Loyal's Home Office building is located at 2800 Dauphin Street, Mobile, Alabama. This building contains approximately 89,000 square feet, of which approximately 62,000 square feet are utilized for Company purposes. The remainder of the building is leased to outside tenants. The book value of the property as of December 31, 1993 is approximately $3.7 million.
Prairie leases marketing and administrative space in several other locations. The aggregate monthly rental for these locations is approximately $14,000.
In addition, Prairie is obligated on leases for space previously used for administrative purposes. This space is currently being sub-leased. The net monthly rental is approximately $4,000.
Premium income improved in 1993 as compared to 1992 due to improvements in new sales and inforce persistency at Prairie and Loyal. Loyal's accident and health premium, primarily related to a cancer indemnity product, accounted for most of the increase. The cancer indemnity product is subject to premium rate adjustments, following regulatory approval. Loyal has been actively managing the premium rate adjustment approval process with positive results.
Premium income improved marginally in 1992 as compared to 1991. Improvements in both new sales and inforce persistency at Prairie and Loyal more than offset a decline in renewal premium due to a substantial block of inforce business at Prairie attaining paid-up premium status during the year. A former subsidiary of Loyal, American Defender Life Insurance Company ("Defender"), had ceased writing new business and was in a run-off position which also resulted in lower premium income.
Benefits for 1992 decreased as a percentage of premium from 95.9% in 1991 to 90.4% in 1992. The decrease in benefits was due primarily to lower levels of death and health claims in 1992 as compared to 1991. During 1992, Loyal filed and received approval for premium rate increases associated with its cancer indemnity product. These premium increases had a positive impact in lowering the benefits as a percentage of premium ratio. This improvement was partially offset due to a substantial block of inforce business at Prairie reaching paid-up premium status during the year. As additional benefits were being paid or accrued on this block with no corresponding premium income, the ratio of benefits to premium income was negatively impacted.
Benefits for 1991 increased as a percentage of premium from 87.0% in 1990 to 95.9% in 1991. Benefits increased $6.8 million while premium income decreased $0.3 million in 1991 as compared to 1990. Adverse health claims experience was incurred by Loyal during 1991 which resulted in premium rate increases being submitted and approved during the second half of 1991. In addition, higher levels of death claims and surrender benefits were incurred during 1991 as compared to 1990 at both Loyal and Prairie.
Expenses as a percentage of premium income in 1992 remained fairly stable when compared to 1991. Following a period of administrative consolidation, operational efficiencies stabilized during the year. Selling expenses associated with the Company's growth in the pre-need life insurance segment at Prairie were higher than in the prior year reflecting the Company's continued investment in this market.
Effective January 1, 1993, the Company adopted Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes" ("SFAS 109"). Under SFAS 109, deferred tax assets or liabilities are computed based on the difference between the financial statement and income tax bases of assets and liabilities applying enacted tax rates. Deferred income tax expenses or benefits are based on the changes in the deferred tax assets or liabilities from period to period. Prior to January 1, 1993, deferred income tax expenses or benefits were recorded to reflect the tax consequences of timing differences between the recording of income and expenses for financial reporting purposes and for purposes of filing federal income tax returns at income tax rates in effect when the differences arose. The cumulative benefit of $400,000 of adopting this change as of January 1, 1993 has been reflected in the statement of operations included herein. Prior year financial statements have not been restated to reflect the new accounting method.
The increase in earnings for 1991 as compared to 1990 of $21.1 million was due primarily to the Special Charges of $18.2 million ($17.7 million after-tax) recorded in 1990. Excluding these Special Charges, net income increased $3.4 million in 1991 as compared to 1990. This increase was due primarily to a $6.2 million ($4.1 million after-tax) increase in realized investment gains. Improvements in net investment income and lower operating expenses were offset by higher levels of benefits and reserve expenses. An increase in the effective tax rate, primarily due to operating losses for which no tax benefit was recognized, also affected 1991 earnings as compared to 1990.
In May 1993, the Financial Accounting Standards Board ("FASB"), issued Statement of Financial Accounting Standard No. 115, "Accounting for Certain Investments in Debt and Equity Securities" ("SFAS 115"). This statement addresses the accounting and reporting on the ownership of investment securities. SFAS 115 specifically applies to the accounting for fixed income securities, which have historically been reported at amortized cost. SFAS 115 allows for the continued use of amortized cost reporting only for those securities that the Company has the positive intent and ability to hold to maturity. Any held securities not qualifying for amortized cost treatment must be reported at fair value. SFAS 115 is required to be adopted on January 1, 1994 and the effects of this statement on the Company have not been quantified.
In addition to the cash flow necessary to fund benefit payments, the Company requires cash flows for operating and administrative expenses, which are normally funded from premium income. The level of expenses generally fluctuates in direct proportion to the amount of premium produced, and the Company's subsidiaries generate sufficient cash flow to meet such expenses. However, the Company's cash disbursements have from time to time exceeded its cash receipts, principally due to its former acquisitions program and commitments made in connection with the acquisitions. Funding of interest on debt incurred in connection with this program of acquisitions as well as the subsequent consolidation of operations, required an expenditure of approximately $4.9 million in 1993, $5.0 million in 1992, and $5.0 million in 1991.
As a holding company, Laurentian Capital's ability to meet debt service obligations and pay operating expenses depends upon receipt of sufficient funds, primarily through dividends, receipt of interest and principal payments on a surplus debenture, and management fees from its subsidiaries. The Company's subsidiaries are currently producing earnings and net cash flow sufficient to cover debt service and preferred stock payment requirements at the parent. However, under the insurance laws of the states in which the Company's insurance subsidiaries are domiciled, certain restrictions are imposed on dividends from the subsidiaries to the parent. The insurance laws and regulations generally limit the amount of dividends to the greater of net statutory gain from operations or 10% of statutory surplus, and dividends in excess of these amounts can be paid only with the prior approval of the insurance regulators. Based upon the 1993 statutory annual statements of the Company's insurance subsidiaries, approximately $7.0 million of dividends can be paid to the parent from its direct insurance subsidiaries without prior approval of insurance regulators.
During 1992, the Company restructured its holding in Prairie. Following approval by the Division of Insurance for the State of South Dakota ("Division of Insurance"), Prairie was sold to a wholly-owned life insurance subsidiary of the Company, Prairie National Life Insurance Company, of Rapid City, South Dakota ("Prairie National"). As part of the consideration for Prairie National purchasing Prairie, Prairie National issued capital stock and a $35 million surplus debenture to the Company. Interest and repayment of principal on the debenture is subject to prior approval by the Division of Insurance. The surplus debenture is payable in scheduled installments through 2001. Payments of principal and interest require prior approval by the South Dakota insurance commissioner and cannot reduce Prairie National's surplus below a certain required level. As of December 31, 1993, Prairie National exceeded its required level of surplus by $11.6 million. Since April 4, 1992, the date of the restructuring, the Division of Insurance has approved $4.0 million in interest payments associated with the surplus debenture, of which $2.2 million was approved during 1993. Principal payments of $4.5 million were approved for payment by the Division of Insurance during 1993. The effects of these transactions are eliminated in consolidation.
On April 25, 1989 an agreement was signed which provided the Company with a five year Revolving Underwriting Facility ("RUF") for a total commitment of $55 million. Pursuant to the terms of the RUF, the Company pays interest at a variable rate, with a maximum rate equal to 0.30% above the London Interbank Offered Rate ("LIBOR"). The agreement contains certain covenants relating to the Company's activities and financial condition. With respect to the financial condition covenants, the Company must maintain a minimum net worth, as defined, and not permit a ratio of outstanding indebtedness, as defined, to net worth of greater than 1.0 to 1.0. On March 6, 1991, the Company entered into an interest rate swap agreement that has the effect of fixing the LIBOR component of the RUF at 7.94% until maturity of the RUF on April 25, 1994. The Company has been actively pursuing refinancing of its presently outstanding debt obligations. While there can be no assurances that the Company will be able to accomplish a refinancing of its presently outstanding debt, management believes that the Company has the ability to execute a plan which will accomplish the desired objectives before the RUF becomes due.
Inflation increases the need for insurance. Many policyholders who once had adequate insurance programs increase their life insurance coverage to provide the same relative financial benefit and protection. The effect of inflation on medical costs leads to accident and health policies with higher benefits. Thus, inflation has increased the need for life and health products.
The financial statements and supplementary data filed with this Report are as set forth in the "Laurentian Capital Corporation and Subsidiaries Index to Financial Statements" following Part IV hereof.