write-off of goodwill and
deferred acquisition costs described in Note 10.
Net income for the quarter ended March 31, 1992, was restated for the
effects of adopting Statement of Financial Accounting Standards No. 109,
Accounting for Income Taxes, as described in Note 4, and Statement of
Financial Accounting Standards No. 106, Accounting for Postretirement
Benefits other than Pensions, as described in Note 1.
<PAGE>
<PAGE>
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Shareholders of USLICO Corporation:
We have audited the accompanying consolidated balance sheets of USLICO
Corporation and subsidiaries as of December 31, 1993 and 1992, and the
related consolidated statements of income and cash flows for each of the
years in the three-year period ended December 31, 1993. These
consolidated financial statements are the responsibility of the company's
management. Our responsibility is to express an opinion on these
consolidated financial statements 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, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of
USLICO Corporation and subsidiaries as of December 31, 1993 and 1992, and
the results of their operations and their cash flows for each of the
years in the three-year period ended December 31, 1993, in conformity
with generally accepted accounting principles.
As discussed in Notes 1 and 4 to the consolidated financial statements,
the company changed its method of accounting for income taxes by adopting
the provisions of the Financial Accounting Standards Board's Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes," in
1992. As discussed in Note 1 to the consolidated financial statements,
the company also adopted the provisions of the Financial Accounting
Standards Board's Statement of Financial Accounting Standards No. 106,
"Employers' Accounting for Postretirement Benefits Other than Pensions"
in 1992.
KPMG Peat Marwick
Washington, D.C.
February 23, 1994
<PAGE>
<PAGE>
REPORT OF MANAGEMENT
Management of USLICO Corporation prepared the accompanying Consolidated
Financial Statements and is responsible for them. The statements have
been prepared in conformity with generally accepted accounting principles
and necessarily include amounts that are based on estimates and
judgments. The financial information included elsewhere in this annual
report is consistent with the Consolidated Financial Statements, unless
labeled that it is prepared in accordance with statutory accounting
practices.
In meeting its responsibilities regarding the reliability of the
Consolidated Financial Statements, management has established and
maintains a system of internal accounting control. This system is
designed to provide reasonable assurance that assets are safeguarded
against loss from unauthorized use or disposition and that transactions
are properly executed and recorded. Management believes this system
provides reasonable assurance that errors or irregularities that could be
material to the Consolidated Financial Statements are prevented or would
be detected in the normal course of business. This system is augmented
by examinations performed by an internal audit department.
The Consolidated Financial Statements have been audited by KPMG Peat
Marwick, independent auditors, and their opinion appears on page 32. As
auditors, they also provide an objective, outside review of operating
results and financial condition. Working with our internal auditors,
they review and test our system of internal accounting controls and the
data included in the Consolidated Financial Statements.
The Audit Committee, which consists of outside directors, has functioned
since 1976 to assure that independent and internal auditors have full and
free access to the board of directors to discuss the results of their
examinations, their opinions on internal accounting controls and the
quality of financial reporting. The committee meets regularly with
management, internal auditors and independent auditors.
Management also recognizes its responsibility for fostering a strong
ethical climate so that the company's affairs are conducted according to
the highest standards of conduct. This responsibility is reflected in
the company's Code of Conduct, which is periodically distributed to all
employees. The Code of Conduct addresses, among other things, integrity,
potential conflicts of interest and the confidentiality of information.
Glenn H. Gettier, Jr.
Executive Vice President and Chief Financial Officer
February 23, 1994
<PAGE>
<PAGE>
BOARD OF DIRECTORS & SENIOR OFFICERS
USLICO DIRECTORS
Robert E. Buchanan Thomas H. Moorer
President, The Buchanan Companies Admiral, USN (Ret.)
Gaithersburg, Md. McLean, Va.
Daniel J. Callahan, III Fioravante G. Perrotta
Chairman and Attorney, Rogers & Wells
Chief Executive Officer New York, N.Y.
Robert F. Cocklin David H. Roe
Major General, AUS (Ret.) President and
Arlington, Va. Chief Operating Officer
Glenn H. Gettier, Jr. David S. Smith
Executive Vice President Attorney, Former Ambassador to Sweden
and Chief Financial Officer Washington, D.C.
William V. McBride Eli Weinberg, CPA
General, USAF (Ret.) Private Investments
San Antonio, Texas Manhasett, N.Y.
SENIOR OFFICERS
W. Alan Aument Deborah B. Holden
Senior Vice President and Treasurer Senior Vice President, Human Resources
USLICO Corporation United Services Life Insurance Company
Daniel J. Callahan, III David W. Karsten
Chairman and Chief Executive Officer Senior Vice President and Controller
USLICO Corporation USLICO Corporation
Glenn H. Gettier, Jr. Thomas Y. Moon
Executive Vice President President
and Chief Financial Officer Bankers Security Life Insurance Society
USLICO Corporation
James J. Hagerty Peter M. Regan
President, Individual Annuity Division President, Individual Life Division
United Services Life Insurance Company United Services Life Insurance Company
Jeffrey P. Hahn David H. Roe
Senior Vice President and Secretary President and Chief Operating Officer
USLICO Corporation USLICO Corporation
<PAGE>
<PAGE>
SHAREHOLDER INFORMATION
USLICO Corporation common stock is traded on the New York Stock Exchange.
The stock symbol is "USC."
USLICO Corporation's convertible debentures are traded on the New York
Bond Exchange. An 8 percent convertible debenture was issued in January
1986, and an 8-1/2 percent convertible debenture was issued in December
1989.
Number of
1993 Shares Traded High Low
1st quarter 1,184,800 20 15
2nd quarter 378,600 18 1/2 16 5/8
3rd quarter 740,800 19 16 7/8
4th quarter 474,400 17 3/4 16 1/8
2,778,600
Number of shareholders at December 31, 1993, was 5,587.
Quarterly dividend was $.06 per share.
There were 10,760,384 publicly-held shares outstanding at December 31,
1993.
Number of
1992 Shares Traded High Low
1st quarter 469,600 20 3/8 17 3/4
2nd quarter 384,700 18 7/8 17 1/4
3rd quarter 431,000 18 1/2 17 1/8
4th quarter 557,000 19 16 3/4
1,842,300
Number of shareholders at December 31, 1992, was 6,251.
Quarterly dividend was $.25 per share.
There were 10,755,484 publicly-held shares outstanding at December 31,
1992.
<PAGE>
<PAGE>
SHAREHOLDER INFORMATION
Annual Meeting
The annual meeting of USLICO Corporation shareholders will be held
Friday, April 29, 1994, at 9:30 a.m. in the auditorium of the United
Services Life Insurance Company building, 3rd floor, 950 N. Glebe Road,
Arlington, VA 22203.
Form 10-K
A copy of Form 10-K as filed with the Securities and Exchange Commission
may be obtained by any shareholder by sending a request to:
Corporate Secretary
USLICO Corporation
4601 Fairfax Drive
P.O. Box 3700
Arlington, VA 22203
Independent Auditors
KPMG Peat Marwick
Washington, D.C.
Registrar and Transfer Agent
American Stock Transfer & Trust Company
40 Wall Street
New York, NY 10005
<TABLE>
EXHIBIT 21
USLICO CORPORATION
SUBSIDIARIES TO REGISTRANT
December 31, 1993
COMPANY % OWNED JURISDICTION NATURE OF BUSINESS
<S> <C> <C> <C>
USLICO CORPORATION Parent Virginia
- -United Services Life Insurance
Company 100.0000 Virginia Life Insurance Company
- --Bankers Security Life Insurance
Society 100.0000 New York Life Insurance Company
- --Delaware Administrators, Inc. 100.0000 Ohio TPA-Health
- -USLICO Securities Corporation 100.0000 Delaware Broker Dealer
- -Bankers Centennial Management Corp 100.0000 Virginia Investment Advisor
- -IB Holdings, Inc. 100.0000 Virginia Holding Company
- --Northeastern Insurance Company of
Hartford 100.0000 Connecticut Reinsurance Company
- --The New Providence Insurance
Company, Limited 100.0000 Cayman Is. Insurance Company
- --IB Resolution, Inc. 100.0000 Virginia Service Company
- ---Washington International Limited 100.0000 Hong Kong In Liquidation
- --International Risks, Inc. 100.0000 Delaware Insurance Agency
</TABLE>
