Item 3. Legal Proceedings.
As previously reported, in November 1981, the Company filed a third amended complaint against Louis Wilcox and other former officers of USLIFE Savings and Loan Association, a former subsidiary of the Company, for indemnification, injunctive relief and accounting (USLIFE Savings and Loan Association v. Louis Wilcox, et al., Superior Court of the State of California for the County of Riverside). In April 1984, defendant Louis M. Wilcox filed a cross complaint against the Company seeking general damages of $1 million, punitive damages of $10 million and special damages. In 1986, Wilcox's causes of action for malicious prosecution and abuse of process were dismissed. On appeal, the dismissal of the cause of action for malicious prosecution was reversed while the dismissal of the abuse of process claim was upheld. Pursuant to the Company's request, the case was bifurcated for trial. In July, 1993, the trial court, after hearing evidence on the issue, without a jury, decided that the Company had probable cause to sue Wilcox in 1981. That ruling was dispositive of the claim for malicious prosecution and, thus, the Court dismissed Wilcox's only remaining claim against the Company. A judgment in the Company's favor was entered in late 1993. Wilcox has appealed and the appeal is still pending. 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.
As previously reported in the Company's Report on Form 10-Q for the quarter ended September 30, 1995, on November 17, 1994, a purported class action (Smith, et al. v. USLIFE Credit Life Insurance Company, et al.) was filed against three subsidiaries of the Company 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 second 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. On July 27, 1995, the parties filed a Stipulation of Dismissal of plaintiffs' claims against USLIFE Credit Life Insurance Company and Security of America Life Insurance Company, leaving the matter pending against only All American Life Insurance Company. The parties have agreed to a settlement of all claims asserted and the settlement was given tentative approval by the Court on December 20, 1995. Under the terms of the Settlement Agreement, class members will be notified of their right to file claims for partial premium refunds. The settlement would resolve all claims against the Company's subsidiaries in this lawsuit as well as the claims asserted by plaintiffs in two cases previously reported in the Company's Report on Form 10-Q for the quarter ended September 30, 1995, which have been terminated without prejudice (Hoban v. USLIFE Credit Life Insurance Company, All American Life Insurance Company and Security of America Life Insurance Company, and Grant, et al. v. USLIFE Credit Life Insurance Company and Security of America Life Insurance Company). A list of potential class members is being compiled and a status hearing is scheduled. In the opinion of management, the ultimate resolution of this action in accordance with the terms of the Settlement Agreement will not result in a material additional liability on the part of the Company.
As previously reported, on August 28, 1995, a purported class action (John G. Robinson & Company, et al. v. The Old Line Life Insurance Company of America) was filed in the District Court of Tarrant County, Texas. On September 29, 1995, the case was removed to the United States District Court for the Northern District of Texas. The Complaint alleges that defendant, a subsidiary of the Company, violated the federal Telephone Consumer Protection Act ("TCPA") by sending unsolicited facsimiles of advertisements. Plaintiff also asserts claims for negligence, gross negligence, trespass to chattels and invasion of privacy. The Complaint contains claims for damages in the amount of $500 for each such unsolicited facsimile (allowed under the TCPA) or alternatively, plaintiffs'
actual monetary loss; plaintiffs have also sued for treble damages or alternatively, punitive damages. Defendant has filed a Motion to Dismiss based on application of the McCarran-Ferguson Act, a Motion to Dismiss plaintiff's class action allegations based on procedural defects and a Motion for Partial Judgment on the Pleadings. These Motions are currently pending before the Court. No contingent loss has been accrued for this litigation because the amount of loss, if any, cannot be reasonably estimated.
As previously reported, on March 16, 1995, a purported class action (Dana Galloway v. USLIFE Credit Life Insurance Company) was filed in the Circuit Court of Fayette County, Alabama. The complaint alleges that defendant, a subsidiary of the Company, issued insurance contracts in an amount sufficient to cover the gross amount of indebtedness, rather than the net amount of indebtedness, contrary to Alabama law. The complaint contains claims of fraud and breach of contract based on allegations that defendant misrepresented the amount of insurance needed (based on a recent ruling in a similar case by the Alabama Supreme Court in McCullar v. Universal Underwriters ). Plaintiffs seek compensatory and punitive damages. Defendant contends that its sale of insurance covering the gross amount of indebtedness was done in reliance on regulations promulgated by the Insurance Department of the State of Alabama and is aggressively defending the case. 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.
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, Pacific and London Stock Exchanges. Dividends for the years ended December 31, 1995 and 1994 have been declared and paid to Common Stockholders at the annual rates of $.91 and $.84 respectively (paid quarterly in 1995 and 1994). As of February 22, 1996 there were approximately 8,500 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)
1995 1994 ____ ____
First quarter...... 22.58 - 25.58 25.00 - 27.58 Second quarter..... 24.67 - 27.67 23.25 - 26.42 Third quarter...... 26.17 - 31.58 22.08 - 25.17 Fourth quarter..... 26.88 - 32.00 20.58 - 23.92
See Note 18 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 45. See Note 21 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 1996.
(1) Mr. Crosby has served as Chairman of USLIFE Corporation since March 21, 1967 and as Chief Executive Officer from June 6, 1971 to December 31, 1994. Mr. Crosby served as President of USLIFE Corporation 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.
Messrs. Bushey, Forte, Chouinard, Faulkner and Griffin have served in their present positions for more than five years.
Mr. Henderson was elected Vice Chairman and Chief Executive Officer in February 1996. He previously served as Vice Chairman and Chief Financial Officer since 1983.
Mr. Ruisi was elected President and Chief Operating Officer in February 1996. He previously served as Vice Chairman and Chief Administrative Officer from May 1993 until that date and has been a Director since November 1992. Prior to May 1993, he served as Senior Executive Vice President - Administration since 1990 and as Executive Vice President - Administration from 1987 to 1990.
Mr. Simpson was elected President - Life Insurance Division in February 1996. He previously served as President and Chief Executive Officer of USLIFE Corporation from January 1995 until that date 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 1986.
Mr. Dicke has served as Executive Vice President - Product Actuary since April 1992. He previously 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 1988 to 1991.
Mr. Gavrity has served as Executive Vice President-Financial Actuary since October 1991 and previously served as Executive Vice President - Chief Actuary since 1984.
Mr. LeFante was elected Executive Vice President - Administration in February 1996. He previously served as Senior Vice President - Audit and Control since September 1991. Prior to that date, he served as Vice President - Audit and Control since 1990.
Mr. Schlomann was elected Executive Vice President - Finance in February 1996. He previously served as Executive Vice President - Financial Operations since joining USLIFE Corporation in October 1993. Prior to that date, he served as Senior Vice President and Controller with Frank B. Hall & Co., Inc. since 1986.
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 1990.
Mr. Auriemmo has served as Senior Vice President and Treasurer since May 1995. He previously served as Vice President and Treasurer since 1984.
Mr. Stern has served as Senior Vice President - Controller since January 1996. He previously served as Senior Vice President - Accounting since May 1993 and as Vice President - Accounting since 1984.
Mr. Bickler has served as President and Chief Executive Officer of All American Life since May 1995. He previously served as President - Chief Operating Officer of All American Life since October 1994. Prior to that date, he served as Executive Vice President - Marketing with that subsidiary since 1990.
Mr. Cargiulo has served as President and Chief Executive Officer of United States Life since May 1993. He previously 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 1990.
Mr. Hendricks has served as President and Chief Executive Officer of USLIFE Systems Corporation since 1988 and as President and Chief Executive Officer of USLIFE Insurance Services Corporation since April 1991.
Mr. Keeler has served as President and Chief Executive Officer of USLIFE Credit Life since May 1995. He previously served as Senior Executive Vice President - Marketing of that subsidiary since May 1994. Prior to joining USLIFE Credit Life at that time, he served as President - Chief Operating Officer for Consolidated Insurance Group of America, Inc. from August 1992. He previously served as executive vice president - chief operating officer of domestic insurance operations and a member of the board of directors of AVCO Financial Services from 1989 to 1992.
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, 1995 for use in connection with the Annual Meeting of Shareholders to be held on May 21, 1996.
Item 11.

Item 11. 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, 1995 for use in connection with the Annual Meeting of Shareholders to be held on May 21, 1996.
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 29, 1996, 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, 1995 for use in connection with the Annual Meeting of Shareholders to be held on May 21, 1996.
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, 1995 for use in connection with the Annual Meeting of Shareholders to be held on May 21, 1996.
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 45.
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 the 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, SEC File No. 1-5683.
3 (ii) - By-laws, as amended and restated, incorporated herein by reference to USLIFE's Annual Report on Form 10-K for the year ended December 31, 1994, SEC File No. 1-5683.
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, SEC File No. 1-5683.
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, SEC File No. 1-5683.
* (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, SEC File No. 1-5683.
* (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, SEC File No. 1-5683.
* (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, SEC File No. 1-5683.
* (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, SEC File No. 1-5683.
* (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, SEC File No. 1-5683.
* (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, SEC File No. 1-5683.
* (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, SEC File No. 1-5683.
* (ix) - Eighth Amendment dated as of May 1, 1995 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, 1995, SEC File No. 1-5683.
* (x) - 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, SEC File No. 1-5683.
* (xi) - 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, SEC File No. 1-5683.
* (xii) - 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, SEC File No. 1-5683.
* (xiii) - 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, SEC File No. 1-5683.
* (xiv) - 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, SEC File No. 1-5683.
* (xv) - 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, SEC File No. 1-5683.
* (xvi) - 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, SEC File No. 1-5683.
* (xvii) - Seventh Amendment dated as of May 1, 1995 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, 1995, SEC File No. 1-5683.
* (xviii) - 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, SEC File No. 1-5683.
* (xix) - 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, SEC File No. 1-5683.
* (xx) - 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, SEC File No. 1-5683.
* (xxi) - 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, SEC File No. 1-5683.
* (xxii) - 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, SEC File No. 1-5683.
* (xxiii) - 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, SEC File No. 1-5683.
* (xxiv) - 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, SEC File No. 1-5683.
* (xxv) - Seventh Amendment dated as of May 1, 1995 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, 1995, SEC File No. 1-5683.
* (xxvi) - 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, SEC File No. 1-5683.
* (xxvii) - 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, SEC File No. 1-5683.
* (xxviii) - 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, SEC File No. 1-5683.
* (xxix) - 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, SEC File No. 1-5683.
* (xxx) - 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, SEC File No. 1-5683.
* (xxxi) - 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, SEC File No. 1-5683.
* (xxxii) - Fifth Amendment dated as of January 1, 1995 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, 1995, SEC File No. 1-5683.
* (xxxiii) - Sixth Amendment dated as of May 1, 1995 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, 1995, SEC File No. 1-5683.
* (xxxiv) - Form of Key Executive Employment Protection Agreement dated November 14, 1995, between USLIFE Corporation and Gordon E. Crosby, Jr., Greer F. Henderson, Christopher S. Ruisi, and William A. Simpson.
* (xxxv) - Form of Employment and Key Executive Employment Protection Agreement dated November 14, 1995, between USLIFE Corporation and Wesley E. Forte, A. Scott Bushey, Arnold A. Dicke, James M. Schlomann and John D. Gavrity.
* (xxxvi) - Form of Key Executive Employment Protection Agreement dated November 14, 1995, between USLIFE Corporation and Frank J. Auriemmo, Jr., Richard J. Chouinard, Richard G. Hohn, Michael LeFante and Neal M. Stern.
* (xxxvii) - Form of Key Executive Employment Protection Agreement dated November 27, 1995, between All American Life Insurance Company and James A. Bickler, USLIFE Real Estate Services Corporation and Philip G. Faulkner, The Old Line Life Insurance Company and James A. Griffin, USLIFE Insurance Services Corporation and Thomas L. Hendricks, USLIFE Credit Life Insurance Company and William M. Keeler, and dated January 24, 1996, between The United States Life Insurance Company In the City of New York and Ralph J. Cargiulo.
(xxxviii) - 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, SEC File No. 1-5683.
(xxxix) - 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, SEC File No. 1- 5683.
(xl) - 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, SEC File No. 1-5683.
(xli) - Third Amendment to Lease dated May 10, 1989 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 Quarterly Report on Form 10-Q for the quarter ended June 30, 1995, SEC File No. 1- 5683.
(xlii) - Fourth Amendment to Lease dated April 14, 1995 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 Quarterly Report on Form 10-Q for the quarter ended June 30, 1995, SEC File No. 1- 5683.
(xliii) - Fifth Amendment to Lease dated as of December 26, 1995 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.
(xliv) - Sixth Amendment to Lease dated as of December 26, 1995 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.
(xlv) - 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, SEC File No. 1-5683.
(xlvi) - 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, SEC File No. 1-5683.
* (xlvii) - 1978 Stock Option Plan, as amended, incorporated herein by reference to USLIFE's Quarterly Report on Form 10-Q for the quarter ended September 30, 1995, SEC File No. 1-5683.
* (xlviii) - 1981 Stock Option Plan, incorporated herein by reference to USLIFE's Quarterly Report on Form 10-Q for the quarter ended September 30, 1995, SEC File No. 1-5683.
* (il) - USLIFE Corporation Non-Employee Directors' Deferred Compensation Plan, as amended January 23, 1996.
* (l) - USLIFE Corporation Book Unit Plan, as amended effective September 1, 1995, incorporated herein by reference to USLIFE's Quarterly Report on Form 10-Q for the quarter ended September 30, 1995, SEC File No. 1-5683.
* (li) - USLIFE Corporation Retirement Plan for Outside Directors (as amended January 23, 1996).
* (lii) - USLIFE Corporation Restricted Stock Plan, as amended effective September 1, 1995, incorporated herein by reference to USLIFE's Quarterly Report on Form 10-Q for the quarter ended September 30, 1995, SEC File No. 1-5683.
* (liii) - USLIFE Corporation 1991 Stock Option Plan, as amended effective September 1, 1995, incorporated herein by reference to USLIFE's Quarterly Report on Form 10-Q for the quarter ended September 30, 1995, SEC File No. 1-5683.
* (liv) - 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.
* (lv) - Annual Incentive Plan, as amended October 25, 1994, for Selected Key Officers of USLIFE Corporation and its Subsidiaries, incorporated herein by reference to USLIFE's Annual Report on Form 10-K for the year ended December 31, 1994, SEC File No. 1- 5683.
* (lvi) - USLIFE Corporation Executive Officer Deferred Compensation Plan (as amended January 23, 1996).
* (lvii) - USLIFE Corporation 1993 Long-Term Incentive Award Guidelines, as amended, incorporated herein by reference to USLIFE's Annual Report on Form 10-K for the year ended December 31, 1994, SEC File No. 1-5683.
* (lviii) - USLIFE Corporation Supplemental Employee Savings and Investment Plan (as amended January 23, 1996).
* (lix) - USLIFE Corporation Supplemental Retirement Plan (as amended January 23, 1996).
* (lx) - Trust Agreement made as of March 1, 1994, as amended, effective January 23, 1996, among USLIFE Corporation, Chemical Bank, and KPMG Peat Marwick LLP (as independent contractor) establishing a trust to fund certain employment contracts and the USLIFE Corporation Executive Officer Deferred Compensation Plan.
* (lxi) - Trust Agreement made as of March 1, 1994, as amended, effective January 23, 1996, among USLIFE Corporation, Chemical Bank and KPMG Peat Marwick LLP (as independent contractor) establishing a trust to fund the USLIFE Corporation Supplemental Retirement Plan and the Supplemental Employee Savings and Investment Plan.
* (lxii) - Trust Agreement made as of March 1, 1994, as amended, effective January 23, 1996, among USLIFE Corporation, Chemical Bank and KPMG Peat Marwick LLP (as independent contractor) establishing a trust to fund the USLIFE Corporation Retirement Plan for Outside Directors and the USLIFE Corporation Deferred Compensation Plan for outside directors.
12 - Computations of ratios of earnings to fixed charges.
21 - List of Subsidiaries.
23 - Consent of Independent Certified Public Accountants (see page 42).
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, 1995 (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, SEC File No. 1-5683.
99 (iii) - Amendment, effective January 23, 1996, to the 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.
* Indicates a management contract or compensatory plan or arrangement.
(b) Reports on Form 8-K.
No Current Report on Form 8-K has been filed for the last quarter of the fiscal year ended December 31, 1995.
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 27, 1996, relating to the consolidated balance sheets of USLIFE Corporation and subsidiaries as of December 31, 1995 and 1994 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, 1995 which report appears in this December 31, 1995 Annual Report on Form 10-K of USLIFE Corporation. Our report refers to a change in accounting to adopt the provisions of the Financial Accounting Standards Board's Statement of Financial Accounting Standards No. 115, "Accounting for Certain Investments in Debt and Equity Securities".
/s/ KPMG Peat Marwick LLP KPMG Peat Marwick LLP
March 26, 1996 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 26, 1996
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, 1995 and 1994, 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, 1995. 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, 1995 and 1994, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 1995, 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."
/s/ KPMG Peat Marwick LLP KPMG Peat Marwick LLP
February 27, 1996 345 Park Avenue New York, New York
See accompanying notes to financial statements.
USLIFE CORPORATION AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
Note 1. Significant Accounting Policies
Basis of Presentation
The consolidated financial statements have been prepared in accordance with generally accepted accounting principles ("GAAP") and include the accounts of USLIFE and all of its subsidiaries (the "Company"). GAAP differs from the statutory accounting practices used by the Company's operating subsidiaries to report to insurance regulatory authorities (see Note 18). All subsidiaries are wholly owned. All material intercompany accounts and transactions have been eliminated.
Use of Estimates
The preparation of financial statements in accordance with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Changes in Accounting Principles
Effective January 1, 1995, the Company adopted Statement of Financial Accounting Standards No. 114 ("SFAS 114"), entitled "Accounting by Creditors for Impairment of a Loan," as modified by SFAS 118, "Accounting by Creditors for Impairment of a Loan - Income Recognition and Disclosures." These Statements require a writedown, as defined by SFAS 114, for certain mortgage loans and similar investments where impairment results in a change in repayment terms. The adoption of these Statements did not have a material impact on the Company's reported financial position or results of operations.
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 fair value in the Consolidated Balance Sheets, 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 fair value pursuant to previous accounting standards. Since the aggregate fair 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 fair value in accordance with previous accounting standards prior to the adoption of SFAS 115 and continues to be carried at fair value as required by the Statement.
As required by SFAS 115, the net impact of the initial adjustment to fair value of these securities, less corresponding adjustments to deferred policy acquisition costs (required where fair 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 (including the required adjustments of deferred policy acquisition costs, certain policyholder liabilities, and deferred income taxes) 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 fair value of the Company's investments in securities are presented in Note 3.
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.
Split of Common Stock
In July 1995, the Board of Directors of USLIFE Corporation approved a 3- for-2 split of its common stock, $1.00 par value. As a result of this action, one additional share of USLIFE common stock was distributed on September 22, 1995 for each two shares held by shareholders of record on September 1, 1995. The par value of the common stock was not changed, and the aggregate par value of $19.2 million for the additional shares issued was transferred from Paid-in Surplus to Common Stock as of the effective date of the transaction. All references in the financial statements herein to number of common shares and related prices, per-share amounts, and stock plan data have been restated as appropriate to reflect the 3-for-2 split of the Company's common stock.
Future Accounting Changes
In March 1995, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards No. 121, entitled "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of." The Statement requires that long-lived assets such as property and equipment, and certain intangible assets, be reviewed for impairment when events or changes in circumstances indicate that the carrying amount may not be recoverable. When recoverability standards specified in the Statement are not met, a writedown of the covered assets may be required. The Statement does not apply to various classes of assets including the Company's investment securities and deferred policy acquisition costs, which will continue to be evaluated based on previously established accounting standards. The adoption of this Statement, in the first quarter of 1996, will not have a material impact on the Company's financial position or results of operations.
In October 1995, FASB issued Statement of Financial Accounting Standards No. 123, entitled "Accounting for Stock-Based Compensation." This Statement, which must be adopted no later than 1996, establishes financial accounting and reporting standards for stock option plans and other stock-based forms of compensation. Under previously established accounting standards, stock options such as those granted by the Company (with option price set equal to market price at date of grant) do not require income statement charges, although the outstanding options are considered in earnings per share calculations. FASB 123 introduces standards for computing "fair value" of these stock options using a mathematical model, as well as expense charges over the related service period based on this calculated value. However, companies can elect to report the pro- forma impact of these computed charges on net income and earnings per share in a footnote rather than actually recording the computed income statement charges. USLIFE Corporation will adopt Statement No. 123 in 1996 and intends to provide footnote disclosure of the pro-forma impact of the calculated stock option expense charges, commencing with its year end 1996 financial statements (indicating comparative data for 1995), rather than record these charges in its income statement.
Investments
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 (bonds and redeemable preferred stocks) is classified as "available for sale" and is carried in the accompanying consolidated balance sheets at fair value. The Company's investments in non- redeemable preferred stocks and common stocks ("equity securities") are carried at fair value in the accompanying consolidated balance sheets. Fair values for fixed maturities and equity securities are based on quoted market prices or dealer quotes.
Mortgage loans are carried at the aggregate of unpaid principal balances, net of unamortized discount and applicable reserves and writedowns. Mortgage loans are considered impaired when it is determined to be probable that the Company will not collect all amounts due under the contractual terms of the loan agreement, and are evaluated based on present value of estimated future cash flows discounted at the contractual rate of the loan. Mortgage loans that are more than 60 days delinquent or in foreclosure are carried at the lower of amortized cost or estimated net realizable value of the underlying collateral.
Real estate is carried at the lower of depreciated cost or estimated net realizable value. Depreciation is calculated on a straight line basis with useful lives varying based on the type of building.
Policy loans 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. Short term investments are carried at cost, which approximates fair value.
Realized gains and losses are included in net income based on specific identification of investments disposed.
Valuation reserves (established through income statement charges which are included in realized gains and losses) 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.
Unrealized gains and losses on available-for-sale securities, other than those relating to a reduction in value determined to be other than temporary, are recorded through direct charges and credits to Equity Capital.
Life Insurance
Traditional Individual Contracts; Group and Credit Insurance
The Company's traditional individual life insurance products, including term insurance, whole life insurance, and immediate annuities, generally provide fixed premiums and guaranteed benefits. Premiums on these policies, as well as group and credit life and health insurance contracts, are recognized when due. Appropriate provisions are made for future policy benefits or unearned premiums. Policy claims are charged to expense when incurred.
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 6- 3/4 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
Universal life insurance policies permit the policyholder to vary the timing and amount of premium payments, within contractual limits. 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. These charges are subject to periodic adjustment by the Company. 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.
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 most policies other than universal life-type contracts, 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 contracts, 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. Additionally, as required by SFAS 115, the carrying amount of these costs is adjusted at each balance sheet date as if the unrealized gains or losses on securities associated with these contracts had been realized and included in the gross profits used to determine required amortization.
Deferred policy acquisition costs are reviewed at least annually to determine that the unamortized portion of such costs does not exceed recoverable amounts, after considering anticipated investment income.
Participating Policies
Participating policies subject to profit limitations approximate 4.9 percent of the individual life insurance in force at December 31, 1995 and 9.5 percent of individual life insurance premium income in 1995. 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 5.0 percent of the total individual life insurance in force at December 31, 1995 and 9.7 percent of individual life insurance premium income in 1995. The provisions for dividends to policyholders in the statements of consolidated income include dividends paid or payable on participating policies.
Liability for Unpaid Claims
The liability for unpaid claims and claim adjustment expenses is based on the estimated amount payable on claims reported prior to the balance sheet date which have not yet been settled, claims reported subsequent to the balance sheet date which have been incurred during the period then ended, and an estimate (based on prior experience) of incurred but unreported claims relating to such period.
Liability for Guaranty Fund Assessments
The Company's life insurance subsidiaries may be required, under the solvency or guaranty laws of the various states in which they are licensed, to pay assessments up to prescribed limits to fund policyholder losses or liabilities of insolvent insurance companies. Certain states permit these assessments, or a portion thereof, to be recovered as an offset to future premium taxes. Assessments are recognized based on notification of liability by regulatory authorities, including provision for certain future amounts payable, and, when subject to credit against future premium taxes and judged to be recoverable, may be capitalized and amortized on a basis consistent with the credits to be realized under applicable state law.
Reinsurance
Amounts paid for or recoverable under reinsurance contracts 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.
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, 1995.
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 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. Fully diluted income per share is the same as income per share data indicated.
Standby and Permanent Financing Commitments
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, 1995.
Note 2. Nature of Operations and Segment Information
USLIFE Corporation is a life insurance-based holding company whose principal subsidiaries engage in the life insurance business. USLIFE operates nationwide through four life insurance companies and offers a broad portfolio of individual life insurance and annuity policies as well as group and credit insurance. The individual life and annuity product line, which includes universal life, term life, whole life, and deferred annuity products as well as income attributed to capital and surplus, accounts for the major portion of USLIFE's pre-tax income and total revenues. These individual products are sold primarily through independent general agencies who are compensated on a commission basis and usually sell products of other companies in addition to those of USLIFE. Other product lines include group life and health insurance, sold principally through employers and associations, and credit life and disability products which are sold primarily to customers of financial institutions through USLIFE's credit insurance group.
The only reportable industry segment of the Company is "Life Insurance" and the related information is presented below:
Supplementary information for product groups included in the Life Insurance industry segment is presented below:
Note 3. Investments
The investments of the Company at December 31, 1995 are summarized as follows:
Based on balance sheet carrying value, assets categorized as "non-income producing" for the 12 months ended December 31, 1995 included in fixed maturities, mortgage loans, real estate investment properties, and real estate acquired in satisfaction of debt amounted to $7.0 million, $4.5 million, $6.1 million and $.9 million, respectively.
At December 31, 1995, consolidated invested assets included approximately $244 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 fair value of approximately $246 million at December 31, 1995 and, based on fair value, represent approximately 3% of consolidated total assets at that date. Approximately $7 million (at fair value) of these investments (adjusted cost, $6 million) represented securities in default at December 31, 1995. Also at December 31, 1995, the book value of mortgage loans included in consolidated total assets which were 60 days or more delinquent or in foreclosure was approximately $5 million, and the book value of property acquired through foreclosure of mortgage loans was approximately $18 million.
The adjusted cost and fair value of the Company's consolidated investments in equity securities and debt securities at December 31, 1995 and 1994 are as follows:
Equity Capital at December 31, 1995 and 1994 includes net unrealized gains and losses on available-for-sale securities as follows:
Changes in net unrealized gains and losses on available-for-sale securities were as follows:
The classification of the Company's fixed maturity portfolio as "available for sale" had no impact on Equity Capital at December 31, 1993, 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 that date.
Realized gains and losses on the Company's consolidated investments in fixed maturities and equity securities for the three years ended December 31, 1995 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.
Pre-tax realized gains and losses on fixed maturities and equity securities are reconciled to consolidated realized gains and losses on investments as follows:
1995 1994 1993 __________ __________ __________
(Amounts in Thousands) Realized gains (losses):
Fixed maturities.............. $ 3,629 $ (630) $ 46,891 Equity securities............. 262 (923) 897 __________ __________ __________
3,891 (1,553) 47,788
Real estate, mortgage loans, and other investments (a)... 2,497 173 (39,272)
__________ __________ __________
Total......................... $ 6,388 $ (1,380) $ 8,516 ========== ========== ==========
(a) Reflects provisions for valuation to estimated net realizable value for certain investments.
The adjusted cost and fair value of debt securities at December 31, 1995 and 1994, 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 investments) during 1995, 1994 and 1993 were $437.7 million, $1.072 billion, and $1.209 billion, respectively. During 1995, gross gains of $12.5 million and gross losses of $8.9 million were realized on such disposals. 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.
The details of consolidated net investment income for the three years ended December 31, 1995 follow:
Note 4. Deferred Policy Acquisition Costs
Details with respect to consolidated deferred policy acquisition costs for the three years ended December 31, 1995 are as follows:
The balance of deferred policy acquisition costs is allocated to product lines as follows:
The balance of deferred policy acquisition costs for employer/association group health insurance includes amounts deferred with respect to the Company's traditional indemnity major medical coverages. As a result of a shift in market emphasis toward managed care products and consequent decline in revenues from indemnity products, the Company initiated strategies to increase the proportion of group business from non-major medical lines, and introduced new managed care products in several states (using provider networks made available through unrelated companies).
Although a significant portion of the Company's 1995 major medical sales came from managed care products, historically the majority of its group insurance premium revenues were derived from indemnity major medical coverages. As a result, about 60% of current employer/association group health and disability premium in force relates to traditional indemnity products. These policies were often sold together with employer/association group life insurance. Recoverability of deferred policy acquisition costs for the employer / association lines has been evaluated based on estimates of future persistency and claims experience by aggregating related product groups.
In January 1996, the Company announced that it would discontinue offering its traditional indemnity major medical products, and that it would restrict its new sales of managed care major medical products to eight states where it has significant market presence and an appropriate managed care network in place. The Company will, however, continue to provide full support and service to all existing indemnity customers regardless of location and will seek to convert cases from indemnity coverage to managed care in order to conserve the business. The Company will continue to monitor this business in order to determine whether future financial statement adjustments are necessary.
Note 5. Notes Payable
Notes payable at December 31, 1995 includes $150 million borrowings under a revolving credit agreement between the Company and The Bank of New York (as agent) which expires in April 1996, at which time all borrowings thereunder must mature. 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, 1995.
(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 6. Long Term Debt
At December 31, 1995 and 1994, 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, 1995 1994 ____________ ____________
(Amounts in Thousands)
1998....................... $149,861 $149,798 1999....................... 50,000 50,000 2000....................... 149,632 149,562 ________ ________
Total............... $349,493 $349,360 ======== ========
None of the Company's debt issues are or have been in default.
Note 7. Federal Income Taxes
Federal income tax expense relating to operations of the Company for 1995, 1994 and 1993 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 1993.
The significant components of deferred income tax expense for the years ended December 31, 1995, 1994 and 1993 are as follows:
Total tax expense differs from the amount computed by applying the Federal income tax rate of 35 percent in 1995, 1994 and 1993, 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, 1995 and 1994 are presented below:
December 31 ______________________
1995 1994 ____ ____
(Amounts in Thousands)
Deferred Tax Assets:
Future policy benefits.......................... $ 152,158 $ 136,884 Net unrealized loss on securities............... -- 84,134 Tax net operating loss carryforward............. 26,161 26,752 Capital gains and losses........................ 40,211 39,845 Capitalization of policy acquisition costs, net of amortization, for tax return purposes.. 66,859 56,313 Sale and leaseback transactions................. 873 1,745 Allowance for uncollectible receivables......... 2,496 2,496 Resisted claim liability........................ 2,840 2,043 Employee retirement benefits.................... 29,740 27,930 Unearned interest............................... 1,451 1,560 Accrual of interest payable..................... 353 1,053 Differences between tax and accounting for reinsurance............................... 926 5,333 Other........................................... 2,510 2,346 _________ _________
Total gross deferred tax assets................. 326,578 388,434
Total valuation allowance....................... (16,368) (16,368) _________ _________
Net deferred tax assets......................... 310,210 372,066 _________ _________
Deferred Tax Liabilities: _________________________
Deferral of policy acquisition costs, net of amortization, for accounting purposes......... (299,028) (275,501) Net unrealized gain on securities............... (105,244) -- Basis differences between tax and accounting for joint ventures............................ (4,499) (6,427) Basis differences between tax and accounting for securities................................ (4,920) (5,145) Depreciation.................................... (5,387) (5,502) Prepaid expenses................................ (3,055) (1,642) Other........................................... (10,853) (6,184) _________ _________
Total gross deferred tax liabilities............ (432,986) (300,401)
_________ _________
Net deferred tax asset (liability).............. $(122,776) $ 71,665 ========= =========
Federal income tax returns have been examined and settled for all years 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, 1995 become taxable, the tax computed at present rates would be approximately $47.8 million.
At December 31, 1995, the Company has nonlife net operating loss carryforwards for Federal income tax purposes of approximately $74.7 million which are available to offset future Federal taxable income, if any, through 2010.
Note 8. Liability for Unpaid Claims
Activity in the liability for unpaid claims and claim adjustment expenses for the Company's health and disability coverages is summarized as follows:
1995 1994 1993 ________ ________ ________ (Amounts in Thousands)
Balance at January 1................. $ 73,627 $ 81,638 $104,222 Less: reinsurance recoverables....... 4,115 4,021 13,831 ________ ________ ________ Net balance at January 1............. 69,512 77,617 90,391 ________ ________ ________
Amount incurred (a).................. 301,344 334,699 370,409
Amount paid, related to: Prior years (b).................. 102,099 94,083 121,470 Current year..................... 196,024 248,721 261,713 ________ ________ ________ Total...................... 298,123 342,804 383,183 ________ ________ ________
Net balance at December 31........... 72,733 69,512 77,617 Plus: reinsurance recoverables....... 5,107 4,115 4,021 ________ ________ ________ Balance at December 31............... $ 77,840 $ 73,627 $ 81,638 ======== ======== ========
(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.
Note 9. 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 $4.2 million, $4.5 million and $4.5 million were made for the years ended December 31, 1995, 1994 and 1993, 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 $7.724 million, $7.848 million and $5.212 million in 1995, 1994 and 1993, respectively. The net periodic pension cost for these plans in 1995, 1994 and 1993 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, 1995 and 1994 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. Under Statement of Financial Accounting Standards No. 87, "Employers' Accounting for Pensions," an additional minimum pension liability is required 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. Statement No. 87 also permits offsetting of this liability with an intangible asset, based on provisions of the Statement. The unrecognized net loss and unrecognized prior service cost relating to the Company's pension plans are subject to amortization on a straight-line basis over the estimated average future service period of active employees expected to receive benefits under the plan. Assumptions used in the actuarial computations for the Company's pension plans were as follows:
In addition to providing pension benefits, the Company and its subsidiaries provide certain health care and life insurance benefits to retired employees under a defined benefit plan. Employees may become eligible for these benefits if they have accumulated ten years of service and reach normal or early retirement age while working for the Company. The 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.
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, 1995 and 1994 is reconciled to accrued postretirement benefit cost as follows:
Net periodic postretirement benefit cost for 1995, 1994 and 1993 included the following components:
For measurement purposes, a 10 percent annual rate of increase in the per- capita cost of covered health benefits (ie., health care cost trend rate) was assumed for 1995; the rate was assumed to decrease gradually to 6 percent by the year 1997 and remain at that level thereafter. A 9 percent annual rate of increase in claims reimbursed by Medicare for retirees over age 65 was assumed for 1995; 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 of Financial Accounting Standards No. 106 ("Employers' Accounting for Postretirement Benefits Other Than Pensions") 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, 1995 by approximately $185 thousand and the aggregate of the service and interest cost components of 1995 net periodic postretirement benefit cost by $12 thousand. The discount rate used in determining the accumulated postretirement benefit obligation was 7.0% at December 31, 1995, 8.25% at December 31, 1994 and 7.5% at December 31, 1993.
Note 10. 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, 1995, 4,480 shares; December 31, 1994, 4,653 shares; December 31, 1993, 4,815 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, 1995 was $8.33 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, 1995, 1,852 shares; December 31, 1994, 2,003 shares; December 31, 1993, 2,050 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, 1995 was $8.34 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, 1995, 10,793,668 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, 1995, 1994 and 1993: 60,000,000 shares; issued, including treasury shares, as of December 31, 1995, 57,468,882 shares; December 31, 1994, 57,465,735 shares; December 31, 1993, 57,463,235 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, 1995, 75,965 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, 1995, participant interests relating to 34,713 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 $107. 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, 1995, 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 1995, 1994 and 1993, respectively, 37,208, 39,861 and 38,534 shares of the Common Stock had been sold pursuant to the Dividend Reinvestment and Stock Purchase Plan.
Treasury Stock
At December 31, 1995, there were 22,997,693 shares of Common Stock held in treasury. During 1995, 207,589 Common shares were acquired (including 128,700 shares purchased under a repurchase program and 78,889 shares relating to benefit plans), at an aggregate cost of $5.3 million, and 449,618 Common shares, with an aggregate cost of $5.6 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, 1994, treasury stock consisted of 23,239,722 Common shares. Common shares outstanding, net of treasury shares, as of December 31, 1995 and 1994 are as follows:
December 31 ________________________
1995 1994 ____ ____
Common shares issued.............. 57,468,882 57,465,735 Treasury shares................... 22,997,693 23,239,722 __________ __________
Net outstanding common shares..... 34,471,189 34,226,013 ========== ==========
Note 11. 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 1,575,000 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. The Plan limits the number of options that may be granted to any one individual during any one-year period to 112,500. 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 on the date of each Annual Meeting of Shareholders, each eligible director will automatically be granted options to purchase 3,000 shares of USLIFE common stock. A maximum of 375,000 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, 1995, 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, 1995 is presented below:
As of December 31, 1995, options for 904,525 common shares were exercisable under all stock option plans at $15.61 to $29.08 per share. At December 31, 1995, up to 2,408,636 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 900,000 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 the 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 the 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 112,500 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 $1.3 million, $1.7 million, and $2.1 million were charged to expense in 1995, 1994 and 1993, respectively.
A summary of units outstanding under the Book Unit Plan follows:
The Company also has a Restricted Stock Plan for selected 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 1,575,000 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 the event of a Change in Control, as defined in the Plan, restrictions would terminate as to previously awarded but unvested shares. The Plan limits the number of shares that may be granted to any one individual during any one-year period to 112,500, and provides 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 1995, a total of 126,699 shares were awarded under the Plan. During 1994, a total of 306,411 shares were awarded under the Plan, and 7,998 previously awarded shares were forfeited pursuant to the terms of the Plan. As of December 31, 1995, there were 375,429 previously awarded shares outstanding under the Plan as to which the restrictions had not yet lapsed. Expense charges recognized in 1995, 1994 and 1993 relating to these awards amounted to approximately $2.6 million, $2.0 million and $2.1 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 12. Leases
A subsidiary of the Company leases a portion of a building located at 125 Maiden Lane, New York, New York, which houses the subsidiary's principal executive offices as well as the headquarters of the Company and several other subsidiaries. The lease expires in 2006 and provides a renewal option based on fair rental value at time of renewal. 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, 1995 approximate $12.0 million in 1996, $10.2 million in 1997, $9.5 million in 1998, $8.6 million in 1999, $8.0 million in 2000, a total of $25.4 million from 2001 to 2005, and a total of $4.1 million from 2006 to 2007. Total rental expense amounted to approximately $12.5 million, $13.1 million and $13.5 million for the years ended December 31, 1995, 1994 and 1993, respectively.
Note 13. 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, as well as certain employee and Director benefit plans, in the event of a Change in Control (as defined in the trust agreements), totalling $93 million. The Company has also entered into Key Executive Employment Protection Agreements with selected key employees, which provide for certain contingent severance benefits, based on compensation, in the event of a Change in Control (as defined in the agreements). 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, 1995) for a ten year period commencing at the effective date of such license. The Company has also agreed to guarantee the payment and performance of two real estate leases which expire December 31, 2006 and June 30, 2007, respectively, for two of its subsidiaries, which represent gross minimum rents for the remaining term of the leases totalling, as of December 31, 1995, $19.4 million and $14.9 million, respectively, plus additional rents representing any increase in operating expenses and real estate taxes over the base year (defined in the leases as calendar year 1995 and 1997, respectively).
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 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. The parties have agreed to a settlement of all claims asserted and the settlement was given tentative approval by the Court in December, 1995. Under the terms of the Settlement Agreement, class members will be notified of their right to file claims for partial premium refunds. In the opinion of management, the ultimate resolution of this action in accordance with the terms of the Settlement Agreement will not result in a material additional liability on the part of the Company.
In August, 1995, a purported class action was filed alleging that a subsidiary of the Company violated the federal Telephone Consumer Protection Act by sending unsolicited facsimiles of advertisements. The Complaint contains claims for damages in the amount of $500 for each such unsolicited facsimile or
alternatively, plaintiffs' actual monetary loss; plaintiffs have also sued for treble damages or alternatively, punitive damages. No contingent loss has been accrued for this litigation because the amount of loss, if any, cannot be reasonably estimated.
In March, 1995, a purported class action was filed alleging that a subsidiary of the Company issued insurance contracts in an amount sufficient to cover the gross amount of indebtedness, rather than the net amount of indebtedness, contrary to Alabama law. The complaint contains claims of fraud and breach of contract based on allegations that defendant misrepresented the amount of insurance needed (based on a recent ruling in a similar case by the Alabama Supreme Court). Plaintiffs seek compensatory and punitive damages. 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 14. Financial Instruments and Concentrations of Credit Risk
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 carrying amounts and estimated fair values of the Company's financial instruments are as follows:
In accordance with the requirements of Statement No. 107 of the Financial Accounting Standards Board, the financial instruments presented above exclude accounts relating to the Company's insurance contracts and certain other classes of assets and liabilities. The 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, 1995 and 1994 are not materially different from the respective carrying values at those dates. 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.
Concentrations of Credit Risk
The Company's investments in fixed maturities and equity securities are comprised of a diverse portfolio represented by approximately 650 issuers, with no issuer accounting for more than 2% of the Company's total investment in these securities, based on fair value, at December 31, 1995.
The geographical distribution of the collateral for the Company's mortgage loans at December 31, 1995, by United States region and based on book value, is as follows:
New England.......................... 6% Middle Atlantic states............... 17 North-central states................. 21 South Atlantic states................ 17 South-central states................. 12 Mountain states...................... 13 Pacific states....................... 14 _____
100% =====
The distribution of the Company's mortgage loans at December 31, 1995 by type of collateral, based on book value, is as follows:
Office buildings..................... 36% Industrial / warehouse properties.... 24 Retail............................... 29 Apartments........................... 1 One to four family residential....... 2 Hotel / motel, medical, and other.... 8 _____
100% =====
The Company's reinsurance receivables and other recoverable amounts at December 31, 1995 relate to approximately 150 reinsurers. Two major United States insurance companies, rated "A+" (superior) and "A" (excellent) respectively by A. M. Best Company, a recognized insurance rating agency, account for approximately 15% and 9%, respectively, of the total reinsurance receivable and recoverable amount at that date. Other than these companies, no single reinsurer accounts for more than 6% of the total reinsurance receivable and recoverable amount at December 31, 1995. The Company monitors the financial condition of its reinsurers in order to minimize its exposure to loss from reinsurer insolvencies.
Note 15. 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, $9.3 billion, representing 6 percent of total life insurance in force as of December 31, 1995, 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 effect of reinsurance on premiums, other considerations, and benefits to policyholders and beneficiaries, is as follows:
A summary of reinsurance activity for the three years ended December 31, 1995 is presented below:
The estimated amounts of reinsurance recoverable on paid and unpaid claims included in the Consolidated Balance Sheets as of December 31, 1995 and 1994 are as follows:
The amount included in the consolidated balance sheets at December 31, 1995 and 1994 for "Other reinsurance recoverable" includes the estimated amounts recoverable on unpaid claims as indicated above as well as prepaid reinsurance premiums.
Note 16. Income Per Share
The following table sets forth the computations of income per share for the three years ended December 31, 1995:
Note 17. Statement of Cash Flows Information
For the years ended December 31, 1995, 1994 and 1993, respectively, interest paid amounted to $38.2 million, $34.8 million, and $32.6 million, and Federal income taxes paid amounted to $55.7 million, $60.5 million and $60.7 million. The major portion of the disposals of fixed maturity investments relate to securities sold or redeemed prior to their maturity dates. The $438 million disposals of fixed maturity investments by the Company for the year ended December 31, 1995 included approximately $115 million (adjusted cost) of securities which were called for redemption by the respective issuers prior to maturity. On a similar basis, redemptions of fixed maturities included in total disposals amounted to $209 million and $928 million in 1994 and 1993, respectively.
Note 18. Statutory Financial Information; Dividend Paying Capability of Life Insurance Subsidiaries
Net income and equity capital of the life insurance subsidiaries, as reported on a regulatory basis and as included in USLIFE's consolidated financial statements in accordance with GAAP, are as follows:
(a) Statutory accounting practices require acquisition costs on new business (including commissions and underwriting and issue costs) to be charged to expense when incurred. Regulatory net income includes income (loss) attributed to participating policyholders of approximately $(21) million, $200 thousand, and $2 million in 1995, 1994, and 1993, respectively, with the 1995 loss primarily a result of increased sales of participating term insurance products. Regulatory equity capital includes capital attributed to participating policyholders of approximately $20 million, $30 million, and $39 million at December 31, 1995, 1994 and 1993, respectively. Capital attributed to participating policyholders is not available for payment of dividends to shareholders.
(b) Regulatory net income includes after-tax capital losses of $8 million, $10 million, and $2 million in 1995, 1994, and 1993, respectively. GAAP net income includes after-tax capital gains (losses) of $4 million, $(1) million and $7 million in those years, respectively.
The dividend paying capability of the life insurance subsidiaries is generally limited by after-tax income and equity capital as reported on a regulatory basis. As a result of the appropriate adjustments, including deferral and amortization of policy acquisition costs and fair value accounting for fixed maturities under GAAP, equity capital of the life insurance subsidiaries prepared in accordance with GAAP exceeds regulatory equity capital as indicated above. 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, 1995, the portion of the aggregate $1.786 billion GAAP 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 regulatory approval ("Restricted Net Assets"), as a result of insurance laws and regulations, amounted to $1.732 billion. Cash dividends paid by all consolidated subsidiaries to the parent company totalled $42 million (including $6.5 million remitted by an inactive life insurance subsidiary and then contributed to another life subsidiary in connection with the earlier combination of the two companies' operations), $46 million and $61 million in 1995, 1994 and 1993, respectively. Additionally, during 1993, securities with market value of $22 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.
Note 19. Supplementary Insurance Information
Supplementary data relating to the life insurance industry segment of the Company for the three years ended December 31, 1995 is presented below.
Note 21. Condensed Quarterly Results of Operations (Unaudited)
The quarterly results of consolidated operations for the two years ended December 31, 1995 are presented below (in thousands of dollars except per share amounts):