Annual Report (Form 10-K), fiscal year 1994

Item 1.
Item 3.




Item 3. Legal Proceedings.
Reference is made to Part II, Item I, Legal Proceedings, in Registrant's Quarterly Report on Form 10-Q for the quarter ended June 30, 1994 for a description of a federal court action entitled USLIFE Savings and Loan Association v. Louis Wilcox, et al., which is incorporated by reference herein. There have been no material developments in this matter since the date of that report.
Reference is made to Part II, Item I, Legal Proceedings, in Registrant's Quarterly Report on Form 10-Q for the quarter ended September 30, 1994 for a description of a purported class action entitled Hoban v. USLIFE Credit Life Insurance Company, All American Life Insurance Company and Security of America Life Insurance Company, which is incorporated by reference herein. There have been no material developments in this matter since the date of that report.
On November 17, 1994, a purported class action (Smith et al. v. USLIFE Credit Life Insurance Company, et al.) was filed in the United States District Court for the Northern District of Illinois. The Complaint alleges that in connection with purchases by plaintiffs of single premium term life insurance from mortgage lenders in connection with mortgage loans, defendants misrepresented the type of insurance offered as credit life insurance and sold the term life insurance at premiums in excess of those permitted for credit life insurance. The Complaint further alleges that upon prepayment of mortgage loans plaintiffs did not receive refunds of unearned premiums, which they would have been entitled to receive had they purchased credit life insurance. The Complaint contains claims for damages for breach of contract, breach of fiduciary duty, unfair and deceptive acts and practices, fraud, restitution and unjust enrichment and civil claims under the Federal RICO statute. On January 10, 1995, defendants filed motions to dismiss the Complaint for, among other reasons, failure to state a legally cognizable claim.
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, 1994 and 1993 have been declared and paid to Common Stockholders at the annual rates of $1.26 and $1.21 respectively (paid quarterly in 1994 and 1993). As of February 24, 1995 there were approximately 7,800 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)
1994 1993 ____ ____
First quarter...... 37 1/2 - 41 3/8 36 1/8 - 42 5/8 Second quarter..... 34 7/8 - 39 5/8 35 3/4 - 41 1/2 Third quarter...... 33 1/8 - 37 3/4 39 3/4 - 43 7/8 Fourth quarter..... 30 7/8 - 35 7/8 36 1/2 - 45 3/4
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 42. 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 1995.
(1) Served as Chairman since March 21, 1967 and as Chief Executive Officer from June 6, 1971 to December 31, 1994. Served as President from November 1966 to June 1971; from October 1974 to March 1976; from January 1984 to November 1987; from December 1988 to May 1993; and from April 1994 to December 1994.
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, and Schlomann, 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. Simpson has served as President and Chief Executive Officer of USLIFE Corporation since January 1995 and has served as a Director since March 1990. He served as President and Chief Executive Officer of All American Life from April 1990 to October 1994 and as President - Chief Operating Officer of the life insurance division of USLIFE Corporation from April 1994 to December 1994. Prior to his employment with USLIFE, 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 1990. Mr. Henderson has served as Vice Chairman and Chief Financial Officer and a Director since at least January 1990. 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 1990. Mr. Bushey has served as Executive Vice President-Corporate Planning since at least January 1990. 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 1990. Mr. Forte has served as Executive Vice President-General Counsel since at least January 1990. 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 1990. 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 1990. Mr. Hohn has served as Senior Vice President - Investor Relations, Secretary and Counsel since October 1994. He previously served as Senior Vice President - Corporate Secretary and Counsel since May 1993, and as Vice President - Corporate Secretary since April 1991. Prior to that date, he served as consultant to the Life Insurance Council of New York, Inc., a trade association of New York life insurance companies, since April 1990; and as an attorney in private practice since at least January 1990. Mr. Lynch has served as Senior Vice President-Controller since at least January 1990. Mr. McQueen has served as Senior Vice President-Financial Operations since at least January 1990. Mr. Chouinard, who has served as Chief Investment Officer of USLIFE since at least January 1990, 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 1990. Mr. Bickler has served as President - Chief Operating Officer of All American Life since October 1994. He previously served as Executive Vice President - Marketing with that subsidiary since March 1990. 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 1990. Mr. Faulkner has served as President and Chief Executive Officer of USLIFE Real Estate Services Corporation since at least January 1990. Mr. Griffin has served as President and Chief Executive Officer of Old Line Life since at least January 1990. Mr. Hendricks has served as President and Chief Executive Officer of USLIFE Systems Corporation since at least January 1990 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 1990.
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, 1994 for use in connection with the Annual Meeting of Shareholders to be held on May 16, 1995.
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, 1994 for use in connection with the Annual Meeting of Shareholders to be held on May 16, 1995.
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, 1995, 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, 1994 for use in connection with the Annual Meeting of Shareholders to be held on May 16, 1995.
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, 1994 for use in connection with the Annual Meeting of Shareholders to be held on May 16, 1995.
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 42.
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 and restated.
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 September 27, 1994, between USLIFE Corporation and Chemical Bank (successor by merger to Manufacturers Hanover Trust Company), as Rights Agent, relating to Common Stock Purchase Rights issued by USLIFE on July 10, 1986, incorporated herein by reference to USLIFE's Report on Form 8-K dated October 12, 1994.
10 * (i) - 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.
* (ii) - 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.
* (iii) - 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.
* (iv) - 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.
* (v) - 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.
* (vi) - 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.
* (vii) - 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.
* (viii) - Seventh Amendment dated as of May 1, 1994 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, 1994.
* (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) - Sixth Amendment dated as of May 1, 1994 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, 1994.
* (xvi) - 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.
* (xvii) - 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.
* (xviii) - 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.
* (xix) - 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, incorporated herein by reference to USLIFE's Annual Report on Form 10-K for the year ended December 31, 1993.
* (xx) - 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.
* (xxi) - Sixth Amendment dated as of May 1, 1994 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, 1994.
* (xxii) - 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.
* (xxiii) - 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.
* (xxiv) - 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.
* (xxv) - 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.
* (xxvi) - 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.
* (xxvii) - 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.
* (xxviii) - Sixth Amendment dated as of May 1, 1994 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, 1994.
* (xxix) - 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.
* (xxx) - 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.
* (xxxi) - 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.
* (xxxii) - 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.
* (xxxiii) - 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.
* (xxxiv) - 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.
* (xxxv) - Sixth Amendment dated as of May 1, 1994 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, 1994.
* (xxxvi) - 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.
* (xxxvii) - 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.
* (xxxviii) - 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.
* (xxxix) - 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.
* (xl) - 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.
* (xli) - 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.
* (xlii) - Sixth Amendment dated as of May 1, 1994 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, 1994.
* (xliii) - 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.
* (xliv) - 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.
* (xlv) - 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.
* (xlvi) - 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.
* (xlvii) - 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.
* (xlviii) - Fourth Amendment dated as of May 1, 1994 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, 1994.
(il) - 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.
(l) - 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.
(li) - 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.
(lii) - 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.
(liii) - 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.
* (liv) - 1981 Stock Option Plan, incorporated herein by reference to USLIFE's Annual Report on Form 10-K for the year ended December 31, 1981.
* (lv) - 1978 Stock Option Plan, incorporated herein by reference to USLIFE's Annual Report on Form 10-K for the year ended December 31, 1980.
* (lvi) - USLIFE Corporation Deferred Compensation Plan, as amended February 28, 1995.
* (lvii) - Book Unit Plan, as amended.
* (lviii) - USLIFE Corporation Retirement Plan for Outside Directors (as amended September 25, 1990).
* (lix) - USLIFE Corporation Restricted Stock Plan, as amended September 27, 1994.
* (lx) - USLIFE Corporation 1991 Stock Option Plan, as amended.
* (lxi) - USLIFE Corporation Non-Employee Directors' Stock Option Plan, incorporated herein by reference to Exhibit 4(a) to USLIFE's Registration Statement No. 33-53265 on Form S-8 dated April 25, 1994.
* (lxii) - Annual Incentive Plan, as amended October 25, 1994, for Selected Key Officers of USLIFE Corporation and its Subsidiaries.
* (lxiii) - USLIFE Corporation Deferred Compensation Plan (as amended November 16, 1993).
* (lxiv) - USLIFE Corporation 1993 Long-Term Incentive Award Guidelines, as amended.
* (lxv) - USLIFE Corporation Supplemental Employee Savings and Investment Plan.
* (lxvi) - USLIFE Corporation Supplemental Retirement Plan.
* (lxvii) - Trust Agreement made as of September 25, 1990 among USLIFE Corporation, Manufacturers Hanover Trust Company (predecessor to Chemical Bank) and KPMG Peat Marwick LLP (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.
* (lxviii) - Trust Agreement made as of September 25, 1990 among USLIFE Corporation, Manufacturers Hanover Trust Company (predecessor to Chemical Bank) and KPMG Peat Marwick LLP (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.
* (lxix) - Trust Agreement made as of September 25, 1990 among USLIFE Corporation, Manufacturers Hanover Trust Company (predecessor to Chemical Bank) and KPMG Peat Marwick LLP (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.
12 - Computations of ratios of earnings to fixed charges.
21 - List of Subsidiaries.
23 - Consent of Independent Certified Public Accountants (see page 39).
27 - Financial Data Schedule.
99 (i) - Annual Report on Form 11-K of USLIFE Corporation Employee Savings and Investment Plan for the plan year ended December 31, 1994 (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 LLP (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.
A Report on Form 8-K was filed on behalf of the Registrant on October 12, 1994, reporting the Board of Directors' approval of the By-Laws of USLIFE Corporation, as amended and restated on May 17, 1994 and September 27, 1994, and the Amended and Restated Rights Agreement, dated September 27, 1994, between USLIFE Corporation and Chemical Bank, the successor by merger to Manufacturers Hanover Trust Company, as Rights Agent.
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; Registration Statement No. 33-53265 on Form S-8 relative to the USLIFE Corporation Non-Employee Directors' 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 28, 1995, relating to the consolidated balance sheets of USLIFE Corporation and subsidiaries as of December 31, 1994 and 1993 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, 1994 which report appears in this December 31, 1994 Annual Report on Form 10-K of USLIFE Corporation. Our report refers to changes in accounting to adopt the provisions of the Financial Accounting Standards Board's Statements of Financial Accounting Standards No. 115, "Accounting for Certain Investments in Debt and Equity Securities" and No. 106, "Employers' Accounting for Postretirement Benefits Other Than Pensions."
/s/ KPMG Peat Marwick LLP KPMG Peat Marwick LLP
March 28, 1995 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 28, 1995
By: /s/ Gordon E. Crosby, Jr. _____________________________ (Gordon E. Crosby, Jr., Chairman of the Board)
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.
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, 1994 and 1993, 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, 1994. 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, 1994 and 1993, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 1994, in conformity with generally accepted accounting principles.
As discussed in Note 1 to the consolidated financial statements, the Company changed its method of accounting for debt and equity securities in 1994 to adopt the provisions of the Financial Accounting Standards Board's Statement of Financial Accounting Standards No. 115, "Accounting for Certain Investments in Debt and Equity Securities." 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 LLP KPMG Peat Marwick LLP
February 28, 1995 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 January 1, 1994, the Company adopted Statement of Financial Accounting Standards No. 115 ("SFAS 115"), entitled "Accounting for Certain Investments in Debt and Equity Securities." SFAS 115 requires that debt securities which may be sold as part of the Company's asset/liability management strategy be classified as "available for sale" and carried at market value in the Consolidated Balance Sheet, commencing with the date of adoption of the Statement. The Company's portfolio of debt securities had been similarly classified as "available for sale" prior to the adoption of SFAS 115, but was carried at lower of aggregate adjusted cost or market value pursuant to previous accounting standards. Since the aggregate market value of these securities exceeded their adjusted cost at December 31, 1993, this classification had no impact on Equity Capital at that date. The Company's equity securities portfolio had been carried at market value in accordance with previous accounting standards prior to the adoption of SFAS 115 and continues to be carried at market value as required by the Statement.
As required by SFAS 115, the net impact of the initial adjustment to market value of these securities, less corresponding adjustments to deferred policy acquisition costs (required where market value differs from cost for certain securities), certain policyholder liabilities, and deferred income taxes, was recorded through a direct credit to "Net unrealized gains (losses) on securities" included in Equity Capital as follows:
(Amounts in Thousands)
Impact of adoption of SFAS 115:
Unrealized gain on debt securities at January 1, 1994......... $380,343 Less: Adjustment of deferred policy acquisition costs............. 99,889 Increase in certain policyholder liabilities................ 16,706
________
Adjustment to Equity Capital before federal income tax........ 263,748 Adjustment of deferred federal income tax liability........... 92,312 ________
Net adjustment to Equity Capital at January 1, 1994........... $171,436 ========
SFAS 115 requires that unrealized gains and losses on available-for-sale securities, other than those relating to a reduction in value determined to be other than temporary, be recorded as direct charges and credits to "Net unrealized gains (losses) on securities" included in Equity Capital. Consequently, the recognition of these unrealized gains and losses has no impact on net income.
Under both SFAS 115 and previous accounting standards, valuation reserves (established through income statement charges) are maintained as an adjustment to cost for investments, including "available for sale" securities, with a reduction in value determined to be other than temporary. The cost and market value of the Company's investments in securities are presented under "Investments in Securities" below.
Also in 1994, the Company adopted Statement of Financial Accounting Standards No. 112, ("SFAS 112") entitled "Employers' Accounting for Postemployment Benefits." SFAS 112 requires advance recognition of non- retirement benefits such as severance pay and health insurance continuation when certain conditions are met. The adoption of SFAS 112 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 112.
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 implementation of SFAS 113, reinsurance receivables amounting to approximately $137 million and $135 million are included in consolidated total assets at December 31, 1994 and 1993, respectively, including approximately $122 million and $118 million, respectively, 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 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 May 1993, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards No. 114, entitled "Accounting by Creditors for Impairment of a Loan." Certain accounting and disclosure requirements contained in Statement No. 114 were modified by FASB Statement No. 118, "Accounting by Creditors for Impairment of a Loan - Income Recognition and Disclosures," issued in October 1994. These statements must be adopted by calendar year enterprises no later than 1995 and will require a writedown to fair value, as defined by Statement No. 114, 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 these Statements, they will not have a material impact on the Company's reported financial position or results of operations. The Company will adopt these Statements in the first quarter of 1995.
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 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. Accordingly, the Company's entire Fixed Maturity portfolio is classified as "available for sale". These securities are carried in the accompanying consolidated balance sheets at market value as of December 31, 1994 and at lower of aggregate adjusted cost or market value at December 31, 1993. The Company's investments in preferred stocks (other than redeemable preferred stocks) and common stocks ("Equity Securities") are carried at market value in the accompanying consolidated balance sheets at December 31, 1994 and 1993. The cost and market value of the Company's consolidated investments in Fixed Maturities and Equity Securities at December 31, 1994, 1993 and 1992 are presented below:
The changes in unrealized gains and losses on securities for the year ended December 31, 1994, including the initial adjustment to Equity Capital at January 1, 1994 resulting from the implementation of "mark to market" accounting for available-for-sale securities as required by SFAS 115, are shown below:
_____
(a) Excluding marketable equity securities at January 1, 1994.
(b) Included in "Net unrealized loss on securities" at December 31, 1994.
The classification of the Company's Fixed Maturity portfolio as "available for sale" had no impact on Equity Capital at December 31, 1993 or 1992, when these securities were carried at the lower of aggregate adjusted cost or market value, since the aggregate market value of these securities exceeded their adjusted cost at those dates.
Valuation reserves (established through income statement charges) are maintained as an adjustment to cost for investments, including "available for sale" securities, with a reduction in value determined to be other than temporary.
At December 31, 1994, consolidated invested assets included approximately $232 million (based on adjusted cost) 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 $228 million at December 31, 1994 and, based on market value, represent approximately 3% of consolidated total assets at that date. Approximately $21 million (at market) of these investments (adjusted cost, $22 million) are classified as problem securities at that date and, of that amount, approximately $21 million (at market) represented securities in default at December 31, 1994. Also at December 31, 1994, the book value of mortgage loans included in consolidated total assets which were 60 days or more delinquent or in foreclosure was approximately $9 million, and the book value of property acquired through foreclosure of mortgage loans was approximately $30 million.
Realized gains and losses on the Company's consolidated investments in Fixed Maturities and Equity Securities for the three years ended December 31, 1994 are summarized as follows:
Pre-tax realized gains and losses 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 and losses on Fixed Maturities and Equity Securities are reconciled to consolidated realized gains and losses on investments as follows:
1994 1993 1992 __________ __________ __________
(Amounts in Thousands) Realized gains (losses):
Fixed Maturities.............. $ (630) $ 46,891 $ 23,094 Equity Securities............. (923) 897 1,584 __________ __________ __________
(1,553) 47,788 24,678
Real estate, mortgage loans, and other investments (a)... 173 (39,272) (27,258)
__________ __________ __________
Total......................... $ (1,380) $ 8,516 $ (2,580) ========== ========== ==========
(a) Reflects provisions for valuation to estimated net realizable value for certain investments.
The adjusted cost and estimated market values of the Company's consolidated investments in equity securities and debt securities at December 31, 1994 and 1993 are as follows:
The adjusted cost and estimated market value of debt securities at December 31, 1994 and 1993, 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 1994, 1993 and 1992 were $1.072 billion, $1.209 billion, and $824.1 million, respectively. During 1994, gross gains of $31.3 million and gross losses of $31.9 million were realized on such disposals. 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.
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, 1994, and regulatory Equity Capital and Equity Capital in accordance with GAAP of such subsidiaries at December 31, 1994, 1993 and 1992 are as follows:
(a) Amounts shown exclude after-tax capital gains (losses) of $(10.9) million, $(1.3) million and $(15.5) million on a regulatory basis and $(0.9) million, $7.1 million, and $(1.4) million on a GAAP basis in 1994, 1993 and 1992, 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.
The 1994 decrease in regulatory after-tax income resulted primarily from a 44% increase in term insurance sales (based on annualized premiums). Statutory accounting practices require acquisition costs on new business (including commissions and underwriting and issue costs) to be charged to expense when incurred. Additionally, statutory reserves initially established for term policies exceed the corresponding amounts required under GAAP.
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 $784.3 million, $826.5 million and $779.0 million, respectively, at December 31, 1994, 1993 and 1992. 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, 1994, the portion of the aggregate $1.327 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 $1.284 billion. Cash dividends paid by all consolidated subsidiaries to the parent company totalled $45.7 million, $61.2 million and $47.7 million for the years ended December 31, 1994, 1993 and 1992, 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, 1994 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 2.2 percent of the individual life insurance in force at December 31, 1994 and 6.6 percent of individual life insurance premium income in 1994. The portion of earnings therefrom that inures to the benefit of the participating policyholders 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 2.3 percent of the total individual life insurance in force at December 31, 1994 and 6.9 percent of individual life insurance premium income in 1994. 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.
Activity in the liability for unpaid claims and claim adjustment expenses for the Company's health and disability coverages is summarized as follows: 1994 1993 1992 ________ ________ ________ (Amounts in Thousands)
Balance at January 1................. $ 81,638 $104,222 $ 89,214 Less: reinsurance recoverables....... 4,021 13,831 9,809 ________ ________ ________ Net balance at January 1............. 77,617 90,391 79,405 ________ ________ ________
Amount incurred (a).................. 334,699 370,409 414,687
Amount paid, related to: Prior years (b).................. 94,083 121,470 117,611 Current year..................... 248,721 261,713 286,090 ________ ________ ________ Total...................... 342,804 383,183 403,701 ________ ________ ________
Net balance at December 31........... 69,512 77,617 90,391 Plus: reinsurance recoverables....... 4,115 4,021 13,831 ________ ________ ________ Balance at December 31............... $ 73,627 $ 81,638 $104,222 ======== ======== ========
(a) Substantially all of the Company's incurred claims and claim adjustment expenses relate to the respective current year.
(b) Includes current year incurred amount on certain claims originating prior to respective current year.
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, 1994.
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, 1994 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, 1994:
Statement of Cash Flows
For the years ended December 31, 1994, 1993 and 1992, respectively, interest paid (net of amounts capitalized) amounted to $34.8 million, $32.6 million, and $34.7 million, and Federal income taxes paid amounted to $60.5 million, $60.7 million and $75.7 million. The major portion of the disposals of fixed maturity investments relate to securities sold or redeemed prior to their maturity dates. The $1.1 billion disposals of Fixed Maturity investments by the Company for the year ended December 31, 1994 included approximately $209 million (adjusted cost) of securities which were called for redemption by the respective issuers prior to maturity. The $1.2 billion disposals of Fixed
Maturity investments in 1993 included approximately $928 million of such redemptions. Certain prior year amounts have been reclassified to conform to current year presentation.
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 500 issuers, with no issuer accounting for more than 1% of the Company's total investment in these securities, based on market value, at December 31, 1994.
The Company's investment in mortgage loans at December 31, 1994 is characterized by a broad geographical distribution, with approximately 7% of total book value relating to the New England region of the United States, 18% from the middle-Atlantic states, 20% from the north-central states, 16% from the south-Atlantic states, 11% from the south-central states, 13% from the mountain states, and 15% from the Pacific states. Based on book value, approximately 39% of the Company's mortgage loans at that date are secured by office buildings, 24% by industrial / warehouse properties, 25% retail, 1% apartments, 2% 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, 1994 relate to approximately 150 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, 1994. The Company monitors the financial condition of its reinsurers in order to minimize its exposure to loss from reinsurer insolvencies.
In the ordinary course of investment operations, the life insurance subsidiaries may, in return for commitment fees, extend standby commitments which represent contingent obligations to replace certain borrowings in the event of default by unaffiliated borrowers. The life insurance subsidiaries historically have not provided permanent financing on the major portion of such commitments. 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 outstanding standby commitments or material permanent financing commitments at December 31, 1994.
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.
Policyholder Account Balances Relating to Investment Contracts
The fair value of the Company's liabilities under investment contracts, primarily deferred annuities, is estimated using discounted cash flow calculations based on interest rates being offered by the Company for similar contracts at the balance sheet date.
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:
(a) The estimated fair value of policyholder account balance liabilities relating to investment contracts at December 31, 1993 is not materially different from the carrying value at that date.
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 Company has not utilized derivative financial instruments such as futures, forward, swap, or option contracts as defined in Statement of Financial Accounting Standards No. 119, "Disclosure about Derivative Financial Instruments and Fair Value of Financial Instruments," for periods presented herein.
The estimated fair values of the Company's policy loan assets at December 31, 1994 and 1993 are not materially different from the respective carrying values at those dates. No material carrying value or fair value amounts were ascribed to the Company's outstanding standby commitments at December 31, 1993. It should be noted that fair value estimates based on assumed discount rates and assumptions and estimates of the timing and amount of future cash flows are significantly affected by the assumptions used.
Note 2. Notes Payable
Notes payable at December 31, 1994 includes $150 million borrowings under a revolving credit agreement between the Company and The Bank of New York (as agent) which commenced on May 13, 1994. The credit agreement expires on May 12, 1995, at which time all borrowings thereunder must mature, subject to extension of the agreement for a period of 364 days at the option of the various participating banks and the Company. The credit agreement 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 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.
Also 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 a revolving short term bank credit agreement 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, 1994.
(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, 1994 and 1993, 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, 1994 1993 ____________ ____________
(Amounts in Thousands)
1994....................... $ -- $100,000 1998....................... 149,798 149,739 1999....................... 50,000 50,000 2000....................... 149,562 149,496 ________ ________
Total............... $349,360 $449,235 ======== ========
None of the Company's debt issues are or have been in default.
Note 4. Federal Income Taxes
Federal income tax expense relating to operations of the Company for 1994, 1993 and 1992 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, 1994, 1993 and 1992 are as follows:
Total tax expense differs from the amount computed by applying the Federal income tax rate of 35 percent in 1994 and 1993, and 34 percent in 1992, 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, 1994 and 1993 are presented below:
December 31 ______________________
1994 1993 ____ ____
(Amounts in Thousands)
Deferred Tax Assets:
Future policy benefits.......................... $ 136,884 $ 129,078 Net unrealized loss on securities............... 84,134 -- Tax net operating loss carryforward............. 26,752 23,990 Capital gains and losses........................ 39,845 42,678 Capitalization of policy acquisition costs, net of amortization, for tax return purposes.. 56,313 45,089 Sale and leaseback transactions................. 1,745 2,617 Allowance for uncollectible receivables......... 2,496 2,489 Resisted claim liability........................ 2,043 1,691 Employee retirement benefits.................... 27,930 26,534 Unearned interest............................... 1,560 1,787 Accrual of interest payable..................... 1,053 2,138 Differences between tax and accounting for reinsurance............................... 5,333 -- Other........................................... 2,346 5,397 _________ _________
Total gross deferred tax assets................. 388,434 283,488
Total valuation allowance....................... (16,368) (16,368) _________ _________
Net deferred tax assets......................... 372,066 267,120 _________ _________
Deferred Tax Liabilities:
Deferral of policy acquisition costs, net of amortization, for accounting purposes......... (275,501) (259,674) Basis differences between tax and accounting for joint ventures............................ (6,427) (4,266) Basis differences between tax and accounting for securities................................ (5,145) (4,672) Depreciation.................................... (5,502) (5,759) Prepaid expenses................................ (1,642) (2,403) Differences between tax and accounting for reinsurance............................... -- (6,596) Other........................................... (6,184) (9,055) _________ _________
Total gross deferred tax liabilities............ (300,401) (292,425)
_________ _________
Net deferred tax asset (liability).............. $ 71,665 $ (25,305) ========= =========
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 1988. 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, 1994 become taxable, the tax computed at present rates would be approximately $47.8 million.
At December 31, 1994, the Company has nonlife net operating loss carryforwards for Federal income tax purposes of approximately $76.4 million which are available to offset future Federal taxable income, if any, through 2009.
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, $4.5 million and $4.2 million were made for the years ended December 31, 1994, 1993 and 1992, 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 $7.848 million, $5.212 million and $4.774 million in 1994, 1993 and 1992, respectively. The net periodic pension cost for these plans in 1994, 1993 and 1992 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, 1994 and 1993 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. As required by Statement of Financial Accounting Standards No. 87, "Employers' Accounting for Pensions," an additional minimum pension liability is recognized for the Company's non-qualified plans to reflect the excess of the accumulated benefit obligations over the liability already recognized as unfunded accrued pension cost. Such minimum pension liability of $7.564 million and $8.276 million in 1994 and 1993, respectively, has been offset with an intangible asset in the consolidated balance sheets. 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:
December 31 ________________________ 1994 1993 1992 ____ ____ ____
Discount rate.................................... 8.25% 7.5% 7.5% Rate of increase in compensation levels.......... 6.0 6.0 6.0 Expected long-term rate of return on assets...... 7.5 7.5 7.5
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 plan provides benefits supplemental to Medicare after retirees are eligible for Medicare benefits. 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.
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, 1994 and 1993 is reconciled to accrued postretirement benefit cost as follows:
December 31 _________________________
1994 1993 ____ ____
(Amounts in Thousands) Accumulated postretirement benefit obligation:
Retirees................................. $(15,767) $(18,982) Fully eligible active plan participants.. (4,414) (4,893) Other active plan participants........... (7,309) (7,949) ________ ________
Total................................. (27,490) (31,824) Plan assets.............................. -- -- ________ ________
Funded status......................... (27,490) (31,824) Unrecognized net (gain) or loss.......... (16,433) (11,752) Unrecognized prior service cost.......... (13,888) (14,329) ________ ________
Accrued postretirement benefit cost...... $(57,811) $(57,905) ======== ========
Net periodic postretirement benefit cost for 1994 and 1993 included the following components:
1994 1993 ____ ____
(Amounts in Thousands) Service cost - benefits earned during the year........ $ 1,044 $ 1,068 Interest cost on accumulated postretirement benefit obligation.................................. 2,010 2,198 Net amortization and deferral......................... (1,704) (1,162) _______ _______ Net periodic postretirement benefit cost.............. $ 1,350 $ 2,104 ======= =======
The non-pension postretirement benefit cost for the year 1992 was comprised primarily of "interest cost."
For measurement purposes, a 12 percent annual rate of increase in the per- capita cost of covered health benefits (ie., health care cost trend rate) was assumed for 1994; the rate was assumed to decrease gradually to 6 percent by the year 1997 and remain at that level thereafter. An 11 percent annual rate of increase in claims reimbursed by Medicare for retirees over age 65 was assumed for 1994; 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, 1994 by approximately $57 thousand and the aggregate of the service and interest cost components of 1994 net periodic postretirement benefit cost by $10 thousand. The discount rate used in determining the accumulated postretirement benefit obligation was 8.25% at December 31, 1994 and 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, 1994, 4,653 shares; December 31, 1993, 4,815 shares; December 31, 1992, 5,627 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, 1994 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, 1994, 2,003 shares; December 31, 1993, 2,050 shares; December 31, 1992, 2,251 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, 1994 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, 1994, 10,793,344 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, 1994 and 1993: 60,000,000 shares; December 31, 1992: 40,000,000 shares; issued, including treasury shares, as of December 31, 1994, 38,310,490 shares; December 31, 1993, 38,308,823 shares; December 31, 1992, 38,255,975 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, 1994, 53,275 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, 1994, participant interests relating to 7,406 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 September 27, 1994 between the Company and Chemical Bank (successor by merger to Manufacturers Hanover Trust Company) 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 $160. 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 worth of the Common Stock for $75. As of December 31, 1994 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 1994, 1993 and 1992, respectively, 26,574, 25,689 and 29,523 shares of the Common Stock had been sold pursuant to the Dividend Reinvestment and Stock Purchase Plan.
Treasury Stock
At December 31, 1994, there were 15,493,148 shares of Common Stock held in treasury. During 1994, 218,908 Common shares were acquired, at an aggregate cost of $7.2 million, and 376,114 Common shares, with an aggregate cost of $7.1 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, 1993, treasury stock consisted of 15,650,354 Common shares. Common shares outstanding, net of treasury shares, as of December 31, 1994 and 1993 are as follows:
December 31 ________________________
1994 1993 ____ ____
Common shares issued.............. 38,310,490 38,308,823 Treasury shares................... 15,493,148 15,650,354 __________ __________
Net outstanding common shares..... 22,817,342 22,658,469 ========== ==========
Note 7. Stock Options and Long-Term Incentive Plans
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. In May 1994, the Plan was amended to limit the number of options that may be granted to any one individual during any one-year period to 75,000. No options may be granted under the 1991 Stock Option Plan after May 20, 2001.
In May 1994, the Company adopted a stock option plan (the "Non-Employee Director Stock Option Plan") for directors of USLIFE who are not employees of the Company or its subsidiaries or affiliates. The Plan provides that each eligible director will automatically be granted options to purchase 2,000 shares of USLIFE common stock, commencing at the date of the Company's 1994 Annual Meeting of Shareholders and on the date of each subsequent Annual Meeting. A maximum of 250,000 shares of the Company's common stock may be issued upon the exercise of stock options which may be granted under the Non- Employee Director Stock Option Plan. No options may be granted under this Plan after May 17, 2004.
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 is 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, 1994, the Company had outstanding options to its employees (including officers) and non-employee directors 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, 1994 is presented below:
As of December 31, 1994, options for 924,438 common shares were exercisable under all stock option plans at $19.75 to $43.63 per share. At December 31, 1994, up to 1,748,813 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.
The Company has 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 units granted prior to 1994 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, excluding the impact of "mark-to-market" adjustments required by FASB Statement No. 115 to recognize unrealized gains and losses on debt and equity securities, plus (b) dividend equivalents for subsequent years up to and including its valuation date. In May 1994, the Plan was amended to limit the number of book units that may be granted to any one individual during a one-year period to no more than 75,000 and further, to eliminate the inclusion of cumulative dividends paid to shareholders in calculating the value of book units awarded in 1994 and thereafter. Accordingly, approximately $1.7 million, $2.1 million, and $1.4 million were charged to expense in 1994, 1993, and 1992, respectively.
A summary of units outstanding under the Book Unit Plan follows:
The Company also has 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 March 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. In May 1994, the Plan was amended to limit the number of shares that may be granted to any one individual during any one-year period to 75,000, and to provide for forfeiture of awards to certain key officers under the Plan in the event that performance goals based on the Company's "Earnings Per Share from Continuing Operations," as defined in the Plan, are not satisfied. 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 1994, a total of 204,274 shares were awarded under the Plan, and 5,332 previously awarded shares were forfeited pursuant to the terms of the Plan. During 1993, a total of 18,356 shares were awarded under the Plan. As of December 31, 1994, there were 223,348 previously awarded shares outstanding under the Plan as to which the restrictions had not yet lapsed. Expense charges recognized in 1994, 1993 and 1992 relating to these awards amounted to approximately $2.0 million, $2.1 million, and $2.0 million, respectively.
In May 1994, the Company adopted an Annual Incentive Plan (the "Incentive Plan") for certain key executive officers. Under the Incentive Plan, annual bonuses for participating key officers will depend on the attainment of performance goals based on levels of income from the Company's core life insurance businesses, as defined in the Plan. The Incentive Plan is administered by the Executive Compensation and Nominating Committee, which may authorize awards of up to 75% of a Participant's base salary based on attainment of performance goals established by the Committee. These awards are payable in cash no later than April 30 after each plan year, following certification by the Committee that the performance goals have been met. The Incentive Plan provides that in the event of a Change in Control (as defined in the Plan), the amount of awards will be calculated as if all performance targets have been met to produce the maximum award and payment of the awards will be accelerated to the date on which the Change in Control occurs.
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, 1994 approximate $13.5 million in 1995, $13.0 million in 1996, $7.2 million in 1997, $6.1 million in 1998, $5.5 million in 1999, and a total of $13.9 million from 2000 to 2003. Total rental expense amounted to approximately $13.1 million, $13.5 million, and $12.4 million for the years ended December 31, 1994, 1993 and 1992, respectively.
Note 9. Contingent Liabilities and Commitments
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 $88 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, 1994) 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 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. In October, 1994, the case was dismissed with prejudice with leave to reinstate after a decision is rendered by another court in a similar case raising the same issues raised by defendants' motion to dismiss. No contingent loss has been accrued for this litigation because the amount of loss, if any, cannot be reasonably estimated.
In November, 1994, a purported class action was filed against three of the Company's subsidiaries alleging that in connection with purchases by plaintiffs of single premium term life insurance from mortgage lenders, defendants misrepresented the type of insurance offered as credit life insurance and sold the term life insurance at premiums in excess of those permitted for credit life insurance. Allegations include claims for damages for breach of contract, breach of fiduciary duty, unfair and deceptive acts and practices, fraud, restitution and unjust enrichment and civil claims under the Federal RICO statute. 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, $7.8 billion, representing 6 percent of total life insurance in force as of December 31, 1994, 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 1994 and 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 ______________________
1994 1993 ____ ____
(Amounts in Thousands)
Premiums, before reinsurance ceded......... $1,043,958 $1,021,694 Premiums ceded............................. 78,480 77,388 __________ __________ Net premiums............................... $ 965,478 $ 944,306 ========== ==========
Other considerations, before reinsurance ceded................................... $ 180,954 $ 166,477 Other considerations ceded................. 14,891 12,938 __________ __________ Net other considerations................... $ 166,063 $ 153,539 ========== ==========
Benefits to policyholders and beneficiaries, before reinsurance recoveries............ $ 782,415 $ 794,640 Reinsurance recoveries..................... 54,804 57,309 __________ __________ Benefits to policyholders and beneficiaries, net of reinsurance recoveries............ $ 727,611 $ 737,331 ========== ==========
A summary of reinsurance activity for the three years ended December 31, 1994 is presented below:
The estimated amounts of reinsurance recoverable on paid and unpaid claims included in the Consolidated Balance Sheets as of December 31, 1994 and 1993 are as follows:
The amount included in the consolidated balance sheets at December 31, 1994 and 1993 for "Other reinsurance recoverable" includes the estimated amounts recoverable on unpaid claims as indicated above as well as prepaid reinsurance premiums.
Note 11. Investment Securities
The investments of the Company at December 31, 1994 are summarized as follows:
Based on balance sheet carrying value, assets categorized as "non-income producing" for the 12 months ended December 31, 1994 included in fixed maturities, mortgage loans, real estate investment properties, and real estate acquired in satisfaction of debt amounted to $15.3 million, $9.5 million, $4.3 million and $2.1 million, respectively.
Note 12. Net Investment Income
The details of consolidated net investment income for the three years ended December 31, 1994 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, 1994 is presented below.
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, 1994 are presented below (in thousands of dollars except per share amounts):