of Statutory Surplus required by any state in which it operates. The A&H Sales also allowed Dixie Life to accelerate the recapture of the Crown reserve credit in 1994, further reducing the dependence on the Crown Agreement.
Liquidity Requirements. Most of the operating liquidity requirements of the Company arise from the insurance operations of Dixie Life and generally are met through funds generated by Dixie Life's operations. Premium income and net investment income provide funds that are used to pay claims to policyholders; make policy loans; pay costs of obtaining new business, principally first year commissions; and pay operating expenses. Dixie Life's operations generated positive cash flow of approximately $778,000, $98,000 and $1,074,000 in 1994, 1993 and 1992, respectively.
Dixie Life pays a monthly management fee of $154,000 to the Corporation. Funds provided by the management fee are sufficient to pay operating and interest expenses of the Corporation.
The loan agreement covering the Term Loan contains three financial covenants. First, the covenants include a requirement that Dixie Life maintain statutory capital and surplus of at least $3,500,000 as of the end of each quarter. Dixie Life's statutory capital and surplus at December 31, 1994, was $6,280,000. Second, the Corporation must maintain tangible net worth, as defined, of at least $9,000,000. At December 31, 1994, tangible net worth was $8,487,818. Finally, the Corporation must maintain a ratio of total liabilities to tangible net worth of not more than 4.5 to 1. At December 31, 1994, the ratio of total liabilities to tangible net worth was 4.17 to 1. Failure to satisfy any of the financial covenants is an event of default unless waived by the holder to the Term Loan. Standard
1. Endeavor to complete the SMC Transaction, thereby satisfying the Term Loan, as well as the Convertible Notes, assuming their due date is extended.
3. In the event the SMC Transaction is canceled by either party, searching for another purchaser of Dixie Life in the 90 days available to it beyond such cancellation beforthe Term Loan is due.
There are no assurances that any of these efforts will be successful.
Investment Portfolio Liquidity. Dixie Life's investment strategy emphasizes investments of the highest quality. Accordingly, Dixie Life's policy has been to invest in securities which are considered investment grade by various investor services and the National Association of Insurance Commissioners ("NAIC"). Occasionally, securities will fall below investment grade over the life of the securities. At December 31, 1994, Dixie Life's investment in securities not of investment grade was less than 1% of total investments.
Statutory Surplus. Minimum required levels of Statutory Surplus vary by state and range from $600,000 to $3,000,000 in states where Dixie Life is licensed. If an insurance company's Statutory Surplus falls below the statutory minimum, that company could be subjected to severe restrictions in the states where such minimum levels are not maintained. Thus any insurance company has a continuing need to maintain required minimum Statutory Surplus levels.
The insurance departments of most of the states in which Dixie Life operates, including its domicile state of Mississippi, have broad discretionary powers to require higher levels of Statutory Surplus, or to impose restrictions on operations, including fund transfers and new business sales, when such restrictions are perceived by the departments as necessary or desirable to maintain adequate amounts of Statutory Surplus.
Total revenues for 1994 were $11,651,000 compared to $21,530,000 in 1993 and $19,312,000 in 1992, reflecting a 46% decrease in 1994 and an 11% increase in 1993.
Premium income in 1994 was $9,516,000, a 51% decrease from 1993 premiums of
Life and Accident Annuity and Health Total 1994 $4,214,000 $5,302,000 $9,516,000 1993 5,314,000 14,185,000 19,499,000 1992 4,892,000 12,287,000 17,179,000
Net investment income was $2,134,000 in 1994 compared to $2,005,000 in 1993 and $2,158,000 in 1992, reflecting an increase of 6% in 1994 and a decrease of 7% in 1993. In 1994 and 1993, net investment income was favorably influenced by a planned program to reinvest significant short term holdings in a portfolio with an average life of 10 years. There was also a positive impact in 1994 from rising interest rates. Several factors counteracted these positive factors. First, in 1991 Dixie Life began reinvesting the proceeds of all calls, maturities and sales in short term investments.This program continued throughout 1992 and into the first quarter of 1993. This resulted in a significant decrease in the yield on Dixie Life's investment portfolio. Second, income on student loans has steadily decreased in absolute dollars, driven partly by a reduction in the amount of loans outstanding and the fact that a significant portion of the outstanding loans provide for floating interest rates which have fallen over the periods being compared.
Life and Accident Annuity and Health Total Benefits and Claims to Policyholders: 1994 $3,512,000 $3,061,000 $ 6,573,000 1993 4,046,000 8,528,000 12,574,000 1992 3,321,000 6,771,000 10,092,000
Commissions: 1994 882,000 1,012,000 1,894,000 1993 367,000 3,142,000 3,509,000 1992 452,000 2,270,000 2,722,000
General expenses declined $323,000 in 1994 compared to 1993. Under the terms of the 1994 A&H Sale, Dixie Life continued to administer the business which was sold through December 16, 1994 and received compensation from the purchaser of $671,000 which was credited to general expense. Actual costs of such administration exceeded the compensation received, accounting for the difference in the decrease and the compensation received. The decreases in all recurring categories were offset by the difference in the loss incurred on the A&H Sales in 1994 compared to 1993.
In 1993, total benefits and expenses increased $4,487,000 with an increase in benefits and claims to policyholders comprising $2,481,000 of this increase, or 55% of the total increase. This increase in benefits and claims to policyholders was caused by an increase in claims paid of $1,895,117 and an increase in accident and health (A&H) reserves resulting from continued high levels of claims. Dixie Life instituted rate increases on several of its A&H policies because of the higher levels of claims and it continually monitored its claims experience and requested rate increases on its A&H products whenever claims experience warranted rate increases. The rate increases which were approved generally were instituted in the latter part of 1993 or early 1994 and thus had little effect on operations for 1993. Amortization of deferred policy acquisition costs and value of insurance purchased increased $450,000 in 1993 as a result of a general increase in the amount of insurance in force and a somewhat higher level of terminated policies in 1993. Commission expenses increased $787,000 as a result of a relatively higher renewal premium income on A&H products which carry a higher renewal commission structure. General expenses increased $437,000 in 1993 with $217,000 of this increase being caused by increased professional fees.