ITEM 1. BUSINESS OF USLICO
USLICO Corporation (USLICO) is an insurance holding company incorporated under the laws of Virginia in 1983. In 1984, USLICO became the parent company of the United Services Life group of companies upon the conversion and exchange of the common stock of United Services Life for USLICO common stock on a one-for-one basis. USLICO owns two life insurance companies and several smaller subsidiaries that provide such services as investment management and sale of insurance and other financial products.
LIFE INSURANCE COMPANIES
USLICO's subsidiary life insurance companies are authorized to write all forms of life insurance, annuities (including variable annuities) and accident and health insurance. The life companies, which collectively write business in all U.S. jurisdictions, Europe, and the Far East, are individually licensed in the following jurisdictions:
- United Services Life Insurance Company ("United Services"), the predecessor of which was formed in 1937, is licensed in all states, except New York (where it is an accredited reinsurer), and in the District of Columbia, Guam, and Japan.
- Bankers Security Life Insurance Society ("Bankers Security"), acquired in 1979, is licensed in all states, the District of Columbia, and the Dominican Republic.
- Two other life insurance subsidiaries were merged into United Services in 1992: Provident Life Insurance Company, which was acquired in 1982, and United Olympic Life Insurance Company, which was acquired in 1984.
The life insurance subsidiaries sell three major product lines: (1) individual life insurance, (2) payroll deduction and group life, and (3) individual annuities. See the accompanying 1993 Annual Report for further information regarding the business of USLICO.
Underwriting
The life insurance companies offer ordinary life, universal life, variable life, and term insurance with accidental death and waiver of premium benefits. The life companies also offer group term life insurance and group association life insurance. As of December 31, 1993, the life companies had $31.3 million of variable life separate account assets.
Accident and health policies include group medical, long-term disability, and accidental death and dismemberment coverages. The life companies also sell individual fixed and variable annuities on both a tax-qualified and non tax-qualified basis. As of December 31, 1993, as a result of variable annuity sales, the life companies had $198.4 million under management in variable annuity separate accounts.
Depending upon the age and classification of the risk, the life companies retain varying amounts of insurance up to a maximum ranging between $10,000 and $400,000 on any one life. As of December 31, 1993, the aggregate amount of reinsurance ceded was $10.4 billion and the life companies had accepted $5.0 billion of SGLI (Servicemen's Group Life Insurance) reinsurance.
For individual life insurance, medical examinations may be required for any ages or amounts if information received indicates a need for examination. Approximately 50% of individual applications are issued without requiring a full medical examination. Blood testing is required for all proposed insureds ages 25 through 45 for amounts greater than $100,000.
For life policies issued to individuals in payroll deduction cases, the life companies have a guaranteed issue program for groups of 50 or more participants. Beyond guaranteed issue amounts, some limited underwriting is performed.
Underwriting with respect to annuities is minimal. Profitability is determined primarily by the investment spread earned on annuity assets. The individual annuities sold by the life companies have no bail-out provisions (with the exception of one annuity form sold in immaterial amounts in certain states).
Competition and Regulation
The life insurance industry is highly competitive. There are more than 2,000 legal reserve life insurance companies in the United States, many of which compete with subsidiaries of USLICO in one or more jurisdictions in which they are authorized to transact business. Competition in the insurance field is based upon price, product design, and services rendered to policyholders and agents.
The insurance subsidiaries are subject to regulation and supervision by their states of incorporation and by other states in which they do business, including regulations governing rates, standards of solvency and business conduct, and rehabilitation and liquidation of insurance companies. In addition, the states generally require the licensing of insurers and their agents and approval of policy forms, prescribe the form and content of statutory financial statements, and restrict the type and concentration of investments. USLICO also is subject to the laws of several states regulating insurance holding companies. These laws generally impose reporting requirements on such companies and require that any subsidiary insurance company's surplus be reasonable in relation to its liabilities and adequate for its financial needs following any distributions with respect to capital stock made to affiliated companies. In addition, state laws generally provide for a ceiling on dividends which a holding company's operating insurance subsidiaries can pay without prior approval by state regulatory authorities. United Services must obtain prior regulatory approval, from the Virginia Bureau of Insurance, for any dividend if the amount of such dividend, together with all other dividends paid in the preceding 12 calendar months, exceeds the lesser of (a) 10% of the statutory policyholders surplus or (b) the net gain from operations as of the end of the prior calendar year. Bankers Security, as a New York domiciled company, must obtain prior approval of the New York Insurance Department for any dividend. Such approval generally is granted if
dividends paid in the 12 most recent calendar months do not exceed the lesser of (1) 50% of the net gain from operations for the prior calendar year or (2) the increase in surplus for the prior calendar year.
State insurance regulators monitor the capital adequacy of life insurance companies by means of Risk-Based Capital (RBC) ratios that relate each insurer's actual statutory capital and surplus to a calculated level of capital needed to support different types of risk inherent in the assets and liabilities of the company. RBC ratios below certain levels call for various forms of regulatory intervention. The ratios at December 31, 1993, for both United Services and Bankers Security were more than double the highest level that would require even the most minimal level of regulatory action.
Insurance Ratings
A. M. Best Company is the acknowledged statistical reporter on the financial condition, history and operating results of insurance companies. Best's ratings are classified in gradations from A++ (Superior) through C- (Marginal). The rating reflects the relative financial strength of the company in comparison to industry performance in such areas as underwriting, control of expenses, reserve adequacy and asset quality. United Services and Bankers Security each received A (Excellent) ratings in 1993. Ratings for 1994 had not been assigned by the date this report was filed. It should be noted that Best's ratings are published for the benefit of policyholders and not for the benefit of shareholders.
Standard & Poor's (S&P) rates the claims-paying ability of insurance companies from the highest level of AAA (Superior) to the lowest levels of CCC (Extremely vulnerable) and R (Regulatory action). United Services and Bankers Security each had ratings of A+ (Good financial security) as of the date of this Annual Report.
Ownership of USLICO Common Stock
United Services owned 300,000 shares of USLICO common stock at December 31, 1993, and the USLICO retirement plan held 273,446 shares of USLICO common stock.
Personnel
The life companies employ approximately 685 full-time employees, none of whom is represented by a union.
PROPERTY AND CASUALTY INSURANCE COMPANIES
USLICO carried out property and casualty insurance operations through three wholly-owned insurance subsidiaries which were sold in July of 1991. A fourth subsidiary, The Northeastern Insurance Company of Hartford ("Northeastern"), was a property and casualty reinsurer. Northeastern ceased writing new business during 1986, commuted substantially all reinsurance liabilities effective December, 1993, and surrendered its insurance licenses in early 1994. See the discussion of discontinued operations in the Financial Review section on page of the accompanying 1993 Annual Report to Shareholders incorporated by reference herein for further information regarding Northeastern.
OTHER BUSINESSES
USLICO owned The International Trust Company of Liberia, Monrovia, Liberia until August 1993, when it was sold. See Note 2 to Consolidated Financial Statements of the accompanying 1993 Annual Report to Shareholders incorporated by reference herein.
USLICO owns International Risks, an insurance agency that sells multiple lines of insurance products, including property and casualty insurance and life and health coverages. The agency markets individual, group and payroll deduction products underwritten by approximately fifteen insurance companies. International Risks employs 16 full-time employees, none of whom is represented by a union.
USLICO owns a broker-dealer, USLICO Securities, which is a distributor for the fixed and variable annuities marketed by United Services and Bankers Security and which offers mutual funds through its registered representatives. USLICO Securities employs a full-time staff of 11, none of whom is represented by a union.
INVESTMENTS OF USLICO
For information regarding USLICO's investment portfolio, see Note 3 to Consolidated Financial Statements of USLICO Corporation in the accompanying 1993 Annual Report to Shareholders incorporated by reference in this Form 10-K as Exhibit 13.
Management actively monitors its commercial mortgage loan portfolios. Commercial properties are inspected on a yearly basis and inspection reports are documented in each file. Particular emphasis is placed upon loans that have one or more of the following conditions:
1. Past due principal and interest payment 2. Past due real estate tax payment 3. Past due hazard insurance premium payment 4. High vacancy rate in subject building (less than breakeven occupancy) 5. High vacancy rate and/or declining property values in neighborhood of subject building 6. Substantive number of leases expiring prior to loan maturity 7. Higher than market rental rates of tenants in subject building 8. Bankruptcy or financial difficulty of borrower 9. Bankruptcy or financial difficulty of major tenants 10. Deferred maintenance 11. Potential environmental liability
On a loan by loan basis, management establishes a loan loss reserve for those loans where there is a reasonable likelihood that a loss will be incurred. The amount of the loss reserve for each loan is determined by estimating the difference between the outstanding loan balance and the estimated market value of the property less foreclosure and selling costs. The reserve calculation is also a function of the probability of ultimate loss. These specific loss reserves totaled $4.8 million at December 31, 1993. A full narrative appraisal is prepared by an independent appraiser at the time of foreclosure. In addition, the Company establishes aggregate unspecified loss reserves based on overall loan portfolio factors. This general reserve was $4 million at December 31, 1993.
The following table sets forth information on nonaccrual, past due (accruing loans more than 90 days delinquent) and restructured mortgage loans on real estate:
USLICO's policy is to stop the accrual of income on mortgage loans more than 90 days delinquent. All mortgage loans on real estate are located within the United States. Approximately 54% of the loans are on warehouse properties and 30% are on office buildings.
As of December 31, 1993, 18 mortgage loans on real estate totaling $24.3 million are considered to be potential problem loans, not reported above, based on knowledge about possible credit problems of borrowers. Of these loans, 17 were current and one was 30 days delinquent. A loss reserve of $350,000 was established at 12/31/93 against one of these loans. The ratio of net charge-offs during 1993 to average loans outstanding during 1993 was 0.4%.
ITEM 2.


ITEM 2. PROPERTIES
USLICO owns no real estate except through subsidiaries.
Bankers Security owns a 60,000 square foot office building, completed in 1980, at 950 North Glebe Road, Arlington, Virginia. USLICO's life companies occupy 77% of this property.
United Services owns a 72,000 square foot office building at 316 North 5th Street, Bismarck, North Dakota, completed in 1954, and occupies 54% of its space.
At December 31, 1993, Bankers Security and United Services owned total foreclosed properties of $3 million.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS
United Olympic Life Insurance Company ("UOL") and Bankers Security Life Insurance Society ("BSL") are subsidiaries of USLICO (the "Company"). UOL was merged into another subsidiary, United Services Life Insurance Company ("USL"), on October 1, 1992. In United Olympic Life Insurance Company, et. al. v. The Delaware County Bank and Trust Company ("the Bank"), Case No. C2-91-1076, in the United States District Court for the Southern District of Ohio, Eastern Division, United Olympic Life Insurance Company, et. al. v. Consultants and Administrators, Inc., Case No. C2-92-142, in the United States District Court for the Southern District of Ohio, Eastern Division,
and The Delaware County Bank and Trust Company vs. United Olympic Life Insurance Company, et. al., Case No. 92CV-H-01-015, in the Court of Common Pleas for Delaware County, Ohio, USL and BSL seek to recover approximately $10 million in consequential damages and $20 million in punitive damages from the Bank for the wrongful transfer by the Bank of premium trust funds to satisfy indebtedness of Consultants and Administrators ("C&A"), a third party administrator, and for the wrongful dishonoring by the Bank of checks drawn on accounts at the Bank. The Bank has counterclaimed against USL, BSL and C&A alleging a conspiracy to defraud the Bank and others and tortious interference with the business relationship between the Bank and C&A. The Bank seeks compensatory damages of $20 million and an unspecified amount of punitive damages. C&A was also sued by USL and BSL and the Bank, and C&A has in turn filed claims against the Bank, USL and BSL claiming damages for alleged breach of contract, wrongful attachment, intentional/negligent interference, fraud, abuse of process and malicious prosecution. C&A alleges damages of $15 million, requests punitive damages of $40 million plus consequential damages in an amount to be determined.
In United Olympic Life Insurance Company, et. al. v. Consultants and Administrators, Inc. et. al. Case No. C2-92-150, in the United States District Court for the Southern District of Ohio, Eastern Division, USL and BSL have filed a declaratory judgment action to determine proper allocation of approximately $200,000 in commissions. After the Court issued an opinion effectively ruling that C&A had a right to direct how commissions which were due should be paid, USL paid all but approximately $10,000 of the commissions and is now waiting for further communication from C&A on further payment. USL and BSL also have sued Paul Bargnesi, President of C&A, individually for approximately $300,000 for breach of contract. Mr. Bargnesi has counterclaimed for unspecified compensatory and punitive damages arising from alleged severe emotional distress and damage to reputation. C&A has also filed counterclaims in this action essentially identical to those described in the second case (Case No. C2-92-142) above.
The Company believes its subsidiaries have substantial defenses to all of the claims asserted by C&A, the Bank and Mr. Bargnesi in all cases.
The Company, including its subsidiaries, is engaged in other litigation in the ordinary course of business. In the opinion of management, the litigation is not material.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The information required in answer to this item is incorporated by reference to USLICO Corporation's definitive proxy statement filed March 29, 1994, for use in connection with the Annual Meeting of Shareholders to be held on April 29, 1994.
PART II
ITEM 5.
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
The common stock and dividend information appearing on page of the accompanying 1993 Annual Report to Shareholders is incorporated by reference in this Form 10-K Annual Report as Exhibit 13.
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA
The five-year financial data appearing on page of the accompanying 1993 Annual Report to Shareholders is incorporated by reference in this Form 10- K Annual Report as Exhibit 13.
ITEM 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION
The information required in answer to this item appears on pages through of the accompanying 1993 Annual Report to Shareholders incorporated by reference in this Form 10-K Annual Report as Exhibit 13.
ITEM 8.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Consolidated Financial Statements, Notes to Consolidated Financial Statements, and Report of Independent Auditors appearing on pages through of the accompanying 1993 Annual Report to Shareholders are incorporated by reference in this Form 10-K Annual Report as Exhibit 13.
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
PART III
ITEM 10.


ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information regarding directors and executive officers of the Registrant is incorporated by reference to USLICO Corporation's definitive proxy statement filed March 29, 1994, for use in connection with the Annual Meeting of Shareholders to be held on April 29, 1994.
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION
Information regarding executive compensation is incorporated by reference to USLICO Corporation's definitive proxy statement filed March 29, 1994, for use in connection with the Annual Meeting of Shareholders to be held on April 29, 1994.
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information regarding beneficial ownership of USLICO Corporation's voting securities by directors, officers, and persons who, to the best knowledge of USLICO Corporation, are known to be beneficial owners of more than five percent of USLICO Corporation's voting securities as of March 1, 1994, is
incorporated by reference to USLICO Corporation's definitive proxy statement filed March 29, 1994, for use in connection with the Annual Meeting of Shareholders to be held on April 29, 1994.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
None. PART IV ITEM 14.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(A) 1. FINANCIAL STATEMENTS - USLICO CORPORATION AND SUBSIDIARIES.
The following financial statements of USLICO Corporation and Subsidiaries, together with the report of independent auditors thereon, are included in Part II of this report by incorporation by reference.
Consolidated Balance Sheets at December 31, 1993 and 1992 Consolidated Statements of Income for the three years ended December 31, 1993 Consolidated Statements of Cash Flows for the three years ended December 31, 1993 Notes to Consolidated Financial Statements Report of Independent Auditors
2. FINANCIAL STATEMENT SCHEDULES - USLICO CORPORATION AND SUBSIDIARIES
The following schedules of USLICO Corporation and subsidiaries together with the applicable report of independent auditors thereon, are submitted herewith.
Independent Auditors' Report on Financial Statement Schedules 9 Schedule I - Summary of Investments at December 31, 1993 10 Schedule III - Condensed Financial Information of Parent Company 11 Schedule VI - Reinsurance 16 Schedule IX - Short-Term Borrowings 17
Other schedules are omitted because of the absence of conditions under which they are required or because the required information is given in the consolidated financial statements or notes.
3. INDEX TO EXHIBITS 18
(B) 1. REPORTS ON FORM 8-K
None.
INDEPENDENT AUDITORS' REPORT ON FINANCIAL STATEMENT SCHEDULES
TO: The Board of Directors and Shareholders of USLICO Corporation
Under date of February 23, 1994, we reported on the consolidated balance sheets of USLICO Corporation and subsidiaries as of December 31, 1993 and 1992, and the related consolidated statements of income and cash flows for each of the years in the three-year period ended December 31, 1993, as contained in the 1993 Annual Report to Shareholders. These consolidated financial statements and our report thereon are incorporated by reference in the Annual Report on Form 10-K for the year 1993. In connection with our audits of the aforementioned consolidated financial statements, we also have audited the related financial statement schedules as listed in the accompanying index. These financial statement schedules are the responsibility of the Company's management. Our responsibility is to express an opinion on the financial statement schedules based on our audits.
In our opinion, such financial statement schedules, when considered in relation to the basic consolidated financial statements taken as a whole, present fairly, in all material respects, the information set forth therein.
As discussed in Notes 1 and 4 to the consolidated financial statements, the Company changed its method of accounting for income taxes by adopting the provisions of the Financial Accounting Standards Board's Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes" in 1992. As discussed in Note 1 to the consolidated financial statements, the Company also adopted the provisions of the Financial Accounting Standards Board's Statement of Financial Accounting Standards No. 106, "Employers' Accounting for Postretirement Benefits Other than Pensions" in 1992.
KPMG Peat Marwick
Washington, D.C. February 23, 1994
SCHEDULE III (cont.)
USLICO CORPORATION
NOTE TO CONDENSED FINANCIAL INFORMATION OF PARENT COMPANY December 31, 1993
The condensed financial information of parent company should be read in conjunction with Notes to Consolidated Financial Statements included in the Annual Report to Shareholders incorporated by reference herein.
INDEX TO EXHIBITS
The following exhibits are filed herewith or incorporated by reference where indicated:
Exhibit Number
2 Plan of acquisition, reorganization, arrangement, liquidation, or succession (not applicable).
3.1 Articles of Incorporation as amended (dated April 27, 1990) (Incorporated by reference to Item 14, Exhibit 3.1 of USLICO's Form 10-K, filed March 27, 1991, File No. 0-12694).
3.2 By-laws, as amended (dated February 23, 1990). (Incorporated by reference to Item 14, Exhibit 3.2 of USLICO's Form 10-K, filed March 25, 1992, file No. 0-12694).
4.1 Form of Indenture between USLICO Corporation and American Security Bank, including Form of Debenture, dated as of January 15, 1986 for the 8% Convertible Subordinated Debentures due 2011. (Incorporated by reference to Exhibit 4 of USLICO's Registration on Form S-2, Registration No. 33- 1925.)
4.2 Form of Rights Agreement between USLICO and Crestar Bank, including form of Rights Certificate, dated as of February 26, 1988 (Incorporated by reference to Item 7(c) exhibit of USLICO's Form 8-K filed March 10, 1988).
4.3 Form of Indenture between USLICO Corporation and Security Trust Company, N.A., including Form of Debenture, dated as of November 8, 1989, amendment #1 filed December 13, 1989, for the 8.5% Convertible Subordinated Debentures due 2014 (Incorporated by reference to Exhibit 4 of USLICO's Registration on Form S-3, Registration No. 33-31871).
9.0 Voting trust agreement (not applicable).
*10.1 USLICO Corporation Stock Option Plan (Incorporated by reference to USLICO's Proxy Statement dated March 27, 1991).
*10.2 Supplemental Retirement Benefits are described and incorporated by reference to USLICO's Proxy Statement dated March 25, 1992, at page 10.
*10.3 Employment Agreements dated October, 1992, between the Registrant and Messrs. Callahan, Roe, and Gettier. (Incorporated by reference to Item 14, Exhibit 10.3 of USLICO's Form 10-K, filed March 31, 1993, File No. 0-12694).
*10.4 Form of Executive Severance Benefit Agreement between the Registrant and executive officers. (Incorporated by reference to Item 14, Exhibit 10.4 of USLICO's Form 10-K, filed March 31, 1993, File No. 0-12694).
*10.5 USLICO Management Incentive Compensation Plan. (Incorporated by reference to Item 14, Exhibit 10.5 of USLICO's Form 10-K, filed March 31, 1993, File No. 0-12694).
*/**10.6 Directors' Retirement Plan.
**11 Statement regarding: Computation of Per Share Earnings.
12 Statements regarding: Computation of ratios (not applicable).
**13 1993 Annual Report of USLICO to security holders.
18 Letter regarding: Change in accounting principles (not applicable).
19 Previously unfiled documents (not applicable).
**21 Subsidiaries to Registrant.
22 Published report regarding matters submitted to vote of security holders (not applicable).
23 Consents of experts and counsel (not applicable).
24 Power of attorney (not applicable).
27 Financial Data Schedule (not applicable).
28 Information from reports furnished to State insurance regulatory authorities (not applicable).
99 Additional Exhibits (not applicable).
* Management contract or Compensatory Plan
** Filed herein
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
USLICO CORPORATION (Registrant)
DANIEL J. CALLAHAN, III DANIEL J. CALLAHAN, III CHAIRMAN AND CHIEF EXECUTIVE OFFICER
MARCH 29, 1994 (Date)
Pursuant to the requirements of the Securities Exchange Act of 1934, this report is signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
DANIEL J. CALLAHAN, III DAVID H. ROE DANIEL J. CALLAHAN, III DAVID H. ROE CHAIRMAN OF THE BOARD, PRESIDENT, CHIEF OPERATING CHIEF EXECUTIVE OFFICER OFFICER AND DIRECTOR AND DIRECTOR
ROBERT E. BUCHANAN ELI WEINBERG ROBERT E. BUCHANAN ELI WEINBERG DIRECTOR DIRECTOR
ROBERT F. COCKLIN DAVID W. KARSTEN ROBERT F. COCKLIN DAVID W. KARSTEN DIRECTOR SENIOR VICE PRESIDENT AND CONTROLLER
GLENN H. GETTIER, JR. GLENN H. GETTIER, JR. EXECUTIVE VICE PRESIDENT, CHIEF FINANCIAL OFFICER AND DIRECTOR
MARCH 29, 1994