United American owns and occupies a 125,000 sq. ft. home office building at 2909 North Buckner Boulevard, Dallas, Texas.
In terms of annualized premium issued, sales of Medicare Supplement insurance declined 13% to $136 million in 1993. Sales rose 43% to $156 million in 1992 over the prior year. In addition to the previously-mentioned uncertainty regarding various health care reforms which might have bearing on the Medicare Supplement market, this market has also experienced a great deal of regulatory change in recent years. These changes include increased government regulation in the form of mandated policy forms, a required minimum 65% loss ratio on products sold, and a required leveling of agents' commissions. Implementation of the stringent loss ratio and policy form regulations in 1992 has put pressure on margins for all Medicare Supplement providers. Medicare Supplement annualized premium in force grew 3.4% in 1993 and stood at $601 million at December 31, 1993. In 1992, Medicare Supplement annualized premium in force grew almost 11% and was $581 million at December 31, 1992.
Liquidity: Torchmark's high level of liquidity is represented by its strong positive cash flow, its liquid assets, and the availability of a line of credit facility. As is typical of established life insurance companies, Torchmark generates cash flow from premium, investment, and other income generally well in excess of its immediate needs for policy obligations, expenses, and other requirements. Additionally, because of the nature of the life insurance business, cash flow is also quite stable and predictable.
Torchmark maintains a line of credit facility with a group of banks which allows borrowings up to $250 million, of which $107 million was borrowed at year-end 1993. This line is available to Torchmark at any time up to the maximum amount, although Torchmark is subject to certain covenants regarding capitalization and earnings. At December 31, 1993, Torchmark was in full compliance with these covenants.
Investments in equity securities, which include common and nonredeemable preferred stocks, are reported at market value. Policy loans are carried at unpaid principal balances. Mortgage loans are carried at amortized cost. Investments in real estate are reported at cost less allowances for depreciation, which are calculated on the straight line method. Short-term investments include investments in certificates of deposit and other interest- bearing time deposits with original maturities within one year. If an investment becomes permanently impaired, such impairment is treated as a realized loss and the investment is adjusted to net realizable value.
Determination of Fair Values of Financial Instruments: Fair value for cash, short-term investments, receivables and payables approximates carrying value. Fair values for investment securities are based on quoted market prices, where available. Otherwise, fair values are based on quoted market prices of comparable instruments. Mortgages are valued using discounted cash flows. The carrying amounts of short-term borrowings approximate their fair value. Substantially all of Torchmark's long-term debt is valued based on quoted market prices.
Torchmark adopted Statement 115 at December 31, 1993 and chose to classify all of its fixed maturity investments as available for sale. Prior year financial statements have not been restated. At December 31, 1992, fixed maturities held-to-maturity were carried at amortized cost and fixed maturities available for sale were carried at the lower of amortized cost or market.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) (DOLLAR AMOUNTS IN THOUSANDS EXCEPT PER SHARE DATA) NOTE 3--INVESTMENT OPERATIONS (CONTINUED) A summary of fixed maturities held for investment and available for sale and equity securities by amortized cost and estimated market value at December 31, 1993 and 1992 is as follows:
Adjustable Rate Preferred Stock: One million shares of adjustable rate preferred stock were issued in 1983 at an issue price of $100 per share. Dividends are cumulative and are payable quarterly. The dividend rate is adjustable, being determined in advance of each period at 1.25% less than the highest of the treasury bill rate, the ten year constant maturity rate, or the twenty year constant maturity rate. However, the dividend rate will never be less than 7% nor greater than 13%. The January 31, 1994 dividend was paid at a rate of 7.00%. The preferred stock is redeemable, at Torchmark's option, from
The following is a summary of quarterly results for the two years ended December 31, 1993. The information is unaudited but includes all adjustments (consisting of normal accruals) which management considers necessary for a fair presentation of the results of operations for these periods.