Item 1.
Item 3.
Item 3. Legal Proceedings.
In November 1981 the Company and certain of its subsidiaries filed a third amended complaint against a former registered representative and certain of his affiliated companies and individuals and against certain former officers of USLIFE Savings and Loan Association ("USLIFE Savings", a former subsidiary of the Company) for indemnification, injunctive relief and accounting (USLIFE Savings and Loan Association v. Louis Wilcox, et al., Superior Court of the State of California for the County of Riverside). In the complaint, the Company, its subsidiaries and USLIFE Savings sought to recover all damages and losses incurred by them as defendants in actions related to the activities of the aforementioned former registered representative as well as attorneys' fees and costs incurred in defending against such actions. In April 1984, defendant Louis M. Wilcox, a former officer of USLIFE Savings, filed a cross complaint in this action. Wilcox seeks special damages in the amount of not less than $15 thousand, general damages of $1 million, and punitive damages of $10 million. In 1986 Wilcox's causes of action for malicious prosecution and abuse of process were dismissed. In 1989 Wilcox voluntarily dismissed the remainder of his case and appealed the 1986 decision dismissing his causes of action for malicious prosecution and abuse of process. On appeal, the dismissal of the cause of action for abuse of process was reversed. The dismissal of the cause of action for malicious prosecution was upheld. Trial was scheduled to begin in June 1993. Pursuant to the Company's request, the case was bifurcated for trial. In July 1993 the trial court, after hearing evidence on the issue, without a jury, decided that the Company originally had probable cause to sue Wilcox. As this was dispositive of Wilcox's claim for malicious prosecution, the Court dismissed Wilcox's claims against the Company. A judgment in the Company's favor was entered in late 1993. Wilcox has appealed.
In March 1992, All American Life Insurance Company ("All American") terminated the right of Doug Ruedlinger, Inc. (the "Managing General Agent" or "DRI") to sell college medical insurance on behalf of All American. All American had entered into an arrangement with the Managing General Agent for sales and the administration of student accident and health policies, embodied in an Exclusive Agency Agreement. In April 1992, All American terminated the Managing General Agent's Exclusive Agency Agreement. The Exclusive Agency Agreement was terminated as a result of the failure of the Managing General Agent to secure adequate reinsurance as required under that contract, and to meet other contractual obligations. Subsequent to the termination of the Exclusive Agency Agreement, the Managing General Agent ceased processing and paying claims under All American policies, and All American assumed these functions. The Managing General Agent then commenced arbitration proceedings against All American before the American Arbitration Association based upon the termination of the Exclusive Agency Agreement (the "Arbitration Proceeding").
All American then commenced an action against the Managing General Agent in the United States District Court for the District of Kansas (All American Life Insurance Co. v. Doug Ruedlinger, Inc. and First Benefits, Inc. ("FBI") (the "Kansas litigation") seeking a Temporary Restraining Order (which was granted), and damages for breach of contract and breach of fiduciary duty; All American also secured a preliminary injunction prohibiting the Managing General Agent from, among other things, collecting premiums, placing any insurance on behalf of All American, or in any way holding itself out as representing All American. All American subsequently filed an amended complaint adding corporations and individuals affiliated with the Managing General Agent as party defendants (the "Ruedlinger Defendants") and alleging claims ranging from civil RICO violations to a claim for common law fraud. The Managing General Agent's Errors and Omissions carrier, Transamerica Insurance Company ("Transamerica"), intervened in the Kansas litigation to deny coverage for the claims asserted against the Managing General Agent in the Arbitration Proceeding and the Kansas litigation, which allegedly fell under the coverage of Transamerica's Errors and Omissions Policy (the "Policy"). In March 1993, All American entered into an Assignment Agreement with Merchants National Bank ("Merchants" or, the "Bank") (the Managing General Agent's former bank). The Bank had asserted a security interest in premiums and reinsurance recoveries on the policies at issue, and had intervened in the Kansas litigation seeking to enforce these alleged security interests. Through the Assignment Agreement, All American purchased all of the Bank's right, title and interest in and to the Managing General Agent's assets, as well as the assets of its parent and affiliates, pursuant to certain loan documents executed by the Managing General Agent and its parent and affiliates. Pursuant to the terms of the Assignment Agreement, all claims asserted by All American and the Bank, against each other, were dismissed. By consent order dated May 25, 1993, the Kansas litigation was stayed by the Court. The Court in the Kansas litigation lifted the stay in that case solely to permit All American to file a second amended complaint in that action, which was identical to the prior pleading except that it set forth an additional claim against an affiliate of the Managing General Agent, Fund Insurance Company, Ltd. ("FICL"), based on a promissory note that was assigned to All American by the Bank under the Assignment Agreement. FICL is a Bermuda insurance company that was already a defendant in the Kansas litigation, and is owned by a Kansas corporation known as The Ruedlinger Company, Inc. Among the loan documents assigned to All American by the Bank pursuant to the Assignment Agreement was a written guaranty by Douglas O. Ruedlinger ("Ruedlinger"), guarantying the full indebtedness represented by the loan documents. Prior to the execution and delivery of the Assignment Agreement, the Bank had commenced an action against Ruedlinger in the Kansas State Court of Shawnee County, Merchants National Bank v. Douglas O. Ruedlinger, 92CV1432 based on that guaranty (the "Guaranty Action"). In April 1993, after the Assignment Agreement, All American was substituted as plaintiff in that action. All American then moved for summary judgment, and by Order and Judgment dated September 15, 1993, the Court awarded All American final judgment against Ruedlinger personally for an amount in excess of $2.4 million. Ruedlinger has filed an appeal of that judgment.
The arbitration hearings between All American and the Managing General Agent, which began in October 1992, and which by January 1993 were substantially completed (the "Arbitration Proceeding"), were effectively stayed on January 19, 1993, when the Managing General Agent, and its captive third-party administration affiliate FBI, filed Chapter 11 reorganization bankruptcy petitions (the "DRI Bankruptcy Cases"). In April 1993, the Bankruptcy Court converted those bankruptcy reorganization proceedings to Chapter 7 liquidations and appointed a trustee to administer the debtors' estates (the "DRI Trustee"). All American moved in those bankruptcy proceedings to lift the stay imposed by the bankruptcy filings to permit the Arbitration Proceeding to be concluded, which motion was granted by the Court in August 1993.
In December 1993, All American negotiated a settlement with the DRI Trustee and Transamerica in the DRI Bankruptcy Cases (the "DRI Bankruptcy Settlement"). Under the terms of that settlement, which was approved by the bankruptcy court at a hearing on December 16, 1993, and later by written order dated January 25, 1994, all claims asserted, or which could have been asserted against All American by DRI, FBI, the DRI Trustee and Transamerica were dismissed, with prejudice. In addition, the DRI Trustee consented to the entry of an award in the Arbitration Proceeding whereby: (i) the arbitrators would find in favor of All American on all of its claims, including a finding that the termination of DRI's Exclusive Agency Agreement was proper and for cause; (ii) finding against DRI on all of its claims; and (iii) further entering a monetary award in All American's favor against DRI and FBI in the sum of $17 million (the "General Claim"). Also in connection with the DRI Bankruptcy Settlement, Transamerica agreed to pay to All American the sum of $200 thousand to settle All American's
claim under Transamerica's Policy. As consideration for this payment, All American agreed to subordinate its claims to all other allowed claims in the DRI Bankruptcy Cases, and to dismiss and release certain claims against DRI, FBI, and certain of the Ruedlinger Defendants. Expressly exempted from the release were claims against FICL, Ruedlinger in the Guaranty Action, Wheatland and various other entities under the Merchants loan documents, and various other entities controlled by Ruedlinger.
On or about April 21, 1993, All American filed involuntary bankruptcy petitions under Chapter 7 against the Managing General Agent's parent corporation, Wheatland Group Holdings, Inc. ("Wheatland"), and five of its other wholly owned subsidiaries, which were also affiliates of the Managing General Agent. Each of the six alleged debtors moved to dismiss the involuntary bankruptcy petition filed against it, and All American opposed those motions. After a hearing before the Court on October 12, 1993, by Judgment dated October 25, 1993, the Bankruptcy Court denied the debtors' motions to dismiss, ruling that All American had properly filed the involuntary bankruptcy petitions against each of the six debtors. In November 1993, the Court entered orders for relief under Chapter 7 of the Bankruptcy Code against each of the involuntary debtors, and appointed a Trustee to administer their estates.
In July 1993, the Judge in an action entitled Sheldon Whitehouse, as Receiver for United International Insurance Company ("UIIC") v. Douglas O. Ruedlinger, et al., pending in the United States District Court for the District of Kansas, 92-4255 (RDR), permitted the plaintiff-Receiver to amend his complaint to add All American as a defendant in that case, and to assert claims against All American for an accounting and for money damages, which complaint was served on All American. In that action it is alleged that over $300 thousand in UIIC premiums were used by FBI to pay All American insured's claims, and that UIIC's Receiver is entitled to a refund of those funds. All American intends to vigorously oppose that action. That action has also been stayed pursuant to a separate consent order issued by the Court. In August 1993, All American filed a claim in the UIIC receivership action in Rhode Island, in which All American claimed that $87 thousand of its premiums were used by FBI to pay claims of UIIC's insureds. The Receiver has taken no position with respect to this claim.
In December 1993, All American settled all potential claims by or against the National Federation of State High School Associations (the "Federation"). The Federation was an insured under a student accident medical payment insurance policy placed by DRI. The policy provided excess insurance to the Federation over a 55% self-insured program for the Federation members. All American and the Federation were involved in a dispute as to when All American's coverage applied. All American contended that its coverage was excess to the self- insured program, and the Federation contended that All American's insurance obligation was primary coverage. The Federation also threatened to bring an action against All American claiming that, since June 1992, All American had collected certain premiums directly from Federation insureds and further alleging that part of those premiums were Federation member dues for the self- insured program. The Federation threatened to seek an accounting from All American, and to the extent that DRI was All American's Managing General Agent, the Federation stated that it would allege that All American was liable to it for over $1.5 million in Federation dues that were misappropriated by DRI. In July 1992, All American entered into a standstill agreement with the Federation, which provided that All American would advance claim payments to Federation insureds for all claims under both the self-insured program and All American's insurance policy, subject to the resolution of the coverage dispute. All American advanced over $750 thousand for such claim payments. In December 1993, All American settled all claims by and against the Federation whereby the Federation has agreed to pay $100 thousand to All American in installments. The Federation and All American have agreed to exchange general releases as part of this settlement.
Starting in June 1991, and through April 1992, DRI filed several claims with reinsurers of All American's insurance under reinsurance treaties issued for the school years 1988-1989, 1989-1990, and 1990-1991. As of June 1992, the outstanding reinsurance claims filed by DRI totalled to approximately $3.5 million. After a preliminary audit of DRI conducted by the reinsurers in February 1992, the reinsurers informed DRI that they would not pay any further claims until a full audit was completed. Among the questions raised by the reinsurers at that audit were (i) whether DRI improperly included a 5% TPA fee as part of loss adjustment expense when filing the aggregate stop loss claims; (ii) whether the reinsurance treaties covered illness claims; and (iii) whether DRI's tack-on premiums should have been included in calculating the premium
component of the stop loss policies' attachment point, and the reinsurance premiums. The reinsurers claim that all three procedures were improper. All American had demanded payment of these outstanding claims, which is currently the subject of negotiations between All American and the reinsurers. Certain of the reinsurers have settled with All American, which when completed, will represent payments to All American of over $230 thousand. Other reinsurers have indicated that they will demand the refund of sums previously paid by them to DRI on certain aggregate claims that the reinsurers contend were improper. All American submitted claims to the reinsurers for the 1991-1992 year of account totalling over $3 million on an excess of loss treaty in effect for this period. These reinsurers, which for the most part were different from the prior years' reinsurers, denied coverage for the vast majority of the claims submitted and refused to pay any claims without a thorough audit. All American has reached settlements with reinsurers possessing over 85% of the participation interests in this period's treaties by agreeing to rescind these treaties, which have resulted in premium refund payments to All American totalling over $900 thousand. All American is continuing to negotiate with the remaining few reinsurers. All American's likelihood of recovering significantly more of these reinsurance billings is currently uncertain.
All American has taken a one-time, after-tax charge of $10.6 million to establish a reserve for amounts receivable from the Managing General Agent. Management is of the opinion that any additional losses that might be suffered will not have a material adverse impact on the consolidated Equity Capital of the Company.
In April 1991, All American commenced a lawsuit against 11 subscribers to a reinsurance pool when the reinsurers failed to honor their obligations under the reinsurance agreement. Approximately $15.8 million of reinsured claims were in dispute. All American's complaint sought declaratory relief, and damages for breach of contract and the reinsurers' duty of good faith and fair dealing (All American Life Insurance Company, et al. v. Beneficial Life Insurance Company, et al., U.S. District Court for the District of New Jersey). All of the defendants in the All American action asserted counterclaims against All American based upon its alleged failure to properly administer the reinsured policies. Certain other common law claims were also asserted. A total of eight of the reinsurers commenced their own lawsuits against All American, among others, arising out of the same transactions. Seven of those brought an action entitled Mutual Benefit Life Insurance Company, et al. v. George G. Zimmerman, et al., in the U.S. District Court for the District of New Jersey. The Mutual Benefit complaint sought rescission of the reinsurance agreement, as well as compensatory and punitive damages, based upon asserted federal and New Jersey state RICO claims and other common law claims for relief. All of the defendants in the Mutual Benefit action also cross-claimed against each other for contribution or indemnification. An eighth reinsurer commenced a further lawsuit arising out of the same transactions, naming All American, among others, as a defendant (Security Benefit Life Insurance Company v. All American Life Insurance Company, et al, U.S. District Court for the District of New Jersey). The Security Benefit complaint sought only rescission of the reinsurance agreement and declaratory relief as against All American. Certain of the other defendants in the Security Benefit action asserted cross- claims against All American for contribution or indemnification. All of the lawsuits were consolidated in the United States District Court for the District of New Jersey, Newark Division. All American has now reached settlements with all of the reinsurers. All direct claims concerning All American in the Mutual Benefit and Security Benefit actions have been dismissed. The consolidated actions are currently in the discovery phase and no date for trial has been set. All American has moved to dismiss the remaining cross-claims for contribution or indemnity asserted against it, but that motion has not yet been decided by the Court.
In June 1993 a purported class action (Hoban v. USLIFE Credit Life Insurance Company, All American Life Insurance Company and Security of America Life Insurance Company) was filed in the United States District Court for the Northern District of Illinois. An Amended Complaint was filed in October 1993. The Amended Complaint alleges that the defendant companies, all of which are subsidiaries of USLIFE Corporation, sold single premium credit life and credit disability insurance policies to second mortgage borrowers in several states. The Amended Complaint further alleges that some second mortgage loans were paid off early so that the insureds were legally entitled to refunds for unearned premiums. The suit seeks damages on behalf of those insureds who did not claim and therefore did not receive partial refunds of their premiums from the named defendants. The Amended Complaint also contains claims under the Federal RICO statute and the Illinois Consumer Fraud Act. Defendants filed a Motion to Dismiss the Amended Complaint for lack of federal jurisdiction, for failure to
allege facts amounting to fraud, and for failure to allege facts amounting to a RICO violation. Plaintiff has filed a Motion to Certify the Class, which defendants opposed. Both motions are awaiting decision by the Court.
At this point in time the outcome of these suits is not predictable. However, in the opinion of management, the ultimate resolution of these suits is not likely to have a material adverse affect on the consolidated Equity Capital of the Company.
Item 4.
Item 4. Submission of Matters to a Vote of Security Holders.
None.
Item 5.
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters.
USLIFE's Common Stock is traded on the New York, Chicago (formerly Midwest), Pacific and London Stock Exchanges. Dividends for the years ended December 31, 1993 and 1992 have been declared and paid to Common Stockholders at the annual rates of $1.21 and $1.14 respectively (paid quarterly in 1993 and 1992). As of February 24, 1994 there were approximately 8,100 record holders of the Common Stock. The following table sets forth the high and low sales prices for the Common Stock as reported in the consolidated transaction system for each quarterly period during the years indicated.
MARKET PRICE RANGES (low to high)
1993 1992 ____ ____
First quarter...... 36 1/8 - 42 5/8 28 1/8 - 31 7/8 Second quarter..... 35 3/4 - 41 1/2 28 3/8 - 34 3/8 Third quarter...... 39 3/4 - 43 7/8 31 1/8 - 35 Fourth quarter..... 36 1/2 - 45 3/4 29 3/8 - 38 1/4
Market prices have been adjusted as appropriate to reflect the three-for-two split of the Company's common stock in December 1992.
See "Insurance Accounting" in Note 1 of Notes to Financial Statements and Management's Discussion and Analysis of "Liquidity" herein, for information concerning regulatory restrictions upon payment of dividends by the Life Insurance Subsidiaries to the Company.
Item 8.
Item 8. Financial Statements and Supplementary Data.
See separate Index to Financial Statements and Financial Statement Schedules on page 44. See Note 15 of Notes to Financial Statements as to condensed quarterly results of operations.
Item 9.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.
None.
Item 10.
Item 10. Directors and Executive Officers of the Registrant.
Executive Officers of the Registrant
The executive officers of USLIFE are listed below. The executive officers, after their initial election, are elected at USLIFE's annual Board of Directors meeting to serve, unless removed, until the next such annual meeting, scheduled for May 1994.
(1) Served as Chairman since March 21, 1967. Had been President from November 11, 1966 to June 14, 1971 and resumed that position from October 15, 1974 to March 1, 1976, from January 24, 1984 to November 17, 1987, and from December 1, 1988 to May 18, 1993.
All of USLIFE's executive officers devote their full time to the business of USLIFE or its subsidiaries. With the exception of Messrs. Dicke, Hohn, Schlomann, and Simpson, all of the executive officers of USLIFE have been employed by USLIFE or one of its subsidiaries or one of their predecessors for at least five years. Mr. Casper has served as President and Chief Operating Officer of USLIFE Corporation since May 1993. He also serves as President and Chief Executive Officer of USLIFE Equity Sales Corporation, and has been a Director since March 1990. Prior to assumption of his current position, Mr. Casper served as President and Chief Operating Officer of the life insurance division of USLIFE Corporation since October 1991 and as President of United States Life since at least January 1989. Mr. Henderson has served as Vice Chairman and Chief Financial Officer and a Director since at least January 1989. Mr. Ruisi has served as Vice Chairman and Chief Administrative Officer since May 1993 and has been a Director since November 1992. Previously, Mr. Ruisi served as Senior Executive Vice President-Administration since March 1990 and as Executive Vice President-Administration since at least January 1989. Mr. Bushey has served as Executive Vice President-Corporate Planning since at least January 1989. Mr. Dicke has served as Executive Vice President - Product Actuary since April 1992. Previously, he served as Vice President and Actuary for The Equitable Life Assurance Society since April 1991, and as Consultant and Actuary with Tillinghast, a Towers Perrin Company, from at least January 1989. Mr. Forte has served as Executive Vice President-General Counsel since at least January 1989. Mr. Gavrity has served as Executive Vice President- Financial Actuary since October 1991 and previously served as Executive Vice President - Chief Actuary since at least January 1989. Mr. Schlomann has served as Executive Vice President - Financial Operations since October 1993. He previously served as Senior Vice President and Controller with Frank B. Hall & Company, Inc., since at least January 1989. Mr. Hohn has served as Senior Vice President - Corporate Secretary and Counsel since May 1993. He previously served as Vice President - Corporate Secretary since April 1991. Prior to that date, he served as consultant to the Life Insurance Council of New York, a trade association of New York life insurance companies, since April 1990; and as an attorney in private practice since at least January 1989. Mr. Lynch has served as Senior Vice President-Controller since at least January 1989. Mr. McQueen has served as Senior Vice President-Financial Operations since at least January 1989. Mr. Chouinard, who has served as Senior Investment Officer of USLIFE since at least January 1989, also serves as President and Chief Executive Officer of Advisers and President and a Director of Income Fund. Mr. Auriemmo has served as Vice President and Treasurer since at least January 1989. Mr. Cargiulo has served as President and Chief Executive Officer of United States Life since May 1993. Previously, he served as President- Chief Operating Officer of United States Life since October 1991. Prior to that date, he served as Executive Vice President for individual underwriting and insurance services of that subsidiary since November 1990 and as Senior Vice President - Individual Insurance Services of United States Life since at least January 1989. Mr. Faulkner has served as President and Chief Executive Officer of USLIFE Real Estate Services Corporation since at least January 1989. Mr. Griffin has served as President and Chief Executive Officer of Old Line Life since at least January 1989. Mr. Hendricks has served as President and Chief Executive Officer of USLIFE Systems Corporation since at least January 1989 and as President and Chief Executive Officer of USLIFE Insurance Services Corporation since April 1991. Mr. Lee has served as President and Chief Executive Officer of USLIFE Credit Life since at least January 1989. Mr. Simpson has served as President of All American Life since April 1990 and as a Director since March 1990. He served as President of USLIFE from March 1990 to October 1991. Previously, Mr. Simpson served as President and Chief Operating Officer and a member of the board of directors of Transamerica Occidental Life Insurance Company since at least January 1989.
Information regarding directors of the Registrant is incorporated by reference to USLIFE Corporation's definitive proxy statement to be filed within 120 days after the end of USLIFE's fiscal year ended December 31, 1993 for use in connection with the Annual Meeting of Shareholders to be held on May 17, 1994.
Item ll. Executive Compensation.
Information regarding executive compensation is incorporated by reference to USLIFE Corporation's definitive proxy statement to be filed within 120 days after the end of USLIFE's fiscal year ended December 31, 1993 for use in connection with the Annual Meeting of Shareholders to be held on May 17, 1994.
Item 12.
Item 12. Security Ownership of Certain Beneficial Owners and Management.
Information regarding beneficial ownership of USLIFE's voting securities by directors, officers, and persons who, to the best knowledge of USLIFE, are known to be the beneficial owners of more than 5% of any class of USLIFE's voting securities as of March 31, 1994, is incorporated by reference to USLIFE Corporation's definitive proxy statement to be filed within 120 days after the end of USLIFE's fiscal year ended December 31, 1993 for use in connection with the Annual Meeting of Shareholders to be held on May 17, 1994.
Item 13.
Item 13. Certain Relationships and Related Transactions.
Information regarding certain relationships and related transactions is incorporated by reference to USLIFE Corporation's definitive proxy statement to be filed within 120 days after the end of USLIFE's fiscal year ended December 31, 1993 for use in connection with the Annual Meeting of Shareholders to be held on May 17, 1994.
Item 14.
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K.
(a) 1 and 2. Financial Statements and Financial Statement Schedules of USLIFE and Subsidiaries.
See separate Index to Financial Statements and Financial Statement Schedules on page 44.
For the purposes of complying with the amendments to the rules governing Form S-8 (effective July 13, 1990) under the Securities Act of 1933, the undersigned registrant hereby undertakes as follows, which undertaking shall be incorporated by reference into registrant's Registration Statements on Form S-8 Nos. 33-40793 (filed June 23, 1991), 33-13999 (filed May 11, 1987) and 2-77278 (filed April 30, 1982):
Insofar as indemnification for liabilities under the Securities Act of 1933 may be permitted to directors, officers and controlling persons of the registrant pursuant to the foregoing provisions, or otherwise, the registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Securities Act of 1933 and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the registrant of expenses incurred or paid by a director, officer or controlling person of the registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Act and will be governed by the final adjudication of such issue.
(a) 3. Exhibits.
3 (i) - Restated Certificate of Incorporation, as amended, incorporated herein by reference to USLIFE's Quarterly Report on Form 10-Q for the quarter ended September 30, 1993.
3 (ii) - By-laws, as amended, incorporated herein by reference to USLIFE's Annual Report on Form 10-K for the year ended December 31, 1992.
4 (i) - See Exhibit 3(i).
(ii) - Indenture dated as of October 1, 1982 (9.15% Notes due June 15, 1999, 6.75% Notes due January 15, 1998, and 6.375% Notes due June 15, 2000) incorporated herein by reference to USLIFE's Registration Statement No. 2-79559 on Form S-3.
Agreements or instruments with respect to long-term debt which are not filed as exhibits hereto do not in total exceed 10% of USLIFE's consolidated total assets and USLIFE agrees to furnish a copy thereof to the Commission upon request.
(iii) - Amended and Restated Rights Agreement, dated as of June 24, 1986 and amended and restated as of January 24, 1989, between USLIFE Corporation and Manufacturers Hanover Trust Company (predecessor to Chemical Bank), as Rights Agent, relating to Common Stock Purchase Rights issued by USLIFE on July 10, 1986, incorporated herein by reference to USLIFE's Current Report on Form 8-K dated January 24, 1989.
10 * (i) - 1981 Stock Option Plan, incorporated herein by reference to USLIFE's Annual Report on Form 10-K for the year ended December 31, 1981.
* (ii) - Employment contract dated as of April 1, 1989 between USLIFE Corporation and Gordon E. Crosby, Jr., incorporated herein by reference to USLIFE's Quarterly Report on Form 10-Q for the quarter ended March 31, 1989.
* (iii) - First Amendment dated as of May 1, 1989 to employment contract dated as of April 1, 1989 between USLIFE Corporation and Gordon E. Crosby, Jr., incorporated herein by reference to USLIFE's Quarterly Report on Form 10-Q for the quarter ended June 30, 1989.
* (iv) - Second Amendment dated as of May 1, 1990 to employment contract dated as of April 1, 1989, as amended, between USLIFE Corporation and Gordon E. Crosby, Jr., incorporated herein by reference to USLIFE's Quarterly Report on Form 10-Q for the quarter ended March 31, 1990.
* (v) - Third Amendment dated as of May 1, 1991 to employment contract dated as of April 1, 1989, as amended, between USLIFE Corporation and Gordon E. Crosby, Jr., incorporated herein by reference to USLIFE's Quarterly Report on Form 10-Q for the quarter ended June 30, 1991.
* (vi) - Fourth Amendment dated as of May 1, 1992 to employment contract dated as of April 1, 1989, as amended, between USLIFE Corporation and Gordon E. Crosby, Jr., incorporated herein by reference to USLIFE's Quarterly Report on Form 10-Q for the quarter ended June 30, 1992.
* (vii) - Fifth Amendment dated as of February 1, 1993 to employment contract dated as of April 1, 1989, as amended, between USLIFE Corporation and Gordon E. Crosby, Jr., incorporated herein by reference to USLIFE's Annual Report on Form 10-K for the year ended December 31, 1992.
* (viii) - Sixth Amendment dated as of May 1, 1993 to employment contract dated as of April 1, 1989, as amended, between USLIFE Corporation and Gordon E. Crosby, Jr., incorporated herein by reference to USLIFE's Quarterly Report on Form 10-Q for the quarter ended June 30, 1993.
* (ix) - Employment contract dated as of April 1, 1989 between USLIFE Corporation and Greer F. Henderson, incorporated herein by reference to USLIFE's Quarterly Report on Form 10-Q for the quarter ended March 31, 1989.
* (x) - First Amendment dated as of May 1, 1989 to employment contract dated as of April 1, 1989, between USLIFE Corporation and Greer F. Henderson, incorporated herein by reference to USLIFE's Quarterly Report on Form 10-Q for the quarter ended June 30, 1989.
* (xi) - Second Amendment dated as of May 1, 1990 to employment contract dated as of April 1, 1989, as amended, between USLIFE Corporation and Greer F. Henderson, incorporated herein by reference to USLIFE's Quarterly Report on Form 10-Q for the quarter ended March 31, 1990.
* (xii) - Third Amendment dated as of May 1, 1991 to employment contract dated as of April 1, 1989, as amended, between USLIFE Corporation and Greer F. Henderson, incorporated herein by reference to USLIFE's Quarterly Report on Form 10-Q for the quarter ended June 30, 1991.
* (xiii) - Fourth Amendment dated as of May 1, 1992 to employment contract dated as of April 1, 1989, as amended, between USLIFE Corporation and Greer F. Henderson, incorporated herein by reference to USLIFE's Quarterly Report on Form 10-Q for the quarter ended June 30, 1992.
* (xiv) - Fifth Amendment dated as of May 1, 1993 to employment contract dated as of April 1, 1989, as amended, between USLIFE Corporation and Greer F. Henderson, incorporated herein by reference to USLIFE's Quarterly Report on Form 10-Q for the quarter ended June 30, 1993.
* (xv) - Employment contract dated as of April 1, 1989 between USLIFE Corporation and Wesley E. Forte, incorporated herein by reference to USLIFE's Quarterly Report on Form 10-Q for the quarter ended March 31, 1989.
* (xvi) - First Amendment dated as of May 1, 1989 to employment contract dated as of April 1, 1989 between USLIFE Corporation and Wesley E. Forte, incorporated herein by reference to USLIFE's Quarterly Report on Form 10-Q for the quarter ended June 30, 1989.
* (xvii) - Second Amendment dated as of May 1, 1990 to employment contract dated as of April 1, 1989, as amended, between USLIFE Corporation and Wesley E. Forte, incorporated herein by reference to USLIFE's Quarterly Report on Form 10-Q for the quarter ended March 31, 1990.
* (xviii)- Third Amendment dated as of May 1, 1991 to employment contract dated as of April 1, 1989, as amended, between USLIFE Corporation and Wesley E. Forte.
* (xix) - Fourth Amendment dated as of May 1, 1993 to employment contract dated as of April 1, 1989, as amended, between USLIFE Corporation and Wesley E. Forte, incorporated herein by reference to USLIFE's Quarterly Report on Form 10-Q for the quarter ended June 30, 1993.
* (xx) - Employment contract dated as of April 1, 1989 between USLIFE Corporation and John D. Gavrity, incorporated herein by reference to USLIFE's Quarterly Report on Form 10-Q for the quarter ended March 31, 1989.
* (xxi) - First Amendment dated as of May 1, 1989 to employment contract dated as of April 1, 1989 between USLIFE Corporation and John D. Gavrity, incorporated herein by reference to USLIFE's Quarterly Report on Form 10-Q for the quarter ended June 30, 1989.
* (xxii) - Second Amendment dated as of May 1, 1990 to employment contract dated as of April 1, 1989, as amended, between USLIFE Corporation and John D. Gavrity, incorporated herein by reference to USLIFE's Quarterly Report on Form 10-Q for the quarter ended March 31, 1990.
* (xxiii)- Third Amendment dated as of May 1, 1991 to employment contract dated as of April 1, 1989, as amended, between USLIFE Corporation and John D. Gavrity, incorporated herein by reference to USLIFE's Quarterly Report on Form 10-Q for the quarter ended June 30, 1991.
* (xxiv) - Fourth Amendment dated as of May 1, 1992 to employment contract dated as of April 1, 1989, as amended, between USLIFE Corporation and John D. Gavrity, incorporated herein by reference to USLIFE's Quarterly Report on Form 10-Q for the quarter ended June 30, 1992.
* (xxv) - Fifth Amendment dated as of May 1, 1993 to employment contract dated as of April 1, 1989, as amended, between USLIFE Corporation and John D. Gavrity, incorporated herein by reference to USLIFE's Quarterly Report on Form 10-Q for the quarter ended June 30, 1993.
* (xxvi) - Employment contract dated as of April 1, 1989 between USLIFE Corporation and Christopher S. Ruisi, incorporated herein by reference to USLIFE's Quarterly Report on Form 10-Q for the quarter ended March 31, 1989.
* (xxvii)- First Amendment dated as of May 1, 1989 to employment contract dated as of April 1, 1989 between USLIFE Corporation and Christopher S. Ruisi, incorporated herein by reference to USLIFE's Quarterly Report on Form 10-Q for the quarter ended June 30, 1989.
* (xxviii)- Second Amendment dated as of May 1, 1990 to employment contract dated as of April 1, 1989, as amended, between USLIFE Corporation and Christopher S. Ruisi, incorporated herein by reference to USLIFE's Quarterly Report on Form 10-Q for the quarter ended March 31, 1990.
* (xxix) - Third Amendment dated as of May 1, 1991 to employment contract dated as of April 1, 1989, as amended, between USLIFE Corporation and Christopher S. Ruisi, incorporated herein by reference to USLIFE's Quarterly Report on Form 10-Q for the quarter ended June 30, 1991.
* (xxx) - Fourth Amendment dated as of May 1, 1992 to employment contract dated as of April 1, 1989, as amended, between USLIFE Corporation and Christopher S. Ruisi, incorporated herein by reference to USLIFE's Quarterly Report on Form 10-Q for the quarter ended June 30, 1992.
* (xxxi) - Fifth Amendment dated as of May 1, 1993 to employment contract dated as of April 1, 1989, as amended, between USLIFE Corporation and Christopher S. Ruisi, incorporated herein by reference to USLIFE's Quarterly Report on Form 10-Q for the quarter ended June 30, 1993.
* (xxxii)- Employment contract dated as of April 1, 1989 between USLIFE Corporation and A. Scott Bushey, incorporated herein by reference to USLIFE's Quarterly Report on Form 10-Q for the quarter ended March 31, 1989.
* (xxxiii)- First Amendment dated as of May 1, 1989 to employment contract dated as of April 1, 1989 between USLIFE Corporation and A. Scott Bushey, incorporated herein by reference to USLIFE's Quarterly Report on Form 10-Q for the quarter ended June 30, 1989.
* (xxxiv)- Second Amendment dated as of May 1, 1990 to employment contract dated as of April 1, 1989, as amended, between USLIFE Corporation and A. Scott Bushey, incorporated herein by reference to USLIFE's Quarterly Report on Form 10-Q for the quarter ended March 31, 1990.
* (xxxv) - Third Amendment dated as of May 1, 1991 to employment contract dated as of April 1, 1989, as amended, between USLIFE Corporation and A. Scott Bushey, incorporated herein by reference to USLIFE's Quarterly Report on Form 10-Q for the quarter ended June 30, 1991.
* (xxxvi)- Fourth Amendment dated as of May 1, 1992 to employment contract dated as of April 1, 1989, as amended, between USLIFE Corporation and A. Scott Bushey, incorporated herein by reference to USLIFE's Quarterly Report on Form 10-Q for the quarter ended June 30, 1992.
* (xxxvii)- Fifth Amendment dated as of May 1, 1993 to employment contract dated as of April 1, 1989, as amended, between USLIFE Corporation and A. Scott Bushey, incorporated herein by reference to USLIFE's Quarterly Report on Form 10-Q for the quarter ended June 30, 1993.
*(xxxviii)- Employment contract dated as of April 16, 1990 between USLIFE Corporation and William A. Simpson, incorporated herein by reference to USLIFE's Quarterly Report on Form 10-Q for the quarter ended March 31, 1990.
* (xxxix)- First Amendment dated as of May 1, 1991 to employment contract dated as of April 16, 1990 between USLIFE Corporation and William A. Simpson, incorporated herein by reference to USLIFE's Quarterly Report on Form 10-Q for the quarter ended June 30, 1991.
* (xl) - Second Amendment dated as of May 1, 1992 to employment contract dated as of April 16, 1990, as amended, between USLIFE Corporation and William A. Simpson, incorporated herein by reference to USLIFE's Quarterly Report on Form 10-Q for the quarter ended June 30, 1992.
* (xli) - Third Amendment dated as of October 1, 1992 to employment contract dated as of April 16, 1990, as amended, between USLIFE Corporation and William A. Simpson, incorporated herein by reference to USLIFE's Quarterly Report on Form 10-Q for the quarter ended September 30, 1992.
* (xlii) - Third Amendment dated as of May 1, 1993 to employment contract dated as of April 16, 1990, as amended, between USLIFE Corporation and William A. Simpson, incorporated herein by reference to USLIFE's Quarterly Report on Form 10-Q for the quarter ended June 30, 1993.
* (xliii)- Employment contract dated as of April 1, 1991 between USLIFE Corporation and Robert J. Casper, incorporated herein by reference to USLIFE's Quarterly Report on Form 10-Q for the quarter ended March 31, 1992.
* (xliv) - First amendment dated as of May 1, 1992 to employment contract dated as of April 1, 1991 between USLIFE Corporation and Robert J. Casper, incorporated herein by reference to USLIFE's Quarterly Report on Form 10-Q for the quarter ended June 30, 1992.
* (xlv) - Second Amendment dated as of October 1, 1992 to employment contract dated as of April 1, 1991, as amended, between USLIFE Corporation and Robert J. Casper, incorporated herein by reference to USLIFE's Quarterly Report on Form 10-Q for the quarter ended September 30, 1992.
* (xlvi) - Second Amendment dated as of May 1, 1993 to employment contract dated as of April 1, 1991, as amended, between USLIFE Corporation and Robert J. Casper, incorporated herein by reference to USLIFE's Quarterly Report on Form 10-Q for the quarter ended June 30, 1993.
* (xlvii)- 1978 Stock Option Plan, incorporated herein by reference to USLIFE's Annual Report on Form 10-K for the year ended December 31, 1980.
* (xlviii)- Deferred Compensation Plan, incorporated herein by reference to USLIFE's Annual Report on Form 10-K for the year ended December 31, 1980.
* (il) - Book Unit Plan, incorporated herein by reference to USLIFE's Annual Report on Form 10-K for the year ended December 31, 1980.
(l) - Lease dated as of December 30, 1986 between The United States Life Insurance Company In the City of New York and RREEF USA Fund-III for the lease of a portion of 125 Maiden Lane, New York, New York, incorporated herein by reference to USLIFE's Annual Report on Form 10-K for the year ended December 31, 1986.
(li) - Amendment to Lease dated August 31, 1988 to Lease dated as of December 30, 1986 between The United States Life Insurance Company In the City of New York and RREEF USA Fund-III for the lease of a portion of 125 Maiden Lane, New York, New York, incorporated herein by reference to USLIFE's Annual Report on Form 10-K for the year ended December 31, 1988.
(lii) - Second Amendment to Lease dated November 16, 1988 to Lease dated as of December 30, 1986 between The United States Life Insurance Company In the City of New York and RREEF USA Fund-III for the lease of a portion of 125 Maiden Lane, New York, New York, incorporated herein by reference to USLIFE's Annual Report on Form 10-K for the year ended December 31, 1988.
(liii) - Lease dated May 21, 1987 between The United States Life Insurance Company In the City of New York and Commercial Realty & Resources Corp. for the lease of premises at the Jumping Brook Corporate Office Park in Neptune, New Jersey, incorporated herein by reference to USLIFE's Annual Report on Form 10-K for the year ended December 31, 1988.
(liv) - February 9, 1989 Amendment to Lease dated May 21, 1987 between The United States Life Insurance Company In the City of New York and Commercial Realty & Resources Corp. for the lease of premises at the Jumping Brook Corporate Office Park in Neptune, New Jersey, incorporated herein by reference to USLIFE's Annual Report on Form 10-K for the year ended December 31, 1988.
* (lv) - Retirement Plan for Outside Directors effective February 28, 1989, incorporated herein by reference to USLIFE's Annual Report on Form 10-K for the year ended December 31, 1988.
* (lvi) - USLIFE Corporation Restricted Stock Plan effective January 1, 1989, incorporated herein by reference to USLIFE's Quarterly Report on Form 10-Q for the quarter ended June 30, 1989.
* (lvii) - Trust Agreement made as of September 25, 1990 among USLIFE Corporation, Manufacturers Hanover Trust Company (predecessor to Chemical Bank) and KPMG Peat Marwick (as independent contractor) establishing a trust to fund certain employment contracts, incorporated herein by reference to USLIFE's Annual Report on Form 10-K for the year ended December 31, 1990.
* (lviii)- Trust Agreement made as of September 25, 1990 among USLIFE Corporation, Manufacturers Hanover Trust Company (predecessor to Chemical Bank) and KPMG Peat Marwick (as independent contractor) establishing a trust to fund the USLIFE Corporation Supplemental Retirement Plan, incorporated herein by reference to USLIFE's Annual Report on Form 10-K for the year ended December 31, 1990.
* (lix) - Trust Agreement made as of September 25, 1990 among USLIFE Corporation, Manufacturers Hanover Trust Company (predecessor to Chemical Bank) and KPMG Peat Marwick (as independent contractor) establishing a trust to fund the USLIFE Corporation Retirement Plan for Outside Directors, incorporated herein by reference to USLIFE's Annual Report on Form 10-K for the year ended December 31, 1990.
* (lx) - 1991 Stock Option Plan, incorporated herein by reference to USLIFE's Annual Report on Form 10-K for the year ended December 31, 1991.
12 - Computations of ratios of earnings to fixed charges.
21 - List of Subsidiaries.
23 - Consent of Independent Certified Public Accountants (see page 41).
99 (i) - Annual Report on Form 11-K of USLIFE Corporation Employee Savings and Investment Plan for the plan year ended December 31, 1993 (to be filed within 120 days of fiscal year end of Plan).
99 (ii) - Trust Agreement made as of December 6, 1990 among USLIFE Corporation, Manufacturers Hanover Trust Company (predecessor to Chemical Bank), and KPMG Peat Marwick (as independent contractor) establishing a trust to fund the USLIFE Corporation Retirement Plan, incorporated herein by reference to USLIFE's Annual Report on Form 10-K for the year ended December 31, 1990.
* Indicates a management contract or compensatory plan or arrangement.
(b) Reports on Form 8-K.
No Current Report on Form 8-K has been filed for the last quarter of the fiscal year ended December 31, 1993.
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
The Board of Directors and Shareholders USLIFE Corporation:
We consent to the incorporation by reference in Registration Statements Nos. 33-18287, 33-8489, 33-58944, 33-29934, 33-17126, 33-67344 and 33-9159 on Form S-3 relative to Debt Securities, and common stock, respectively; the post effective amendment to Registration Statement No. 33-29934 on Form S-3 relative to Debt Securities; the post effective amendment to Registration Statement No. 33-9159 on Form S-3 relative to common stock; the post effective amendments to Registration Statement Nos. 2-93655 and 33-11019 on Form S-3 relative to the General Agents Incentive Compensation Plan; Registration Statement No. 33-45377 on Form S-3 relative to the United States Life Insurance Company Retirement Plan for General Agents and Producers; the post effective amendments to Registration Statement No. 33-17126 relative to Debt Securities; Registration Statement No. 33-40793 on Form S-3 relative to the 1991 Stock Option Plan; and the post effective amendment to Registration Statement Nos. 2-63159, 2-32606 and 2-77278 on Form S-8 relative to the Stock Option Plans and Registration Statement Nos. 2-75011 and 33-13999 on Form S-8 relative to the Employee Savings and Investment Plan of USLIFE Corporation of our report dated February 22, 1994, relating to the consolidated balance sheets of USLIFE Corporation and subsidiaries as of December 31, 1993 and 1992 and the related statements of consolidated income, equity capital, and cash flows for each of the years in the three-year period ended December 31, 1993 which report appears in this December 31, 1993 Annual Report on Form 10-K of USLIFE Corporation. Our report refers to a change in accounting to adopt the provisions of the Financial Accounting Standards Board's Statement of Financial Accounting Standards No. 106, "Employers' Accounting for Postretirement Benefits Other Than Pensions."
/s/ KPMG Peat Marwick KPMG Peat Marwick
March 22, 1994 345 Park Avenue New York, New York
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.
USLIFE Corporation (Registrant)
Dated: March 22, 1994
By: /s/ Gordon E. Crosby, Jr. _____________________________ (Gordon E. Crosby, Jr., Chairman of the Board and Chief Executive Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
USLIFE CORPORATION AND SUBSIDIARIES
INDEX TO FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES
Page ____
Selected Financial Data for the five years ended December 31, 1993............................................... 2 Independent Auditors' Report...................................... 45 Consolidated balance sheets as of December 31, 1993 and 1992...... 46 Statements of consolidated income for the three years ended December 31, 1993............................................... 48 Statements of consolidated cash flows for the three years ended December 31, 1993............................................... 49 Statements of consolidated Equity Capital for the three years ended December 31, 1993................................... 50 Notes to financial statements..................................... 51
Schedule of the Registrant:
(A) Schedule III - Condensed Financial Information of Registrant (incorporated in Note 14 of Notes to Financial Statements)...................................
Schedules of the Registrant and Consolidated Subsidiaries:
(A) Schedule I - Summary of investments-other than investments in related parties (incorporated in Note 11 of Notes to Financial Statements)...............
(B) Schedule V - Supplementary insurance information (incorporated in Note 13 of Notes to Financial Statements).............................................
(C) Schedule VI - Reinsurance (incorporated in Note 10 of Notes to Financial Statements)..........................
(D) Schedule IX - Short-term borrowings (incorporated in Note 2 of Notes to Financial Statements)................
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholders USLIFE Corporation:
We have audited the accompanying consolidated balance sheets of USLIFE Corporation and subsidiaries as of December 31, 1993 and 1992, and the related statements of consolidated income, equity capital, 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 USLIFE Corporation and subsidiaries at 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 5 to the consolidated financial statements, the Company changed its method of accounting for postretirement benefits other than pensions in 1992 to adopt the provisions of the Financial Accounting Standards Board's Statement of Financial Accounting Standards No. 106, "Employers' Accounting for Postretirement Benefits Other Than Pensions."
/s/ KPMG Peat Marwick KPMG Peat Marwick
February 22, 1994 345 Park Avenue New York, New York
USLIFE CORPORATION AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
Note 1. Significant Accounting Policies
Changes in Accounting Principles
Effective as of the first quarter of 1993, the Company adopted Statement of Financial Accounting Standards No. 113 ("SFAS 113"), entitled "Accounting and Reporting for Reinsurance of Short-Duration and Long-Duration Contracts." SFAS 113 requires that assets and liabilities relating to reinsured contracts be reported on a gross basis rather than net of the impact of reinsurance as permitted under previous accounting standards. The Statement also establishes guidelines for determining whether risk is transferred under a reinsurance contract and requires reinsurance contracts which do not qualify under these guidelines to be accounted for as deposits. As a result of the adoption of SFAS 113, reinsurance receivables amounting to approximately $135 million are included in consolidated total assets at December 31, 1993, including approximately $118 million which would have been offset to various liability accounts under previous accounting standards. Other than the required gross presentation of reinsurance assets and liabilities, SFAS 113 did not have a material impact on the Company's reported financial position or results of operations. Financial statements of previous years were not restated as a result of the adoption of SFAS 113. See Note 10 of Notes to Financial Statements for further information regarding the Company's reinsurance contracts.
Effective as of January 1, 1992, the Company implemented new accounting standards for non-pension postretirement benefits required by Statement of Financial Accounting Standards No. 106 ("SFAS 106"), entitled "Employers' Accounting for Postretirement Benefits Other Than Pensions" and recognized the initial liability required by SFAS 106 by means of a one-time charge to net income for "cumulative effect of accounting change." As required by SFAS 106, this charge, which amounted to $38.0 million or $1.67 per share, was retroactively recorded in the first quarter of 1992. See Note 5 of Notes to Financial Statements for further information regarding non-pension postretirement benefits.
Also in 1992, the Company adopted Statement of Financial Accounting Standards No. 109 ("SFAS 109"), entitled "Accounting for Income Taxes," and restated, as appropriate, the financial statements of previous years presented to retroactively give effect to the accounting standards required by SFAS 109. See Note 4 of Notes to Financial Statements for further information regarding Federal income taxes.
Future Accounting Changes
In November 1992, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards No. 112, "Employers' Accounting for Postemployment Benefits." Statement No. 112, which must be implemented in 1994, will require advance recognition of non-retirement benefits such as severance pay and health insurance continuation when certain conditions are met. The adoption of Statement No. 112 will not have a material impact on the Company's reported financial position or results of operations.
In May 1993, FASB issued two additional Statements which will require the Company to adopt new accounting and reporting standards in preparation of future period financial statements.
Statement No. 114, "Accounting by Creditors for Impairment of a Loan," must be adopted by calendar year enterprises no later than 1995 and will require a writedown to fair value, as defined by the Statement, for certain mortgage loans and similar investments where impairment results in a change in repayment terms. Based on current evaluation of the Company's investments that are covered by this Statement, it is not anticipated to have a material impact on the Company's reported financial position or results of operations. The Company has not yet determined the timing of its implementation of Statement No. 114.
Statement No. 115, "Accounting for Certain Investments in Debt and Equity Securities," will require most fixed maturity investments to be carried at market value commencing in 1994. It is currently anticipated that substantially all of the Company's fixed maturity investments will be included in a category established by the Statement that will require the securities to be valued at market, with changes in market value recognized through equity. In addition to application of appropriate tax effect, the impact on Equity Capital from this unrealized appreciation may also be subject to certain additional adjustments which have not yet been quantified by the Company. Market value of these securities exceeds adjusted cost by approximately $380 million at December 31, 1993. The Company will adopt Statement No. 115 in the first quarter of 1994. Adjustments to market value will be required each quarter following the implementation of Statement No. 115, resulting in both increases and decreases to Equity Capital.
Basis of Consolidation
The consolidated financial statements include the accounts of USLIFE and all of its subsidiaries (the "Company"). All subsidiaries are 100 percent owned. All material intercompany accounts and transactions have been eliminated.
Segment Information
The only reportable industry segment of the Company is "Life Insurance" and the related information is presented below:
The caption "Other" above consists principally of investment income and capital gains attributable to Equity Capital.
Investments in Securities
The Company's investments in preferred stocks (other than redeemable preferred stocks) and common stocks ("Equity Securities") are carried at market value in the Consolidated Balance Sheets at December 31, 1993, 1992, and 1991 and related valuation allowances, "Net unrealized losses on marketable equity securities," in the amounts of $29 thousand, $165 thousand, and $13 thousand, respectively, are included in Equity Capital at those dates. Effective December 31, 1992, Fixed Maturity investments (including bonds and redeemable preferred stocks) which may be sold prior to maturity as a result of the Company's investment strategies are considered available for sale and carried at the lower of aggregate amortized cost or market value as of the balance sheet date. The Company's investment management policies include continual monitoring and evaluation of securities market conditions and circumstances relating to its investment holdings which may result in the selection of investments for sale prior to maturity. Securities may also be sold as part of the Company's asset/liability management strategy in response to changes in interest rates, resultant prepayment risk, and similar factors. The reclassification, as of December 31, 1992, of the Company's entire Fixed Maturity portfolio to the "available for sale" category did not affect reported net income, and this classification had no impact on Equity Capital at December 31, 1993 or 1992 as the aggregate market value of these securities exceeded
their amortized cost at those dates. Valuation reserves are maintained for investments with a reduction in value determined to be other than temporary. The cost and market values of the Company's consolidated investments in Fixed Maturities and Equity Securities at December 31, 1993, 1992 and 1991 are presented below:
At December 31, 1993, consolidated invested assets included approximately $221 million book value of less than investment grade corporate securities, based on ratings assigned by recognized rating agencies and insurance regulatory authorities. Such investments had an aggregate market value of approximately $232 million at December 31, 1993 and, based on book value, represent approximately 3.3% of consolidated total assets at that date. Approximately $28 million book value of these investments are classified as problem securities at that date and, of that amount, approximately $16 million represented securities in default at December 31, 1993. Also at December 31, 1993, the book value of mortgage loans included in consolidated total assets which were 60 days or more delinquent or in foreclosure was approximately $26 million, and the book value of property acquired through foreclosure of mortgage loans was approximately $25 million.
Realized gains on the Company's consolidated investments in Fixed Maturities and Equity Securities for the three years ended December 31, 1993 are summarized as follows:
Pre-tax realized gains shown above reflect provisions for valuation of certain investments with decline in value determined to be other than temporary. The cost of securities sold for purposes of determination of realized gains or losses included in net income is based on the specific identification method.
Pre-tax realized gains on Fixed Maturities and Equity Securities are reconciled to consolidated realized gains (losses) on investments as follows:
1993 1992 1991 __________ __________ __________
(Amounts in Thousands) Realized gains (losses):
Fixed Maturities.............. $ 46,891 $ 23,094 $ 10,950 Equity Securities............. 897 1,584 1,244 __________ __________ __________
47,788 24,678 12,194
Real estate, mortgage loans, and other investments (a)... (39,272) (27,258) (14,115) __________ __________ __________
Total......................... $ 8,516 $ (2,580) $ (1,921) ========== ========== ==========
(a) Reflects provisions for valuation to estimated net realizable value for certain investments.
The amortized cost and estimated market values of the Company's consolidated investments in debt securities at December 31, 1993 and 1992 are as follows:
The amortized cost and estimated market value of debt securities 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 prepayment penalties.
Proceeds from disposals of investments in debt securities (excluding short term commercial paper) during 1993, 1992 and 1991 were $1.209 billion, $824.1 million, and $756.1 million, respectively. During 1993, gross gains of $57.9 million and gross losses of $11.0 million were realized on such disposals. During 1992, gross gains of $41.0 million and gross losses of $17.9 million were realized on such disposals. During 1991, gross gains of $26.3 million and gross losses of $15.4 million were realized on such disposals.
Short term investments are carried at cost, which approximates market value.
Other Investments
Real estate is carried at the lower of depreciated cost or net realizable value. Depreciation is calculated on a straight line basis with useful lives varying based on the type of building. Policy loans and mortgages, other than those with a decline in value determined to be other than temporary, are stated at the aggregate of unpaid principal balances. Other long term investments are stated at the lower of cost or their estimated net realizable value.
Insurance Accounting
Amounts for the life insurance subsidiaries are reported to regulatory authorities on the basis of statutory accounting practices and have been presented herein in conformity with generally accepted accounting principles ("GAAP").
Regulatory after-tax income and after-tax income in accordance with GAAP of the life insurance subsidiaries for the three years ended December 31, 1993, and regulatory Equity Capital and Equity Capital in accordance with GAAP of such subsidiaries at December 31, 1993, 1992 and 1991 are as follows:
______
(a) Amounts shown exclude after-tax capital gains (losses) of $(1.3) million, $(15.5) million and $5.0 million on a regulatory basis and $7.1 million, $(1.4) million, and $(1.4) million on a GAAP basis in 1993, 1992 and 1991, respectively. GAAP income above also excludes an after-tax charge in 1992 of $21.5 million for "cumulative effect of accounting change" relating to the adoption of FASB Statement No. 106 which had no impact on 1992 regulatory net income. Both regulatory and GAAP after-tax income shown above for 1992 reflect a charge equivalent to $10.6 million on an after-tax basis relating to receivables from an Association Group Health marketing organization which declared bankruptcy.
As a result of the appropriate adjustments, Equity Capital of the life insurance subsidiaries prepared in accordance with GAAP exceeds that which was prepared on a regulatory basis by $826.5 million, $779.0 million and $736.7 million, respectively, at December 31, 1993, 1992 and 1991. It should be noted that the dividend paying capability of the life insurance subsidiaries is generally limited by income before capital gains and losses and Equity Capital as reported on a regulatory basis. Notice to or approval by regulatory authorities is frequently required for dividends paid by insurance companies. Loans to or advances from the life insurance subsidiaries to the parent company may also be subject to regulatory approval requirements or limitations. At December 31, 1993, the portion of the aggregate $1.376 billion Equity Capital of the life insurance subsidiaries which was not available for transfer to the parent company by dividend, loan, or advance or available for such transfer only with approval of a third party ("Restricted Net Assets"), as a result of the aforementioned regulatory requirements, amounted to $1.308 billion. Cash dividends paid by all consolidated subsidiaries to the parent company totalled $61.2 million, $47.7 million and $58.2 million for the years ended December 31, 1993, 1992 and 1991, respectively. Additionally, during 1993, securities with market value of $21.6 million were transferred from a life insurance subsidiary to the parent company and subsequently contributed to another life insurance subsidiary in connection with the combination of the two subsidiaries' operations. In addition to the 1992 cash dividends, investment securities with market value of $26.3 million were transferred by dividend from a life insurance subsidiary to the parent company.
Life Insurance
Deferred Policy Acquisition Costs
The costs of acquiring new business (principally commissions) and certain costs of issuing policies (such as medical examinations and inspection reports) and certain agency and marketing expenses, all of which vary with and are primarily related to the production of new business, have been deferred. For traditional life insurance policies, these costs are being amortized over the premium-paying periods of the related policies in proportion to the ratio of the annual premium revenue to the total anticipated premium revenue. Anticipated premium revenue was estimated using the same assumptions which were used for computing liabilities for future policy benefits. For universal life- type policies, these costs are being amortized over the lives of the policies in relation to the incidence of gross profits arising principally from investment, mortality and expense margins. Deferred policy acquisition costs are reviewed to determine that the unamortized portion of such costs does not exceed recoverable amounts, after considering anticipated investment income.
Details with respect to consolidated deferred policy acquisition costs and premium income for life insurance and annuities and accident and health insurance for the three years ended December 31, 1993 are as follows:
Future Policy Benefits
Liabilities for future policy benefits relating to traditional life insurance policies have been computed by the net level premium method based on estimated future investment yield, mortality and termination experience. Interest rate assumptions for most non-interest sensitive life insurance have ranged from 2-1/2 to 3-1/2 percent on issues of 1959 and prior, to 5-1/2 to 5- 7/8 percent on issues of 1967 and subsequent years. (On certain products, the rate ranges as high as 8-3/4 percent.) Mortality has been calculated principally on an experience multiple applied to select and ultimate tables in common usage in the industry. Estimated terminations have been determined principally based on industry tables.
Universal Life-Type and Investment Contracts
Revenues for universal life insurance, other interest-sensitive life insurance, and investment contracts include policy charges for administration and cost of insurance, and surrender charges assessed against policyholder account balances during the period. Premiums received on these products are treated as policyholder deposits rather than revenues. The liability for policyholder account balances represents the accumulated amounts which accrue to the benefit of policyholders, and reflects interest credited at rates which are subject to periodic adjustment. Charges to expense relating to these policies and contracts include such interest credited as well as benefits during the period in excess of related policy account balances.
Participating Policies
Participating policies subject to profit limitations approximate 2.4 percent of the individual life insurance in force at December 31, 1993 and 6.5 percent of individual life insurance premium income in 1993. The major portion of earnings therefrom inures to the benefit of the participating policyholders and is not available to shareholders. Undistributed earnings payable to participating policyholders are included as a liability in the Consolidated Balance Sheets.
All participating policies approximate 2.5 percent of the total individual life insurance in force at December 31, 1993 and 6.8 percent of individual life insurance premium income in 1993. The provisions for dividends to policyholders in the statements of consolidated income include dividends paid or payable on participating policies.
Liability for Unpaid Claims
The liability for unpaid claims and claim adjustment expenses is based on the estimated amount payable on claims reported prior to the balance sheet date which have not yet been settled, claims reported subsequent to the balance sheet date which have been incurred during the period then ended, and an estimate (based on prior experience) of incurred but unreported claims relating to such period.
Liability for Guaranty Fund Assessments
The Company's life insurance subsidiaries may be required, under the solvency or guaranty laws of the various states in which they are licensed, to pay assessments up to prescribed limits to fund policyholder losses or liabilities of insolvent insurance companies. Certain states permit these assessments, or a portion thereof, to be recovered as an offset to future premium taxes. Assessments are recognized based on notification of liability by regulatory authorities, including provision for certain future amounts payable, and, when subject to credit against future premium taxes and judged to be recoverable, may be capitalized and amortized on a basis consistent with the credits to be realized under applicable state law.
Other Assets
Included in other assets is the unamortized portion of goodwill, representing the excess of cost over the value of net assets acquired in subsidiary acquisitions accounted for by the purchase method. Such amounts are being amortized by straight-line basis charges to income over forty year periods which began at the respective dates of acquisition of the acquired subsidiaries. Amortization of goodwill amounted to approximately $2 million for each of the three years ended December 31, 1993.
Income Taxes
Deferred income taxes arise as a result of applying enacted statutory tax rates to the temporary differences between the financial statement carrying value and the tax basis of assets and liabilities. Such differences result primarily from amounts capitalized for policy acquisition costs and calculated for future policy benefit liabilities.
The Company and its subsidiaries file a consolidated Federal income tax return and have elected to include the life insurance and non-life insurance subsidiaries in the consolidated tax return. Taxes on income for life insurance and non-life insurance subsidiaries are recorded in the individual income accounts of the subsidiaries and are remitted to the Company on a separate return basis. The provision for taxes in the Statements of Consolidated Income for the three years ended December 31, 1993 represents the tax for all companies on a consolidated return basis.
Income Per Share
Income per share was computed by dividing the income applicable to common and common equivalent shares by the weighted average number of common and common equivalent shares outstanding during each year. The weighted average number of common and common equivalent shares was determined by using the average number of common shares outstanding during each year, net of reacquired (treasury) shares from the date of acquisition; by converting the shares of the Series A and Series B Preferred Stock to their equivalent common shares, and by calculating the number of shares issuable on exercise of those common stock options with exercise prices lower than the market price of the common stock, reduced by the number of shares assumed to have been purchased with the proceeds from the exercise of the options. Income before cumulative effect of accounting change and net income were adjusted to deduct the dividend requirements on Series C Preferred Stock for periods when that issue was outstanding. Fully diluted income per share is the same as income per share data indicated. The following table sets forth the computations of income per share for the three years ended December 31, 1993:
Statement of Cash Flows
For the years ended December 31, 1993, 1992 and 1991, respectively, interest paid (net of amounts capitalized) amounted to $32.6 million, $34.7 million, and $39.4 million, and Federal income taxes paid amounted to $60.7 million, $75.7 million and $71.4 million. The major portion of the disposals of fixed maturity investments relate to securities sold or redeemed prior to their maturity dates. The $1.154 billion disposals of Fixed Maturity investments by the Company for the year ended December 31, 1993 included approximately $928 million book value of securities which were called for redemption by the respective issuers prior to maturity. The $799 million disposals of Fixed Maturity investments in 1992 included approximately $497 million of such redemptions.
Financial Instruments and Concentrations of Credit Risk
The Company's investments in Fixed Maturities and Equity Securities are comprised of a diverse portfolio represented by approximately 600 issuers, with no issuer accounting for more than 1% of the Company's total investment in these securities, based on book value, at December 31, 1993.
The Company's investment in mortgage loans at December 31, 1993 is characterized by a broad geographical distribution, with approximately 6% of total book value relating to the New England region of the United States, 16% from the middle-Atlantic states, 23% from the north-central states, 16% from the south-Atlantic states, 10% from the south-central states, 14% from the mountain states, and 15% from the Pacific states. Based on book value, approximately 40% of the Company's mortgage loans at that date are secured by office buildings, 24% by industrial / warehouse properties, 25% retail, 1% apartments, 3% one to four family residential, and the remainder secured by hotel / motel, medically oriented, or other specialty properties.
The Company's reinsurance receivables and other recoverable amounts at December 31, 1993 relate to approximately 160 reinsurers. Two major United States insurance companies, rated "A" (excellent) and "A+" (superior) respectively by A. M. Best Company, a recognized insurance rating agency, each account for approximately 10% of the reinsurance receivable and recoverable amounts at that date. Other than these companies, no single reinsurer accounts for more than 6% of total reinsurance receivable and recoverable amounts at December 31, 1993. The Company monitors the financial condition of its reinsurers in order to minimize its exposure to loss from reinsurer insolvencies.
As described in Note 9 of Notes to Financial Statements, a life insurance subsidiary has an outstanding standby commitment amounting to $6.8 million at December 31, 1993. The Life Insurance Subsidiaries historically have not provided permanent financing on the major portion of such commitments. In the ordinary course of investment operations, the Life Insurance Subsidiaries also may extend permanent financing commitments for investments in mortgage loans, with specified closing dates typically within 90 to 120 days after approval and interest rates and other terms (based on the credit policies utilized for investments in mortgage loans) determined at the commitment date. There were no material permanent financing commitments outstanding at December 31, 1993.
Disclosures about Fair Value of Financial Instruments
The following methods and assumptions were used to estimate the fair value of the indicated classes of financial instruments:
Cash and Short-term Investments
The carrying amounts of these assets approximate their fair value.
Fixed Maturities and Equity Securities
Fair values are based on quoted market prices or dealer quotes.
Mortgage Loans
The fair value of mortgage loans, other than those which are more than 60 days delinquent or in foreclosure, is estimated by discounting the expected future cash flows. The rates used for this purpose are the estimated current rates that would be applied to the loans in a purchase or sale transaction, on an aggregate or bulk basis grouped by maturity range, considering the creditworthiness of the borrowers and the general characteristics of the collateral. For purposes of this calculation, the fair value of loans with stated interest rates greater than the estimated applicable market rate was adjusted to reflect the impact of prepayment options or other contractual terms upon market value. For mortgage loans which are classified as delinquent or are in foreclosure, fair value is based on estimated net realizable value of the underlying collateral.
Long-term Debt
The fair value of the Company's long-term debt is estimated based on rates believed to be currently available to the Company for borrowings with terms similar to the remaining maturities of the outstanding debt. For outstanding debt securities with fixed interest rates in excess of current market rates, repayment on call dates prior to stated maturity was assumed for purposes of fair value estimation.
The estimated fair values of the Company's financial instruments are as follows:
In accordance with the requirements of Statement No. 107 of the Financial Accounting Standards Board, the financial instruments presented above exclude accounts relating to the Company's insurance contracts and certain other classes of assets and liabilities. The estimated fair values of the Company's policy loan assets and its policyholder account balance liabilities relating to investment contracts at December 31, 1993 and 1992 are not materially different from the respective carrying values at those dates. No material carrying value or fair value amounts are ascribed to the Company's outstanding standby commitments at December 31, 1993 and 1992.
Note 2. Notes Payable
Included in this item are short term borrowings against bank lines of credit or pursuant to certain bank revolving credit agreements, and other short term bank borrowings. The Company has lines of credit of $60.0 million with 7 banks and revolving short term credit agreements with two banks which provide term loan borrowing facilities up to a maximum of $100 million. The lines of credit provide for annual review and renewal at the option of each bank. The interest rates and terms of loans under the lines of credit and the revolving credit agreements are determined bilaterally on the date of borrowing. Although there are no formal requirements to maintain compensating balances, the Company has carried balances which generally approximate 5 to 10 percent of the lines.
The following table sets forth summary information with respect to short term borrowings of the Company for the three years ended December 31, 1993.
(a) The average amounts of short term borrowings were computed by determining the arithmetic average of months' end short term borrowings.
(b) The weighted average interest rates were determined by dividing interest expense related to short term borrowings by the average amounts of such borrowings.
Note 3. Long Term Debt
At December 31, 1993 and 1992, consolidated long term debt consists of the following:
The contractual maturities of the Company's long term debt are as follows:
Parent Company and Consolidated _______________________________
December 31, December 31, 1993 1992 ____________ ____________
(Amounts in Thousands)
1994....................... $100,000 $150,000 1995....................... -- 49,917 1996....................... -- 99,522 1998....................... 149,739 -- 1999....................... 50,000 50,000 2000....................... 149,496 -- ________ ________
Total............... $449,235 $349,439 ======== ========
Current maturities of long term debt at December 31, 1993 is comprised of $100 million borrowings under a two-year credit agreement between the Company and the Bank of New York which commenced on May 15, 1992 and provides for term borrowings in segments of up to six months with interest indexed to the LIBOR borrowing rate or based on certain alternative interest rates at the option of the Company. USLIFE Corporation has the option to prepay amounts borrowed under the credit agreement, in whole or in part, and to reborrow loans thereunder provided the total amount of outstanding borrowings does not exceed $150 million. All borrowings under the credit agreement must mature no later than May 13, 1994. Long term debt at December 31, 1992 includes $150 million borrowings under this agreement.
None of the debt issues of the Company or its subsidiaries are or have been in default.
Note 4. Federal Income Taxes
Federal income tax expense relating to operations of the Company for 1993, 1992 and 1991 is comprised of the following components:
The Omnibus Budget Reconciliation Act of 1993, enacted in August 1993, increased the Federal corporate income tax rate from 34% to 35% retroactively to January 1, 1993. This rate increase resulted in additional tax expense for the first half of 1993 amounting to $666 thousand, and the effect of the tax rate change upon net deferred tax liabilities as required by Statement of Financial Accounting Standards No. 109 ("SFAS 109") was $1.322 million. In accordance with SFAS 109, the $1.988 million aggregate catch-up impact of the rate change was included in Federal income tax expense for the third quarter of 1993.
The significant components of deferred income tax expense for the years ended December 31, 1993, 1992 and 1991 are as follows:
Total tax expense differs from the amount computed by applying the Federal income tax rate of 35 percent in 1993 and 34 percent in 1992 and 1991 to income before tax for the following reasons:
The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities at December 31, 1993 and 1992 are presented below:
December 31 ______________________
1993 1992 ____ ____
(Amounts in Thousands)
Deferred Tax Assets:
Future policy benefits.......................... $ 129,078 $ 116,176 Tax net operating loss carryforward............. 23,990 26,005 Capital gains and losses........................ 42,678 27,913 Capitalization of policy acquisition costs, net of amortization, for tax return purposes.. 45,089 32,661 Sale and leaseback transactions................. 2,617 3,390 Allowance for uncollectible receivables......... 2,489 2,833 Resisted claim liability........................ 1,691 1,944 Employee retirement benefits.................... 26,534 27,818 Unearned interest............................... 1,787 1,814 Accrual of interest payable..................... 2,138 513 Other........................................... 5,397 5,393 _________ _________
Total gross deferred tax assets................. 283,488 246,460
Total valuation allowance....................... (16,368) (15,900) _________ _________
Net deferred tax assets......................... 267,120 230,560 _________ _________
Deferred Tax Liabilities:
Deferral of policy acquisition costs, net of amortization, for accounting purposes......... (259,674) (239,991) Basis differences between tax and accounting for joint ventures............................ (4,266) (4,906) Basis differences between tax and accounting for securities................................ (4,672) (4,301) Depreciation.................................... (5,759) (6,079) Prepaid expenses................................ (2,403) (2,052) Differences between tax and accounting for reinsurance............................... (6,596) (10,366) Other........................................... (9,055) (7,808) _________ _________
Total gross deferred tax liabilities............ (292,425) (275,503)
_________ _________
Net deferred tax liability...................... $ (25,305) $ (44,943) ========= =========
The 1993 change in the above valuation allowance is due only to the change in the Federal income tax rate from 34% to 35%.
Federal income tax returns have been examined and settled for all life insurance subsidiaries and their predecessors through 1980. The consolidated Federal income tax returns of the Company and non-life insurance subsidiaries have been examined and settled through 1980. The life-nonlife consolidated Federal income tax returns of the Company and all subsidiaries have been examined and settled for 1981 through 1985. The Company believes that its recorded income tax liabilities are adequate for all open years.
Under the provisions of prior tax law applicable to life insurance companies, one half of the excess of the gain from operations of a life insurance company over its taxable investment income was not taxed but was set aside in a special "Policyholders' Surplus Account". Under provisions of the Tax Reform Act of 1984, this account is "frozen" as of December 31, 1983 and is subject to tax under conditions set forth pursuant to prior tax law. Policyholder Surplus may be taxable at the time of its distribution to the company's shareholders or under certain other specified conditions. The Company does not believe that any significant portion of the amount in this account will be taxed in the foreseeable future. However, should the balance at December 31, 1993 become taxable, the tax computed at present rates would be approximately $54.3 million.
At December 31, 1993, the Company has nonlife net operating loss carryforwards for Federal income tax purposes of approximately $68.5 million which are available to offset future Federal taxable income, if any, through 2008.
Note 5. Retirement Plans
The Company and its subsidiaries have a qualified noncontributory defined benefit pension plan covering substantially all employees. Benefits are generally based on years of service, the employee's compensation during the last three years of employment, and an average of Social Security covered wage bases. It is the Company's policy to fund pension costs in accordance with the requirements of the Employee Retirement Income Security Act of 1974. Based on such standards, contributions amounting to $4.5 million, $4.2 million and $3.9 million were made for the years ended December 31, 1993, 1992 and 1991, respectively. Substantially all of the Plan assets are invested in the general investment account of a life insurance subsidiary of the Company through a deposit administration insurance contract. As a result of compensation and benefit limitations under Federal tax law applicable to the Company's qualified defined benefit pension plan, the "excess" portion of the pension benefits for certain employees is provided under an unfunded Supplemental Retirement Plan for which eligibility requirements and certain other provisions were modified during 1993. Additionally, the Company has an unfunded Retirement Plan for Outside Directors which provides pension benefits to non-employee Directors of USLIFE Corporation subject to specified eligibility requirements. Benefits are based on years of service and the annual retainer at time of retirement.
Pension expense for all of the above pension plans amounted to $5.212 million, $4.774 million and $3.748 million in 1993, 1992 and 1991, respectively. The net periodic pension cost for these plans in 1993, 1992 and 1991 included the following components:
The funded status is reconciled to accrued pension cost included in the Company's consolidated balance sheets as of December 31, 1993 and 1992 as follows:
The unrecognized net asset relating to the qualified pension plan is being recognized over a 14 year period which began January 1, 1987. The unrecognized net loss and unrecognized prior service cost relating to the Company's pension plans are subject to amortization on a straight-line basis over the estimated average future service period of active employees expected to receive benefits under the plan. Assumptions used in the actuarial computations for the Company's pension plans were as follows:
In addition to providing pension benefits, the Company and its subsidiaries provide certain health care and life insurance benefits to retired employees under a defined benefit plan. Employees may become eligible for these benefits if they have accumulated ten years of service and reach normal or early retirement age while working for the Company. The postretirement benefit plan contains cost-sharing features such as deductibles and coinsurance, and contributions of certain retirees are subject to annual adjustment. It is the Company's current policy to fund these benefits, which are provided through an insurance contract with a life insurance subsidiary of the Company, on a "pay as you go" basis.
Effective as of January 1, 1992, the Company adopted Statement of Financial Accounting Standards No. 106, "Employers' Accounting for Postretirement Benefits Other Than Pensions." Statement No. 106 requires that an employer's obligation for non-pension plan benefits provided after retirement be recognized by income statement charges during the service periods of eligible employees rather than on a cash basis as permitted by previously established accounting standards. The Company elected to recognize the initial obligation under the Statement, representing the present value of future benefits attributed to service already rendered by eligible employees as of January 1, 1992, by means of a one-time charge to net income for cumulative effect of the accounting change. This initial obligation, and the consequent charge, amounted to $57.6 million before applicable taxes. Excluding this one-time charge, the cost of non-pension postretirement benefits for 1992 was approximately $2 million. Postretirement benefit costs of approximately $2 million in 1991, which were recorded on a cash basis, have not been restated.
During 1993, the Company's non-pension postretirement benefit program was modified in several respects, including the establishment of a maximum dollar cap on amounts to be paid by the Company for future increases in the cost of retiree health benefits. These plan amendments resulted in an unrecognized reduction in prior service cost, which is being amortized over the remaining average service period to full eligibility for benefits of the active participants. Excess gains or losses are being amortized over the average remaining service period to full eligibility for benefits of the active participants.
The funded status of the non-pension postretirement benefit program as of December 31, 1993 and 1992 is reconciled to accrued postretirement benefit cost as follows:
Net periodic postretirement benefit cost for 1993 included the following components:
(Amounts in Thousands)
Service cost - benefits earned during the year........ $1,068 Interest cost on accumulated postretirement benefit obligation.................................. 2,198 Net amortization and deferral......................... (1,162) ______ Net periodic postretirement benefit cost.............. $2,104 ======
The non-pension postretirement benefit cost for the year 1992 was comprised primarily of "interest cost." For measurement purposes, a 14 percent annual rate of increase in the per-capita cost of covered health benefits (ie., health care cost trend rate) was assumed for 1993; the rate was assumed to decrease gradually to 6 percent by the year 1997 and remain at that level thereafter. The assumed health care cost trend rate does not have a significant effect on the amounts reported in accordance with Statement No. 106 due to the maximum dollar cap adopted. For example, increasing the assumed health care cost trend rates by one percentage point in each year would increase the accumulated postretirement benefit obligation as of December 31, 1993 by approximately $94 thousand and the aggregate of the service and interest cost components of 1993 net periodic postretirement benefit cost by $7 thousand. The discount rate used in determining the accumulated postretirement benefit obligation was 7.5% at both December 31, 1993 and 1992.
Note 6. Capital Stock
Non-Redeemable Preferred Stocks
The $4.50 Series A Convertible Preferred Stock ($1.00 par value; authorized and issued as of December 31, 1993, 4,815 shares; December 31, 1992, 5,627 shares; December 31, 1991, 6,420 shares) is carried at involuntary liquidating value of $100 per share in the financial statements; is entitled to cumulative annual dividends of $4.50 per share; may be redeemed in whole or in part at the option of the Company at $100 per share; and is convertible at any time into Common Stock at a conversion price which at December 31, 1993 was $12.49 per share (each share of Series A Stock valued at $100), subject to adjustment under a formula intended to protect against dilution in certain events. Holders are entitled to vote together with the Common Stock and Series B Convertible Preferred Stock as one class on the basis of one vote per share and to vote as a class upon the election of two directors during any period in which four quarterly dividends (whether or not consecutive) are in default.
The $5.00 Series B Convertible Preferred Stock ($1.00 par value; authorized and issued as of December 31, 1993, 2,050 shares; December 31, 1992, 2,251 shares; December 31, 1991, 2,405 shares) is carried at involuntary liquidating value of $50 per share in the financial statements; is entitled to cumulative annual dividends of $5.00 per share; may be redeemed in whole or in part at the option of the Company at $100 per share; and is convertible at any time into Common Stock at a conversion price which at December 31, 1993 was $12.51 per share (each share of Series B Stock valued at $100), subject to adjustment under a formula intended to protect against dilution in certain events. Voting rights are the same as those of holders of Series A Stock.
The Preferred Stock, undesignated ($1.00 par value; authorized as of December 31, 1993, 10,793,135 shares, issued none), may be issued by authorization of the Board of Directors without further approval of shareholders. The Board has broad powers to fix the terms of such issues subject to the limit that the aggregate of all amounts which may be paid to holders of all of the series of Preferred Stock upon the involuntary liquidation, dissolution or winding up of the Company cannot exceed $100 times the number of such shares plus accrued unpaid dividends.
Common Stock
The outstanding shares of Common Stock (par value $1.00 per share; authorized, as of December 31, 1993: 60,000,000 shares; December 31, 1992 and 1991: 40,000,000 shares; issued, including treasury shares, as of December 31, 1993, 38,308,823 shares; December 31, 1992, 38,255,975 shares; December 31, 1991, 38,117,150 shares) entitle each holder to one vote per share in the election of directors and on all other matters submitted to a vote of shareholders and to such dividends and distributions as may be declared by the Board of Directors out of funds legally available. At December 31, 1993, 54,948 shares of Common Stock were reserved for issuance upon conversion of Preferred Stock. The Company sponsors, through certain of its life insurance subsidiaries, savings plans for selected general agents and producers (the "Agents Plans") providing for distribution of Common shares to participants if specified qualification and vesting requirements are satisfied. As of December 31, 1993, participant interests relating to 5,797 Common shares had vested under the Agents Plans. On July 10, 1986 the Company issued, to shareholders of record on that date, one Common Stock Purchase Right (a "Right") for each share of Common Stock owned on that date. Until the Rights become exercisable they will be represented by the stock certificates for all outstanding Common Stock including newly issued shares. Upon the occurrence of certain events specified in a Rights Agreement dated as of June 24, 1986 and amended and restated as of January 24, 1989 between the Company and Manufacturers Hanover Trust Company (predecessor to Chemical Bank) as Rights Agent, the Rights will become exercisable, separate certificates representing the Rights will be issued, and each Right will entitle the holder to purchase one half of a share of the Common Stock for $50.00. Under certain circumstances specified in the Rights Agreement each Right will entitle the holder to purchase, for one half of its then market value, publicly traded common stock of any corporation which acquires the Company; each Right will also entitle the holder, with certain exceptions specified in the Rights Agreement, to purchase $150.00 worth of the Common Stock for $75.00. As of December 31, 1993 the Rights had not become exercisable.
The Company also sponsors a Dividend Reinvestment and Stock Purchase Plan which enables holders of the Company's Common Stock to invest cash dividends and optional cash payments in additional shares of the Common Stock. In 1993, 1992 and 1991, respectively, 25,689, 29,523 and 34,430 shares of the Common Stock had been sold pursuant to the Dividend Reinvestment and Stock Purchase Plan.
Treasury Stock
At December 31, 1993, there were 15,650,354 shares of Common Stock held in treasury. During 1993, 65,666 Common shares were acquired, at an aggregate cost of $2.6 million, and 168,811 Common shares, with an aggregate cost of $3.2 million, were utilized for certain employee, director, and agent benefit plans and for the Dividend Reinvestment and Stock Purchase Plan of USLIFE Corporation. At December 31, 1992, treasury stock consisted of 15,753,499 Common shares.
Note 7. Stock Options, Book Units and Restricted Stock Plan
In May, 1991, the Company adopted a stock option plan (the "1991 Stock Option Plan") for key employees to replace the previous stock option plan under which options could no longer be granted. Under the 1991 Stock Option Plan, a maximum of 1,050,000 shares of the Company's common stock may be issued upon the exercise of stock options which may be granted pursuant to the Plan. The 1991 Stock Option Plan also provides for "Reload" options, which are automatically granted to a participant upon the exercise of an option if the participant uses previously owned shares to pay for the option shares. Reload options will be for the number of previously-owned shares delivered upon the employee's exercise of an option. Under the 1991 Stock Option Plan, the purchase price of shares subject to each option will be not less than 100% of their fair market value at the time of the grant of the option. No options may be granted under the 1991 Stock Option Plan after May 20, 2001.
No option granted under the Company's stock option plans is exercisable in whole or in part in less than six months from the date of grant. Each option may be exercisable in one or more installments as provided therein. To the extent such options are not exercised, installments accumulate to the total granted and are exercisable in whole or in part at any time during the term of the option. This term shall be set forth in the option but in no event is an option exercisable, in whole or in part, after the expiration of ten years from the date of grant. The 1991 Stock Option Plan provides that in the event of a Change in Control (as defined in the Plan), all outstanding options granted under that Plan which have been held for at least six months from the date of grant shall become immediately exercisable.
As of December 31, 1993, the Company had outstanding options to its employees (including officers) for purchase of shares of its Common Stock as follows:
A summary of activity under all stock option plans for the three years ended December 31, 1993 is presented below:
As of December 31, 1993, options for 530,483 common shares were exercisable under all stock option plans at $18.42 to $29.50 per share. At December 31, 1993, up to 1,585,445 common shares could be issued under the Company's stock option plans. Common shares may be issued under the Company's stock option plans from shares in treasury or authorized but unissued shares.
In May, 1976 the Company adopted a Book Unit Plan for certain key employees. Under the terms of the plan, the Board of Directors may award, at its sole discretion, one or more units to employees it has selected to become participants in the plan. No more than 600,000 units shall be outstanding under the plan at any time. The value of a unit shall be the amount by which the book value per share, as of its award date, has been increased or decreased by (a) the sum of the increases or decreases in the book value per share of the Company's common stock plus (b) dividend equivalents for subsequent years up to and including its valuation date. Accordingly, approximately $2.1 million, $1.4 million, and $1.1 million were charged to expense in 1993, 1992, and 1991, respectively.
A summary of units outstanding under the Book Unit Plan follows:
In May, 1989, the Company adopted a Restricted Stock Plan for certain key employees. Under the terms of the Plan, a committee of the Board of Directors may award restricted shares of common stock of the Company, up to an aggregate maximum of 1,050,000 shares, to designated Participants. The shares, when awarded, are initially non-transferable and subject to forfeiture in the event that the Participant ceases to be an employee of USLIFE or any of its subsidiaries other than by reason of death, permanent disability, retirement, or certain other specified circumstances. These restrictions generally terminate with respect to 20% of the number of shares awarded on January 1 of each of the five calendar years following the year of award, at which time the appropriate number of unrestricted shares are distributed to the Participant. For certain awards, restrictions terminate with respect to one-third of the number of shares awarded on the first, second, and third anniversaries of the award date, with similar distribution. Upon award of shares under the Plan, deferred compensation equivalent to the market value of the shares on the award date is charged to Equity Capital. Such deferred compensation is subsequently amortized by means of charges to expense over the period during which the restrictions lapse. During 1993, a total of 18,356 shares were awarded under the Plan. During 1991, a total of 16,200 previously awarded shares were forfeited pursuant to the terms of the plan. As of December 31, 1993, there were 30,356 previously awarded shares outstanding under the Plan as to which
the restrictions had not yet lapsed. Expense charges recognized in 1993, 1992 and 1991 relating to these awards amounted to approximately $2.1 million, $2.0 million, and $2.0 million, respectively.
Note 8. Leases
In December, 1986 a subsidiary of the Company sold its home office building located at 125 Maiden Lane, New York, New York, and leased back portions of the premises which are utilized as the subsidiary's principal executive offices as well as the headquarters of the Company and several other subsidiaries. A $16.9 million portion of the gain arising from the sale and leaseback transaction (net of related taxes) was deferred and is being amortized by credits to income in proportion to rental payments made in accordance with the lease commitments over a ten year period. Additionally, several subsidiaries lease office space at other locations generally for periods ranging from five to fifteen years, and certain subsidiaries utilize leased furniture and office equipment. Certain of the operating leases for office premises provide for renewal options for periods ranging from five to twenty years based on fair rental value at time of renewal, and further options relating to rental of additional office space. The minimum rental commitments for all such non-cancelable operating leases as of December 31, 1993 approximate $12.6 million in 1994, $12.4 million in 1995, $11.4 million in 1996, $6.6 million in 1997, $5.5 million in 1998, and a total of $18.4 million from 1999 to 2003. Total rental expense amounted to approximately $13.5 million, $12.4 million, and $12.0 million for the years ended December 31, 1993, 1992 and 1991, respectively.
Note 9. Contingent Liabilities and Commitments
A life insurance subsidiary has an outstanding standby commitment, representing a contingent obligation to replace certain borrowings in the event of default by unaffiliated borrowers, amounting to $6.8 million at December 31, 1993. The life insurance subsidiaries historically have not provided permanent financing on the major portion of such commitments. This commitment, which is not guaranteed by the parent company, will expire in 1994.
The Company has outstanding Standby Letters of Credit with two banks representing contingent obligations to fund various trusts established in connection with certain employment contracts of management employees, the Company's Supplemental Retirement Plan, Retirement Plan for Outside Directors, and Retirement Plan, in the event of a Change in Control (as defined in the trust agreements), totalling $31 million. Additionally, in connection with the application by a life insurance subsidiary for an additional state license to transact business, USLIFE Corporation has agreed to guarantee that subsidiary's maintenance of the state's minimum capital and surplus requirements (amounting to $4.4 million at December 31, 1993) for a ten year period commencing at the effective date of such license.
The Company and certain of its subsidiaries are involved in litigation, which originated in 1981, with a former officer of a former subsidiary of the Company. Allegations in the former officer's lawsuit include breach of the covenant of good faith and fair dealing, breach of fiduciary duty, infliction of emotional distress and malicious prosecution. Judgment was rendered in favor of the Company. That judgment is being appealed. No contingent loss has been accrued for this litigation because the amount of loss, if any, cannot be reasonably estimated, nor is it probable in the opinion of management that the ultimate outcome of this litigation will result in a liability to the Company or any of its subsidiaries.
In April 1991, All American Life Insurance Company ("All American"), a life insurance subsidiary of the Company, commenced a lawsuit against 11 subscribers to a reinsurance pool when the reinsurers failed to honor their obligations under the reinsurance agreement. Certain of the reinsurers also filed their own lawsuits against All American. Approximately $15.8 million of reinsured claims were in dispute. All American reached settlements with the 11 reinsurers. There remain pending against All American certain cross claims for indemnification and contribution by a third party administrator and a reinsurance intermediary. In the opinion of management the ultimate resolution of this matter will not result in a material adverse financial impact upon the Company.
In March 1992, All American terminated the right of a Managing General Agent to sell college medical insurance on behalf of All American as a result of the failure of the Managing General Agent to secure adequate reinsurance under the contract and meet other contractual obligations. All American is currently involved in litigation with this former Managing General Agent, who has declared bankruptcy, and All American has taken a charge of $10.6 million (after applicable taxes) to establish a reserve for amounts receivable from the Managing General Agent. No contingent loss has been accrued for this litigation because the amount of additional loss, if any, cannot be reasonably estimated, nor is it probable in the opinion of management that the ultimate outcome of this litigation will result in a liability to the Company or any of its subsidiaries.
In June 1993, a purported class action was filed against three of the Company's subsidiaries alleging that the class members were entitled to premium refunds on policies of credit life and disability insurance purchased from the three subsidiaries. No contingent loss has been accrued for this litigation because the amount of loss, if any, cannot be reasonably estimated.
In addition to the aforementioned legal proceedings, the Company and its subsidiaries are parties to various routine legal proceedings incidental to the conduct of their business. Based on currently available information, in the opinion of management it is not probable that the ultimate resolution of these suits will result in a material liability on the part of the Company.
Note 10. Reinsurance
The life insurance subsidiaries reinsure with other companies portions of the risks they underwrite and assume portions of risks on policies underwritten by other companies. The life insurance subsidiaries generally reinsure risks over $1.5 million as well as selected risks of lesser amounts. In this connection, $7.5 billion, representing 6 percent of total life insurance in force as of December 31, 1993, was ceded to other carriers. Reinsurance contracts do not relieve the Company from its obligations to policyholders, and the Company is contingently liable with respect to insurance ceded in the event any reinsurer is unable to meet the obligations which have been assumed.
The Company's consolidated financial statements for 1993 reflect the adoption of Statement of Financial Accounting Standards No. 113 ("SFAS 113"), "Accounting and Reporting for Reinsurance of Short-Duration and Long-Duration Contracts." Pursuant to the standards of SFAS 113, amounts paid for or recoverable under reinsurance contracts, including amounts previously reported as a reduction of various liability accounts as permitted under previous accounting standards, are included in total assets as reinsurance receivable or recoverable amounts. The cost of reinsurance related to long-duration contracts is accounted for over the life of the underlying reinsured policies using assumptions consistent with those used to account for the underlying policies. Financial statements of previous years were not restated as a result of the adoption of SFAS 113.
The effect of reinsurance on premiums, other considerations, and benefits to policyholders and beneficiaries, is as follows:
Year Ended December 31, 1993 _______________________
(Amounts in Thousands)
Premiums, before reinsurance ceded......... $1,021,694 Premiums ceded............................. 77,388 __________ Net premiums............................... $ 944,306 ==========
Other considerations, before reinsurance ceded................................... $166,477 Other considerations ceded................. 12,938 ________ Net other considerations................... $153,539 ========
Benefits to policyholders and beneficiaries, before reinsurance recoveries............ $794,640 Reinsurance recoveries..................... 57,309 ________ Benefits to policyholders and beneficiaries, net of reinsurance recoveries............ $737,331 ========
A summary of reinsurance activity for the three years ended December 31, 1993 is presented below:
The estimated amounts of reinsurance recoverable on paid and unpaid claims included in the Consolidated Balance Sheets as of December 31, 1993 and 1992 are as follows:
The amount included in the consolidated balance sheet at December 31, 1993 for "Other reinsurance recoverable" includes the estimated amounts recoverable on unpaid claims as indicated above as well as prepaid reinsurance premiums. For periods prior to 1993, these amounts were netted against the related insurance liabilities in accordance with previous accounting standards.
Note 11. Investment Securities
The investments of the Company at December 31, 1993 are summarized as follows:
Based on book value, assets categorized as "non-income producing" for the 12 months ended December 31, 1993 included in fixed maturities, mortgage loans, real estate investment properties, and real estate acquired in satisfaction of debt amounted to $16.3 million, $13.5 million, $4.9 million and $8.9 million, respectively.
Note 12. Net Investment Income
The details of consolidated net investment income for the three years ended December 31, 1993 follow:
Note 13. Supplementary Insurance Information
Supplementary data relating to the life insurance industry segment of the Company for the three years ended December 31, 1993 is presented below.
Year Ended December 31, 1991 ___________________________________
Non- Life Reportable Insurance Segments and Industry Consolidating Segment Adjustments Consolidated __________ _________ __________
Deferred policy acquisition costs........ $ 648,835 $ - $ 648,835 ========== ========= ==========
Future policy benefits:
Life........... $1,091,759 $ - $1,091,759 Accident and health........ 189,585 - 189,585 __________ _________ __________
Total......... $1,281,344 $ - $1,281,344 ========== ========= ==========
Policyholder account balances for universal life-type and investment contracts....... $2,147,849 $ - $2,147,849 ========== ========= ==========
Other policy claims and benefits payable......... $ 223,755 $ (6,675) $ 217,080 ========== ========= ==========
Premium income: Life........... $ 409,096 $ (566) $ 408,530 Accident and health....... 436,978 (5,250) 431,728 __________ _________ __________
Total........ $ 846,074 $ (5,816) $ 840,258 ========== ========= ==========
Other consider- ation.......... $ 129,109 $ - $ 129,109 ========== ========= ==========
Net investment income......... $ 351,671 $ 9,905 $ 361,576 ========== ========= ==========
Realized gains (losses)....... $ (2,235) $ 314 $ (1,921) ========== ========= ==========
Benefits, claims, losses and settlement expenses........ $ 835,084 $ 190 $ 835,274 ========== ========= ==========
Amortization of deferred policy acquisition costs........... $ 130,659 $ - $ 130,659 ========== ========= ==========
Other operating expenses ...... $ 231,362 $ 74,592 $ 305,954 ========== ========= ==========
Note 14. Condensed Financial Information of Parent Company
Note 15. Condensed Quarterly Results of Operations (Unaudited)
The quarterly results of consolidated operations for the two years ended December 31, 1993 are presented below (in thousands of dollars except per share amounts):