ITEM 1. BUSINESS.
GENERAL DEVELOPMENT OF BUSINESS
Laurentian Capital Corporation (the 'Company') is a Delaware holding company engaged through its subsidiaries in providing life and health insurance and related services. As the context requires, references herein to the Company refer to the Company individually or to the Company together with its subsidiaries.
The Company's principal insurance subsidiaries are Loyal American Life Insurance Company, Mobile, Alabama ('Loyal') and Prairie States Life Insurance Company, Rapid City, South Dakota ('Prairie'). The Company's principal non-insurance subsidiaries are International Funeral Associates, Inc., Hurst, Texas ('IFA'), Laurentian Investment Services, Inc., Houston, Texas ('LIS'), and CSW Management Services, Inc., Houston, Texas ('CSW').
Approximately 71.6% of the outstanding common stock of the Company is owned by The Imperial Life Assurance Company of Canada ('Imperial') and an additional 9.8% is owned by Imperial's direct parent, Laurentian Financial, Inc. ('Financial'), which in turn is a wholly-owned subsidiary of The Laurentian Group Corporation ('Group'). Prior to January 1, 1994, Group was an indirect subsidiary of The Laurentian Mutual Management Corporation. On that date, La Confederation des caisses popularies et d'economie Desjardins du Quebec, a cooperative association constituted under the laws of the province of Quebec, Canada (the 'Confederation'), through its subsidiaries, Desjardins Laurentian Financial Corporation ('DLFC') and La Societe financiere des caisses Desjardins, Inc. ('SFCD'), acquired substantially all of the outstanding voting shares of Group, thereby becoming beneficial owner of the approximately 81.4% of the outstanding common stock of the Company beneficially owned by Group.
In November 1994, the Company engaged Oppenheimer & Co., Inc. ('Oppenheimer') as financial advisor to evaluate various strategies for maximizing shareholder value, including possible business combinations or other transactions. Oppenheimer is in the process of evaluating a variety of alternatives and has contacted third parties in that connection. There can be no assurances that the engagement will result in any transaction.
INSURANCE OPERATIONS
The Company's life and health insurance products are directed primarily towards the middle and lower income markets and are generally sold utilizing third party sponsorship to facilitate solicitation.
Loyal is a life insurance company incorporated under the laws of Alabama. It writes various forms of life insurance and accident and health insurance, principally with the sponsorship of credit unions and banks, which endorse its products to their members. It also writes life and health insurance through independent brokers.
Prairie is a life insurance company incorporated under the laws of South Dakota. It markets individual life insurance policies with the sponsorship of state associations of funeral directors as well as individual funeral directors in various locations.
Of all the prefunded funerals in the United States, approximately 35% are funded through pre-need life insurance and annuity products purchased from life insurance companies, with the balance funded through various state and local master funeral trusts. Prairie's operations are conducted in conjunction with relationships with a variety of non-insurance companies connected with pre-need products and services, including subsidiaries of the Company.
IFA is an association whose membership consists of funeral directors throughout the United States. IFA members receive a variety of benefits (such as discounts on casket purchases) as a result of their membership.
LIS provides trust management and investment advisory services for various state and local master funeral trusts. CSW specializes in providing administrative services, including accounting, tax reporting, commission accounting and income and expense allocations, to various funeral trusts.
MARKETING
The Company's marketing emphasizes third party sponsorship and focuses on the middle income and lower income markets, the so-called gray collar and blue collar markets. The Company continues to develop and market products and services designed to serve the needs of the senior life market. Company subsidiaries are licensed in 49 states, the District of Columbia, Puerto Rico and the Virgin Islands. The subsidiaries utilize a variety of distribution channels, including both independent and controlled agency sales forces, brokers and independent Personal Producing General Agents where their specialized product/market niche requires it. In addition, the companies use direct mail solicitation to specific markets.
ACQUISITIONS/DIVESTITURES
The Company's growth and expansion philosophy has placed an emphasis on internal sales expansion with some reliance upon selective acquisition of insurance and non-insurance operations. The Company believes that under appropriate circumstances, it can acquire established life and health insurance companies, compatible blocks of business or other companies that complement its existing operations. The Company was active in acquisitions prior to 1988, but limited its expansion activities from 1988 through 1993.
During 1994, the Company completed three acquisitions which it anticipates will enhance the operations of its two principal insurance subsidiaries. Prairie acquired Assured Security Life Insurance Company ('Assured') in July 1994, which has resulted in expanded penetration into the pre-need life insurance and annuity marketplace. In September 1994, the Company acquired CSW, which specializes in pre-need trust administration services. In August 1994, Loyal acquired Purity Financial Corporation ('Purity'), a marketing agency based in Jacksonville, Florida which is anticipated to enhance Loyal's business within the credit union market.
GEOGRAPHIC DISTRIBUTION OF PREMIUM INCOME
The Company received premium income from all states in 1994. Based on the premium income of the various subsidiaries in 1994, the Company's premium revenue was distributed approximately as follows:
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* No other state produced as much as 2% of premium income.
The Company operates primarily in the life and health insurance industry and, therefore, does not present separate segment information with respect to industry segments. Operations of non-life companies are not material to be isolated for segment reporting purposes.
STATISTICAL INFORMATION CONCERNING OPERATIONS
The following table indicates terminations of individual life insurance in force attributable to death, lapse, expiry, and surrender. Lapse ratios are also indicated, which compare lapses plus surrenders to the average insurance in force.
INVESTMENTS
The laws under which each insurance subsidiary of the Company operates prescribe the nature and quality of and set limits on the various types of investments which may be made by insurance companies. These laws generally permit investments in qualified state, municipal and federal government obligations, corporate bonds, preferred and common stock, real estate, and real estate mortgages where the value of the underlying real estate exceeds the amount of the mortgage loan. The following table shows the Company's investments at December 31, 1994:
In accordance with generally accepted accounting principles, all investments other than equity securities and the portion of fixed maturities which the Company has designated as available for sale are valued at either original or amortized cost. The equity securities and fixed maturities available for sale are valued at market with any unrealized investment gains or losses reflected in stockholders' equity, net of applicable deferred taxes. Investments are adjusted for other than temporary declines in carrying value when deemed appropriate. See Note 2 to Consolidated Financial Statements for certain information relating to the market value of the Company's investments. Consistent with the long-term nature of life insurance contracts, the Company expects to hold the fixed maturity investments to maturity, earlier prepayment or redemption.
The investment strategy of the Company emphasizes investment quality fixed income securities. Over the past several years the Company has reduced its percentage of investments held in equity securities, mortgage loans, investment real estate, and policy loans from 40% in 1988 to 15% at the end of 1994. As of December 31, 1994, 84.7% of investments were in fixed income securities, and of that total, over 99% of such securities are classified as investment grade.
The quality of the Company's fixed maturity investments at December 31, 1994, according to the rating assigned by nationally recognized statistical rating organizations, is as follows:
------------------ (1) Bonds are classified according to the highest rating by a nationally recognized statistical rating organization. Bonds not rated by any such organization are classified according to the rating assigned to them by the Securities Valuation Office of the National Association of Insurance Commissioners ('NAIC') as follows: for the purposes of the table, NAIC Class 1 is included in the 'A' rating; Class 2, 'BBB-'; Class 3, 'BB-'; and Classes 4-6, 'B and below'.
(2) The NAIC assigns security quality ratings and uniform book values called 'NAIC Designations' which are used by insurers when preparing their statutory annual statements. The NAIC assigns ratings to publicly traded as well as privately placed securities. The ratings assigned by the NAIC range from Class 1 to Class 6, with a rating in Class 1 being of the highest quality. The NAIC ratings above are as of December 31, 1994, the latest date for which such ratings are available.
(3) At amortized cost for fixed maturities held to maturity, and at market value for fixed maturities available for sale. See Notes 1 and 2 to the Company's consolidated financial statements for the year ended December 31, 1994.
The following table shows the investment results of the Company for the years 1990 through 1994:
REINSURANCE
In keeping with industry practice, the Company's insurance subsidiaries reinsure portions of the life and health insurance and annuities underwritten by them. Under most of the subsidiaries' reinsurance arrangements, new insurance sales are reinsured automatically rather than on a basis that would require the reinsurer's prior approval. Generally, each subsidiary enters into indemnity reinsurance arrangements to assist in diversifying its risks and to limit its maximum loss on large or unusually hazardous risks, including risks that exceed the subsidiary's policy-retention limits, currently ranging from $50,000 to $125,000 per life.
In recent years, the Company's amount of ceded reinsurance premium has declined. The reduction was due primarily to the run-off (i.e., non-renewal) of policies subject to certain older reinsurance treaties as well as the continued emphasis on premium growth in the pre-need life insurance market, where face amounts on most policies are within current Company retention limits. Expressed as a percentage of direct premiums written, ceded reinsurance has decreased from approximately 33% in 1987 to 6.3% in 1994.
Indemnity reinsurance does not fully discharge the ceding insurer's liability to meet policy claims on the reinsured business. The ceding insurer remains responsible for policy claims to the extent the reinsurer fails to pay such claims, as a result, for example, of the insolvency of the reinsurer. No reinsurer of business ceded by a Company subsidiary has failed to pay any material policy claim due to the insolvency of the reinsurer.
RESERVES
The applicable insurance laws under which the Company's insurance subsidiaries operate require that each subsidiary report policy reserves as liabilities to meet future obligations on the outstanding policies. These reserves are amounts which, with the additional premiums to be received and interest thereon compounded annually at certain assumed rates, are calculated to be sufficient to meet the various policy and contract obligations as they mature. These laws specify that the reserves shall not be less than reserves calculated using certain specified mortality tables and interest rates. The policy liabilities carried in the Company's financial statements differ from the policy reserves specified by the laws of the various states which are carried in the insurance subsidiaries' statutory financial statements. These differences arise from the use of mortality and morbidity tables and interest assumptions that are believed to be more appropriate for financial reporting purposes than those required for statutory accounting purposes, from the introduction of lapse assumptions into the reserve calculations and from the use of the net level premium reserve method. For a more complete discussion of policy liabilities, see Note 1 to Consolidated Financial Statements.
FEDERAL INCOME TAX MATTERS
The Company's life insurance subsidiaries are taxed by the federal government in a manner similar to companies in other industries. However, certain restrictions on consolidating life insurance company income with non-insurance income are applicable to the Company; thus, the Company is not able to fully consolidate the operating results of its subsidiaries for federal income tax purposes.
COMPETITION
The insurance market is highly competitive and occupied by a large number of companies, many of which have substantially greater capital and surplus, larger and more diversified portfolios of life and health insurance products and larger agency sales operations than the Company. The Company's subsidiaries are also encountering increased competition from banks, securities brokerage firms and other financial intermediaries marketing insurance products and other investments such as savings accounts and securities. The Company's subsidiaries compete primarily on the basis of the experience, number, accessibility and claims response of their agent representatives, the suitability and variety of their policy portfolios, and premium rates. The Company believes that its subsidiaries generally have good relationships with their agents, and have an adequate variety of policies approved for issuance which are generally competitive based on premium rates and service in the markets served.
REGULATION
The Company's subsidiaries, like other insurers, are subject to comprehensive regulation in the various states in which they are authorized to conduct business. The laws of such states establish supervisory agencies with broad administrative powers, among other things, to grant and revoke licenses for transacting business, to regulate the form and content of policies, to set reserve requirements, to specify the type and amount of investments and to review premium rates for fairness and adequacy. These supervisory agencies periodically examine the business and accounts of the Company's subsidiaries and require such subsidiaries to file detailed annual convention statements prepared in accordance with statutory requirements.
Insurance companies also can be required, under the solvency or guaranty laws of most states in which they do business, to pay assessments (up to prescribed limits) to fund policyholder losses or liabilities of insurance companies that become insolvent. These assessments may be deferred or forgiven under most guaranty laws if they would threaten an insurer's financial strength and, in certain instances, may be offset against future premium taxes. The frequency and amount of such assessments have increased in recent years and are generally expected to increase further in future years. Loyal and Prairie were assessed, and paid, $376,000 in 1994 to various state guaranty funds. The amount of any material future assessments under these laws cannot reasonably be estimated.
Although there are no direct restrictions regarding the payment of dividends by the Company, its life insurance subsidiaries may not, under applicable state law, pay a cash dividend to the Company, except out of that part of their available and accumulated surplus funds which is derived from net gains from operations, calculated according to statutory accounting principles. In addition, the payment of principal and interest under surplus debentures, which are debt securities issued by insurance companies and payable solely out of the issuer's unrestricted surplus, require the prior approval of insurance regulatory authorities. The Company derives substantial portions of its operating funds from management fees, dividends and surplus debenture payments by its insurance subsidiaries.
Generally, under the insurance statutes of most states, state insurance authorities must approve in advance the direct or indirect acquisition of 10% or more of the voting securities of any insurance company chartered in that state. In addition, because the Company owns voting securities of certain life insurance companies, any acquisition of a substantial block of its outstanding voting securities is subject to certain regulatory requirements of the various subsidiaries' domiciliary states.
The National Association of Insurance Commissioners ('NAIC') is an association made up of the officials of each state responsible for the administration of that state's insurance laws. The NAIC and state insurance regulators have become involved in the process of reexamining certain existing insurance laws and regulations and their application to insurance companies. This reexamination has addressed a number of areas, including insurance company investment and solvency issues, risk-based capital ('RBC') guidelines, assumption reinsurance, interpretation of existing laws, the development of new laws, and the circumstances under which dividends may be paid. The NAIC has encouraged states to adopt model NAIC laws on specific topics such as holding company regulations and the definition of extraordinary dividends. It is not possible to predict the future impact of changing state regulation on the operations of the Company.
The RBC rules currently in effect attempt to measure statutory capital and surplus needs based upon the risks in an insurance company's mix of products and investment portfolio. An RBC analysis evaluates the adequacy of statutory capital and surplus in relation to investment and insurance risks associated with: (i) asset quality; (ii) mortality and morbidity; (iii) asset and liability matching; and (iv) other business factors. According to the NAIC, the RBC rules are not intended to be used by state insurance regulators as an absolute minimum or ideal level of required surplus. Rather, they are designed to serve as a tool to assist state insurance regulators in identifying potentially impaired insurance companies on a timely basis. The RBC rules will prompt different levels of regulatory action depending upon the result of RBC analysis for each company.
In states which have adopted the NAIC regulations, the new RBC requirements provide for four different levels of regulatory attention depending on an insurance company's RBC Ratio (its Adjusted Capital compared to its Authorized Control Level, as defined in the regulations). The 'Company Action Level' is triggered if a company's RBC Ratio is less than 200% but greater than or equal to 150%, or if a negative trend has occurred (as defined in the regulations) and the company's RBC Ratio is less than 250%. At the Company Action Level, the company must submit a comprehensive plan to the regulatory authority which discusses proposed corrective actions to improve its capital position. The 'Regulatory Action Level' is triggered if a company's RBC Ratio is less than 150% but greater than or equal to 100%. At the Regulatory Action Level, the regulatory authority will perform a special examination of the company and issue an order specifying corrective actions that must be followed. The 'Authorized Control Level' is triggered if a company's RBC Ratio is less than 100% but greater than or equal to 70%, and the regulatory authority may take any action it deems necessary, including placing the company under regulatory control. The 'Mandatory Control Level' is triggered if a company's RBC Ratio is less than 70%, and the regulatory authority is mandated to place the company under its control.
Based upon the enacted RBC rules, both Loyal and Prairie have strong RBC Ratios (in excess of 500%) as of December 31, 1994.
The Company is registered under the Securities Exchange Act of 1934 and is subject to rules and regulations of the Securities and Exchange Commission. As a company with securities listed on the American Stock Exchange ('AMEX'), the Company is also subject to the rules and policies of the AMEX.
EMPLOYEES
The Company had approximately 327 full-time employees and 2,617 full and part-time agents at December 31, 1994. The various subsidiaries have separate benefit programs for their employees but in general they are covered by contributory major medical insurance and group life insurance plans. In addition, the Company maintains a 401(k) profit sharing savings plan for its employees and the employees of the Company's subsidiaries. See Note 10 to Consolidated Financial Statements. The costs for all these benefits, except profit sharing plans, amounted to approximately $1.7 million in 1994.
ITEM 2.
ITEM 2. PROPERTIES.
The Company's principal executive offices are located in Wayne, Pennsylvania. It leases approximately 4,100 square feet of office space at 640 Lee Road, Suite 303, Wayne, Pennsylvania. The aggregate monthly rental is approximately $8,800.
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 at December 31, 1994 is approximately $3.5 million.
Prairie's Home Office building is located at 440 Mount Rushmore Road, Rapid City, South Dakota. The building contains approximately 44,000 square feet, of which approximately 34,000 square feet are utilized for Company purposes, while the remainder of the building is leased to outside tenants. This six-story building and the underlying real property are subject to mortgage indebtedness (capitalized lease) of approximately $476,000 as of December 31, 1994. The book value of the property at December 31, 1994 is approximately $3.4 million.
Prairie leases marketing and administrative space in several other locations. The aggregate monthly rental for these locations is approximately $4,000.
CSW and IFA lease marketing and administrative space in their respective offices. The aggregate monthly rental for these locations is approximately $6,000.
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 $5,500.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS.
The Company is routinely engaged in litigation incidental to its business. In the judgment of management, no individual case or group of similar cases, net of loss reserves established therefore and giving effect to reinsurance, is likely to result in judgments for amounts material to the financial condition of the Company.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matters were submitted to a vote of the Company's security holders during the fourth quarter of the year ended December 31, 1994.
PART II
ITEM 5.
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
The Company's common stock trades on the American Stock Exchange ('AMEX') under the symbol 'LQ'.
The transfer agent for the Company's common stock is Chemical Bank, Security Holder Relations, P.O. Box 24935, Church Street Station, New York, New York 10249.
The table below presents the high and low sales prices of the Company's common stock on the AMEX during the time periods indicated.
The closing market price of the Company's common stock on March 21, 1995, was $12.00 per share.
At March 21, 1995, there were approximately 10,000 holders of record of the Company's common stock.
The Company has paid no common stock dividends during the two years ended December 31, 1994. It is the policy of the Company to retain its earnings to finance expansion and growth. While the payment of future dividends will rest with the discretion of the Board of Directors and will depend, among other things, upon the Company's earnings, capital requirements and financial condition, the Company presently expects to retain its earnings to facilitate growth, both internally and by acquisition. The Company has no present plans to pay common stock dividends.
The Company's ability to pay common stock dividends may be limited by regulations affecting its insurance subsidiaries. Under applicable insurance laws, the Company's insurance subsidiaries may generally only pay cash dividends out of that part of available surplus which is derived from statutory net gains from operations, unless regulatory approval is obtained. In addition, payments of interest and principal relating to a surplus debenture at one of the Company's insurance subsidiaries also requires prior regulatory approval. See Note 7 to Consolidated Financial Statements and 'LIQUIDITY AND CAPITAL RESOURCES' under Item 7.
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA.
The following selected consolidated financial data of the Company has been derived from the Consolidated Financial Statements of the Company. Certain reclassifications have been made to prior year amounts for comparative purposes.
ITEM 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
The following is an analysis of the results of operations and financial condition of Laurentian Capital and its consolidated subsidiaries. The consolidated financial statements and related notes and schedules included elsewhere in the Form 10-K should be read in conjunction with this analysis. Certain reclassifications have been made to prior year amounts for comparative purposes.
OVERVIEW
Laurentian Capital's net income for 1994 was $9.5 million, or $1.22 per share, as compared to net income of $8.2 million, or $1.05 per share, in 1993 and a net income of $6.7 million, or $0.80 per share, in 1992. Excluding the cumulative effect of the adoption of Statement of Financial Accounting Standards No. 109, 'Accounting for Income Taxes' ('SFAS 109'), which contributed $0.4 million to net income in 1993, the Company's net income for 1993 was $7.8 million, or $1.00 per share.
The 1994 net income of $9.5 million, or $1.22 per share, compares favorably to 1993 net income of $8.2 million, or $1.05 per share. The improvement in net income was due primarily to increased life sales, a lower effective tax rate, and reduced interest expense on the Company's debt. During 1994, the Company refinanced its debt at a lower interest rate and used internal funds to repay $10 million of the debt.
The 1993 net income of $8.2 million, or $1.05 per share, compared favorably to 1992 net income of $6.7 million, or $0.80 per share. The improvement in net income was due primarily to increased realized capital gains on investments, as well as the Company's successful implementation of expense reduction programs.
The 1992 net income of $6.7 million, or $0.80 per share, compared favorably to 1991 net income of $5.4 million, or $0.63 per share. The improvement in net income was due primarily to increased investment income and lower death and health claim benefits. In addition, substantially lower levels of realized investment gains were included in 1992 net income than in the prior year.
RESULTS OF OPERATIONS
PREMIUM INCOME
The following table sets forth for the periods shown the amount of premium income and the percentage change in each from the prior period:
Premium income improved in 1994 as compared to 1993 due principally to increased life insurance sales at Prairie. This increase is primarily applicable to the pre-need life insurance line of business, where Prairie has benefitted from expanded relationships with funeral directors. In addition, Loyal's cancer indemnity product sales improved over the prior year.
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.
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.
NET INVESTMENT INCOME, REALIZED INVESTMENT GAINS AND OTHER INCOME
The following table sets forth for the periods shown the amount of net investment income, realized investment gains and other income and the percentage increase (decrease) from the corresponding prior periods.
During 1994, there was a decrease of 1.7% in net investment income, realized investment gains and other income as compared to 1993. During 1993 and early 1994, the Company experienced substantial prepayments on its fixed maturity investments as individuals and corporations took advantage of low interest rates and refinanced their debt obligations. These significant prepayments were reinvested at lower interest rates and, as expected, lowered the overall portfolio yield during the year. This decrease during 1994 was partially offset by the Company's sale of its investment in North American National Corporation ('NANC') in the first quarter for a gross realized gain of $1.7 million. Also, partially offsetting the decline in portfolio yield has been an increase in invested assets. The increase in invested assets was partially offset by the Company's payment of $10 million in conjunction with its debt refinancing during 1994.
During 1993, there was an increase of 5.2% in net investment income, realized investment gains and other income as compared to 1992. This increase resulted primarily from a $2.7 million increase in realized investment gains. During 1993, the Company experienced substantial prepayments on its fixed maturity investments as individuals and corporations refinanced their debt obligations. The significant prepayments received in 1993 were reinvested at lower interest rates. The Company's increased level of realized investment gains resulted primarily from the exercise of call provisions on these debt obligations, usually at a premium. Net investment income remained stable as a lower portfolio yield was offset by increased invested assets.
During 1992, there was a decrease of 2.4% in net investment income, realized investment gains and other income as compared to 1991. This decrease resulted primarily from a $3.6 million decline in realized investment gains. During 1992, $4.7 million in other than temporary impairments were recorded, principally to reduce real estate to appraised values, as compared to $0.9 million in 1991. Net investment income in 1992 increased $1.6 million when compared to 1991, due to growth in the Company's invested asset base combined with the accelerated recognition of income on mortgage-backed securities due to increases in prepayment activity.
BENEFITS AND EXPENSES
The following table sets forth for the periods shown the benefits and expenses incurred by the Company as a percentage of premium income:
BENEFITS
Benefits for 1994 decreased as a percentage of premium to 92.1% from 94.7% in 1993. The decrease in benefits was due to a decrease in accident and health insurance benefits incurred by Loyal of approximately $0.9 million. In addition, life insurance benefits at Loyal decreased by approximately $0.7 million due to improved claims experience.
Benefits for 1993 increased as a percentage of premium to 94.7% from 90.4% in 1992. The increase in benefits was due primarily to higher levels of death and health claims in 1993 as compared to 1992. During 1993, the Company achieved sales improvement in single premium funeral related life insurance and cancer indemnity products. Both products have a higher initial benefit to premium ratio than the existing inforce insurance business and substantially account for the increase in benefit ratio.
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.
EXPENSES
Expenses as a percentage of premium income in 1994 decreased to 53.8% as compared to 56.2% in 1993. Interest expense during 1994 was $1.3 million lower than during 1993 due to the refinancing of the Company's debt. The refinanced principal was $10 million less than the debt at December 31, 1993, and the effective interest rate was also lower on the refinanced amount due to the maturity of an Interest Rate Swap Agreement.
Expenses as a percentage of premium income in 1993 decreased to 56.2% as compared to 59.5% in 1992. The decrease was due primarily to continued emphasis on cost containment and reduction as indicated by a $1.7 million decline in selling and administrative expenses.
Expenses as a percentage of premium income in 1992 remained fairly stable when compared to 1991. Following a period of administrative consolidation, operational efficiencies continued during the year.
INCOME TAXES
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.
The Company's effective tax rate for the year ended December 31, 1994 was 24.3%, as compared to 31.5% for the year ended December 31, 1993. The effective tax rate for the year ended December 31, 1994 was lower than the enacted statutory tax rate of 34% due primarily to the reduction in valuation allowances associated with the deferred tax asset related to certain real estate assets sold in 1994, net operating losses utilized in 1994, and temporary differences of the non-life companies. Excluding the effect of these real estate transactions, the effective rate for 1994 would have been marginally higher than the effective rate for 1993.
The Company's effective tax rate has varied considerably in past years. Prior to 1992, one of the primary reasons for these variances was the difference in financial statement and tax reporting groups. For financial statement purposes, the profits and losses of all subsidiaries were reported on a consolidated basis; for tax purposes, Laurentian Capital Corporation filed a separate return, while Loyal and a former subsidiary, Defender, filed a consolidated return, as did Prairie and its subsidiary, Rushmore National Life Insurance Company ('Rushmore'). Filing separate tax group returns caused various effective tax rates to apply to the profits and losses of the financial statement filing group. Beginning in 1992, the Company qualified to file a consolidated life/non-life federal tax return, except that Rushmore and Assured do not qualify to join in the filing of the consolidated Company return until
1995 and 2000, respectively. The Company elected to file one consolidated return and, therefore, the financial reporting and federal tax reporting groups were primarily the same. However, variations in effective tax rates may persist as a result of limitations imposed by the Internal Revenue Code on the utilization of non-life insurance tax losses against life insurance taxable income. For 1992 and prior tax years, under then existing GAAP, effective tax rates also varied as a result of the differences between the tax bases of assets and liabilities and those assigned under purchase accounting ('Purchase Accounting Adjustments'). Pursuant to then existing GAAP, these Purchase Accounting Adjustments were treated as permanent differences. Accordingly, as these differences reversed, they increased or decreased the Company's effective tax rate. For 1993 and subsequent years under SFAS 109, Purchase Accounting Adjustments are treated as temporary differences and changes in these differences will not affect the Company's effective tax rate.
NET INCOME
The following table sets forth for the periods shown the net income and the earnings per share:
The increase in net income for 1994 as compared to 1993 of $1.3 million is due to increased life sales (offset by a decrease in the yield of the investment portfolio), lower benefits and expenses, and a lower effective tax rate. Continued emphasis on cost containment and cost reduction has improved efficiency in the operations during a period of increased selling activity. Expenses were further reduced by $1.3 million as a result of the refinancing of the Company's debt at a lower interest rate which occurred during 1994. The Company also repaid $10 million of debt at the date of refinancing using internal funds.
The increase in net income for 1993 as compared to 1992 of $1.5 million was due to higher realized investment gains, lower operating expenses, recognition of a benefit from the adoption of SFAS 109 and a lower effective tax rate.
The increase in net income for 1992 as compared to 1991 of $1.3 million was due to higher investment income and lower death and health claims experience which offset the lower levels of realized investment gains.
LIQUIDITY AND CAPITAL RESOURCES
The life insurance industry normally produces a positive cash flow from operations and scheduled principal repayments from portfolios of fixed maturity investments (bonds and redeemable preferred stocks) and mortgage loans. This cash flow is used to fund an investment portfolio to finance future benefit payments, which represent long-term obligations reserved for using certain assumed interest rates. Since future benefit payments are primarily long-term obligations, the Company's investments are predominately long-term fixed rate instruments such as bonds which are expected to provide a sufficient return to cover these obligations. The nature and quality of the various types of investments made by a life insurance company must comply with the statutes and regulations imposed by the states in which that company is licensed. These statutes and regulations generally require that securities acquired be investment grade and provide protection for policyholders.
On January 1, 1994, the Company adopted the provisions of Statement of Financial Accounting Standard No. 115, 'Accounting for Certain Investments in Debt and Equity Securities' ('SFAS 115'). 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 designated as fixed maturities held to
maturity. The balance of the Company's fixed maturity portfolio has been designated as available for sale, and must be reported at fair value. The initial effect of the adoption of SFAS 115 on the Company was an increase in stockholders' equity of $4.3 million (or $0.57 per share) as of the adoption date of January 1, 1994. Due to the general decline in the bond market experienced during 1994, the effect of SFAS 115 was to decrease stockholders' equity by $10.5 million (or $1.38 per share), at December 31, 1994.
In accordance with generally accepted accounting principles, all of the Company's investments are reported in the financial statements at either their original or amortized cost or their market value. At December 31, 1994, the fixed maturity investments had an amortized cost of $508.0 million with a market value of $461.8 million, $46.2 million below amortized cost. The Company's investment strategy is to hold its investments to maturity, and accordingly, the Company does not intend to realize the losses on its portfolio which have been generated as a result of increases in interest rates. The Company had $21.4 million in mortgage loans at December 31, 1994, which could reflect a small premium or discount if those mortgage loans had quoted market prices. The basis used for carrying these long-term fixed rate investments is consistent with the basis used in determining the liability for future policy benefits. Since these assets are invested for terms corresponding to anticipated future benefit payments and carry interest rates in excess of the assumed reserve interest rates, and because they produce predictable cash flows independent of premium income, they should be sufficient to fund the Company's future benefit payments in the ordinary course of business without any need for liquidation prior to maturity.
The Company holds a substantial component of its investment portfolio in mortgage-backed securities and collateralized mortgage obligations (collectively 'MBS'). At the end of 1994, the book value of the total investment in MBS amounted to $437 million, or 75% of total investments. These are instruments collateralized by pools of residential and commercial mortgages, which return interest and principal payments to the investor. Approximately 27% of the Company's MBS holdings are U.S. government agency securities (GNMA, FNMA and FHLMC), which carry either a direct government or a quasi-government guarantee and are rated AAA in terms of quality. The Company also owns non-agency MBS, issued by major U.S. financial institutions, which are rated AAA, AA or A. Non-agency MBS are credit-enhanced in order to achieve a high rating. The form of the credit enhancement is generally a senior/subordinated structure, a limited corporate guarantee from a large financial institution or a letter of credit from a major commercial bank. Historically, residential mortgages in the U.S. have had a very low default rate and the Company's non-agency MBS are well-diversified geographically. Thus, the Company is protected against adverse regional economic conditions. Mortgage-backed securities typically yield more than corporate bonds of similar maturity. MBS also are not subject to so-called event risk, which can cause investment grade bonds of a corporation to become 'junk', as a result, for example, of a leveraged acquisition. In addition, MBS are generally liquid issues with major brokerage houses providing ready markets. However, MBS are subject to prepayment and extension risk which can adversely affect their yield and expected maturity.
With the significant decline in interest rates during the second half of 1992 and the first three quarters of 1993, the Company experienced a substantial increase in the level of prepayments associated with its investments in MBS during 1993 and early 1994. The total prepayments received on the MBS portfolio amounted to $52.7 million during 1994, compared to $137.3 million during 1993. Amounts received associated with these prepayments were accounted for as adjustments to investment yield. The Company experienced a decline in portfolio yield as a result of reinvesting these proceeds into similar investments at lower interest rates. The Company's investment strategy for MBS is to emphasize certain types of MBS that have a more predictable pattern of repayment and therefore reduce risk of a loss of a portion of the original principal due to changes in interest rates. A substantial portion of the MBS portfolio consists of Planned Amortization Class ('PAC'), Target Amortization Class ('TAC') and subordinate instruments. These investments are designed to amortize in a more predictable manner by shifting the primary risk for prepayment of the underlying collateral to investors in other tranches of the MBS. No loss of principal has occurred on the Company's MBS portfolio in recent years. The Company's investment policy has been to avoid investments in highly leveraged
derivative instruments. For instance, the Company has not owned such mortgage-backed instruments as interest only, principal only, or inverse floaters.
Policy loans at December 31, 1994 were $50.6 million. Policy loan rates for the Company's policies are generally in the 3 1/2% to 8% range, at least equal to the assumed interest rates used for future policy benefits; accordingly, policy loans should not result in negative cash flow.
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 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 $3.6 million in 1994, $4.9 million in 1993, and $5.0 million in 1992.
As of December 31, 1993, the Company's indebtedness under its then outstanding Revolving Underwriting Facility ('RUF') amounted to $54.8 million, which was due on April 25, 1994. On April 25, 1994, the Company entered into a five year revolving credit facility in the amount of $45 million to refinance part of the RUF. The new credit facility, together with the payment of $10 million by the Company, satisfied the repayment of the RUF. Pursuant to the terms of the new credit facility, the Company will pay interest at a variable rate equal to 1.125% above the London Interbank Offered Rate. There are covenants relating to the Company's activities and financial condition, including a requirement that the Company maintain a minimum net worth, as defined under the new credit facility, of $75 million. In connection with the new credit facility, DLFC has agreed, for the benefit of the lenders, to maintain the minimum net worth at the greater of $75 million and the amount of debt outstanding.
The Company issued approximately 58,000 shares of its Series A Preferred Stock on July 7, 1987. The preferred stock is subject to mandatory redemption provisions which provide that no more than 80% of the original issue will be outstanding at the end of the sixth year after issuance, with additional reductions of 20% of the original issue being required in each of the following four years. During 1994, the Company redeemed 8,524 shares of the preferred stock at $100 per share, in accordance with the mandatory redemption provision, and subsequently retired the stock. In order to satisfy the 1995 mandatory redemption provision, the Company must redeem 9,832 additional shares.
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, 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. The maximum dividend distribution which can be made to the Company by Loyal during 1995 without prior notice or approval is $3.4 million. Upon prior notice to the Division of Insurance of the State of South Dakota ('Division of Insurance'), the maximum dividend distribution which can be made by Prairie States to Prairie National Life Insurance Company ('Prairie National'), a wholly-owned life insurance subsidiary of the Company, during 1995 under current insurance law is $5.6 million. This would then be available to Prairie National to remit interest and principal payments due under its surplus debenture to the Company, subject to prior approval of the state regulatory authorities.
During 1992, the Company restructured its holding in Prairie States. Following approval by the Division of Insurance, Prairie States was sold to Prairie National. As part of the consideration for
Prairie National purchasing Prairie States, 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, 1994, Prairie National exceeded its required level of surplus by $8.1 million. Since April 4, 1992, the date of the restructuring, and through the end of 1994 the Division of Insurance has approved $5.9 million in interest payments associated with the surplus debenture, of which $1.9 million was approved during 1994. Principal payments of $6.5 million were approved by the Division of Insurance during 1994. The effects of these transactions are eliminated in consolidation.
IMPACT OF INFLATION
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.
Inflation has significantly increased the cost of health care. The adequacy of premium rates in relation to the level of health claims is constantly monitored and, where appropriate, premium rates on such policies are increased as policy benefits increase. Failure to make such increases commensurate with health care cost increases may result in a loss from health insurance operations.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
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.
ITEM 9.
ITEM 9. DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.
The Company has not had a disagreement with its accountants on any matters of accounting principles or practices or financial statement disclosure which is required to be reported in response to this Item.
PART III
ITEM 10.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
Information with respect to the directors and executive officers of the Company is incorporated by reference from the sections captioned 'ELECTION OF DIRECTORS', 'ABOUT THE BOARD OF DIRECTORS' and 'EXECUTIVE OFFICERS' in the Company's definitive proxy statement relating to the Company's 1995 Annual Meeting of Stockholders. The proxy statement will be filed with the Securities and Exchange Commission by the Company within the time contemplated by General Instruction G(3) of this Form 10-K or the information required by this Item 10 will be filed within such time by amendment of this Form 10-K.
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION.
Information with respect to the executive officers of the Company is incorporated by reference from the sections captioned 'EXECUTIVE COMPENSATION' and 'OTHER COMPENSATION' in the Company's definitive proxy statement relating to the Company's 1995 Annual Meeting of Stockholders. The proxy statement will be filed with the Securities and Exchange Commission by the Company within the time contemplated by General Instruction G(3) of this Form 10-K or the information required by this Item 11 will be filed within such time by amendment of this Form 10-K.
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
Information with respect to ownership of the Company's stock by certain beneficial owners and by the Company's management is incorporated by reference from the section captioned 'Security Ownership of Certain Beneficial Owners and Management' in the Company's definitive proxy statement relating to the Company's 1995 Annual Meeting of Stockholders. The proxy statement will be filed with the Securities and Exchange Commission by the Company within the time contemplated by the General Instruction G(3) of this Form 10-K, or the information required by this Item 12 will be filed within such time by amendment of this Form 10-K.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Information with respect to certain relationships and related transactions is incorporated by reference from the sections captioned 'CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS' and 'Compensation Committee Interlocks and Insider Participation' in the Company's definitive proxy statement relating to the Company's 1995 Annual Meeting of Stockholders. The proxy statement will be filed with the Securities and Exchange Commission by the Company within the time contemplated by General Instruction G(3) of this Form 10-K, or the information required by this Item 13 will be filed within such time by amendment of this Form 10-K.
PART IV
ITEM 14.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(a), (d) Financial Statements and Financial Statement Schedules:
A listing of financial statements and financial statement schedules filed as a part of this report is set forth in the 'Laurentian Capital Corporation and Subsidiaries Index to Financial Statements and Schedules' following Part IV hereof.
(b) Reports on Form 8-K:
The Company filed a Form 8-K Current Report dated November 9, 1994, reporting its issuance of a press release announcing that it had engaged Oppenheimer & Co., Inc. as a financial advisor to evaluate various strategies for maximizing shareholder value, including possible business combinations or other transactions.
(c) Listing of Exhibits:
------------------ * Compensatory plan, contract or arrangement.
------------------ * Compensatory plan, contract or arrangement.
SIGNATURE
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.
LAURENTIAN CAPITAL CORPORATION
By: _______/S/__BERNHARD M. KOCH______ Bernhard M. Koch Senior Vice President, Chief Financial Officer, Treasurer and Secretary
Date: March 27, 1995
SIGNATURES
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 date indicated.
LAURENTIAN CAPITAL CORPORATION AND SUBSIDIARIES
FORM 10-K, PART II, ITEM 8 YEAR ENDED DECEMBER 31, 1994
LAURENTIAN CAPITAL CORPORATION AND SUBSIDIARIES INDEX TO FINANCIAL STATEMENTS AND SCHEDULES
All other schedules are omitted as the required information is not applicable or the information is presented in the financial statements or related notes.
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders Laurentian Capital Corporation
We have audited the consolidated financial statements and the financial statement schedules of Laurentian Capital Corporation and Subsidiaries listed in the index on page of this Form 10-K. These financial statements and financial statement schedules are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and financial statement schedules 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 financial statements referred to above present fairly, in all material respects, the consolidated financial position of Laurentian Capital Corporation and Subsidiaries as of December 31, 1994 and 1993 and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 1994 in conformity with generally accepted accounting principles. In addition, in our opinion, the financial statement schedules referred to above, when considered in relation to the basic financial statements taken as a whole, present fairly, in all material respects, the information required to be included therein.
As discussed in Notes 1 and 5 to the consolidated financial statements, the Company changed its method of accounting for certain investments in debt and equity securities in 1994 and changed its method of accounting for income taxes in 1993.
COOPERS & LYBRAND L.L.P.
Philadelphia, Pennsylvania February 17, 1995
LAURENTIAN CAPITAL CORPORATION CONSOLIDATED BALANCE SHEETS (DOLLARS IN THOUSANDS)
See notes to consolidated financial statements.
LAURENTIAN CAPITAL CORPORATION CONSOLIDATED STATEMENTS OF OPERATIONS (DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
See notes to consolidated financial statements.
LAURENTIAN CAPITAL CORPORATION CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DOLLARS IN THOUSANDS)
See notes to consolidated financial statements.
LAURENTIAN CAPITAL CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS (DOLLARS IN THOUSANDS)
See notes to consolidated financial statements.
LAURENTIAN CAPITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(ALL DOLLAR AMOUNTS IN TABLES ARE IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization And Principles Of Consolidation -- The consolidated financial statements include, after intercompany eliminations, Laurentian Capital Corporation (individually or collectively with its subsidiaries, the Company), and its wholly-owned subsidiaries, principally Loyal American Life Insurance Company (Loyal), and Prairie National Life Insurance Company (Prairie National), a life insurance holding company, which owns Prairie States Life Insurance Company (Prairie States). Prairie States owns Rushmore National Life Insurance Company (Rushmore) and Assured Security Life Insurance Company (Assured). Prairie States acquired Assured during 1994 for $6.7 million in a transaction accounted for as a purchase.
The Imperial Life Assurance Company of Canada (Imperial) directly owned approximately 72% of the Company and Imperial's parent, Laurentian Financial, Inc., directly owned approximately 10% of the Company at December 31, 1994. Laurentian Financial, Inc. is a wholly-owned subsidiary of The Laurentian Group Corporation (Group). Effective January 1, 1994, Group became a subsidiary of Desjardins Laurentian Financial Corporation (Desjardins Laurentian). The ultimate owner of Desjardins Laurentian is La Confederation des caisses popularies et d'economie Desjardins du Quebec.
Basis of Presentation -- The accompanying financial statements have been prepared on the basis of generally accepted accounting principles (GAAP), which vary from accounting principles used by its subsidiaries to prepare financial statements filed with state insurance departments.
Investments -- Effective January 1, 1994, the Company adopted the provisions of Statement of Financial Accounting Standards Number 115, 'Accounting for Certain Investments in Debt and Equity Securities' (SFAS 115). SFAS 115 requires that debt securities are to be classified as either held to maturity (carried at amortized cost), available for sale (carried at market value with net unrealized gains or losses reported in stockholders' equity), or trading (carried at market value with unrealized gains or losses reported in net income).
The Company believes that it has the ability and intent to hold to maturity its debt security investments that are classified as held to maturity. The Company also recognizes that there may be circumstances where it may be appropriate to sell a security prior to maturity in response to changes in a variety of circumstances. In recognizing the need for the flexibility to respond to such changes, the Company has designated a portion of its fixed maturity portfolio as available for sale. The Company has not classified any of its fixed maturity securities as trading.
SFAS 115 does not permit a retroactive application to prior years' financial statements. The effect of adopting SFAS 115 was to increase the carrying amount of fixed maturity securities classified as available for sale by $6.5 million, increase deferred income taxes payable by $2.2 million, and increase stockholders' equity by $4.3 million (or $0.57 per share), as of January 1, 1994. Due to the general decline in the bond market experienced during 1994, the carrying amount of fixed maturities available for sale, deferred income taxes payable and stockholders' equity decreased by $15.9 million, $5.4 million and $10.5 million (or $1.38 per share), respectively, at December 31, 1994.
Investments are reported as follows:
- Fixed maturities held to maturity (bonds, notes and redeemable preferred stocks) -- at cost, adjusted for amortization of premium or discount and other than temporary impairments in market value. The Company has the ability and intent to hold such investments to maturity and accordingly, reports these investments at amortized cost.
- Fixed maturities available for sale (bonds, notes and redeemable preferred stocks) -- at current market value, adjusted for other than temporary impairments in market value.
- Equity securities (common and nonredeemable preferred stocks) -- at current market value, adjusted for other than temporary impairments in market value.
- Mortgage loans on real estate -- at unpaid balances, net of valuation allowances and adjusted for amortization of premium or discount.
LAURENTIAN CAPITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(ALL DOLLAR AMOUNTS IN TABLES ARE IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) - Investment real estate -- at cost, net of valuation allowances and less allowances for depreciation computed on the straight-line method.
- Policy loans -- at unpaid balances.
- Short-term investments -- at cost, which approximates market.
Realized gains and losses on sales of investments are recognized in net income. The cost of investments sold is determined on a specific identification basis. Temporary market value changes in equity securities and fixed maturities available for sale are reflected as unrealized gains or losses directly in stockholders' equity net of related income taxes and, accordingly, have no effect on net income. The rate of amortization of discount or premium on mortgage-backed securities is adjusted to reflect the current rate of prepayments on the related securities. The amortization adjustments are recorded as net investment income in the period that the rate of prepayment changed.
Deferred Policy Acquisition Costs -- The costs of acquiring new business, which vary with and are directly related to the production of new business, have been deferred to the extent that such costs are deemed recoverable. Such costs include commissions, certain costs of policy issuance and underwriting, and certain variable marketing expenses.
Costs deferred related to traditional life and health insurance are amortized over the premium paying period of the related policies, in proportion to the ratio of annual premium revenues to total anticipated premium revenues. Such anticipated premium revenues were estimated using the same assumptions used for computing liabilities for future policy benefits.
Costs deferred related to universal life insurance and deferred annuity products are being amortized over the lives of the policies, in relation to the present value of estimated gross profits.
Included in deferred policy acquisition costs are amounts representing the present value of future profits on business in force of acquired insurance subsidiaries, which represents the portion of the cost to acquire such subsidiaries that is allocated to the value of the right to receive future cash flows from insurance contracts existing at the dates of acquisition. These amounts are amortized with interest over the estimated remaining life of the acquired policies.
Costs In Excess Of Net Assets Of Business Acquired -- The costs in excess of net assets of business acquired are being amortized to expense on a straight-line basis over periods ranging from twenty-five to forty years.
Property And Equipment -- Property and equipment is reported at cost. Depreciation is charged to operations over the estimated useful lives of the assets using the straight-line method.
Cash -- For purposes of reporting cash flows, cash includes all cash and short-term deposits available on demand, including certificates of deposit with an initial term to maturity of three months or less.
Policy Liabilities -- Liabilities for future policy benefits of traditional ordinary life policies are computed using a net level premium method including assumptions as to investment yields, mortality, withdrawals, and other assumptions commensurate with the Company's past experience, modified as necessary to reflect anticipated trends, including possible unfavorable deviations. The liability for future policy benefits for universal life policies and deferred annuities is equal to the accumulated fund balance including interest credits at rates declared by the Company. Interest rate assumptions range from 4.25% to 10%. Assumed mortality and withdrawals are based on various industry published tables modified as appropriate for the Company's actual experience. Morbidity and withdrawals are based on actual and projected experience.
LAURENTIAN CAPITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(ALL DOLLAR AMOUNTS IN TABLES ARE IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) Life insurance in force, net of reinsurance, was approximately $2.6 billion as of December 31, 1994 and 1993.
Liabilities for other policy claims and benefits payable include provisions for reported claims and an estimate based on ratios developed through prior experience for claims incurred but not reported.
Assets Held In And Liabilities Related To Separate Accounts -- Investment annuity deposits and related liabilities represent deposits maintained by several banks under a previously offered tax deferred annuity program. The Company receives an annual fee from each bank for sponsoring the program and depositors may elect to purchase an annuity from the Company at which time funds are transferred to the Company.
Premium Revenue And Related Expenses -- For traditional life and accident and health products, premiums are recognized as revenue when legally collectible from policyholders. Policy reserves have been established in a manner which allocates policy benefits and expenses on a basis consistent with the recognition of related premiums and generally results in the recognition of profits over the premium-paying period of the policies.
For interest-sensitive life and universal life products, premiums are recorded in a policyholder account which is classified as a liability. Revenue is recognized as amounts are assessed against the policyholder account for mortality coverage and contract expenses. Surrender benefits reduce the account value. Death benefits are expensed when incurred, net of the account value.
For investment type contracts, principally deferred annuity contracts, premiums are treated as policyholder deposits and are recorded as liabilities. Benefits paid reduce the policyholder liability. Revenues for investment products consist of investment income, with profits recognized as investment income earned in excess of the amount credited to the contracts. Reserves for these contracts represent the premiums received, plus accumulated interest. Contract benefits that are charged to expense include benefit claims incurred in excess of related contract values, and interest credited to contract values.
Income Taxes -- Effective January 1, 1993, the Company adopted Statement of Financial Accounting Standards No. 109, 'Accounting for Income Taxes' (SFAS 109). This statement requires the use of the asset and liability method of accounting for deferred income taxes. Under the asset and liability method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to temporary differences between the financial statement carrying amounts and their respective tax bases. Deferred tax assets and liabilities are measured by applying enacted statutory tax rates expected to apply to taxable income in the years in which those deferred tax assets and liabilities are expected to be recovered or settled. Under SFAS 109, the effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that such change is enacted.
Prior years' financial statements have not been restated to reflect the provisions of SFAS 109. The adoption of SFAS 109 resulted in a cumulative benefit of $400,000 for the year ended December 31, 1993, or $0.05 per common share.
Reinsurance -- Insurance liabilities are reported gross of the effects of reinsurance. Reinsurance receivables, including amounts related to insurance liabilities, are reported as assets. Estimated reinsurance receivables are recognized in a manner consistent with the liabilities related to the underlying reinsured contracts.
Recently Issued Accounting Standards -- In May 1993, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards No. 114, 'Accounting by Creditors for Impairment of a Loan' (SFAS 114), as amended by SFAS 118, 'Accounting by Creditors for Impairment of a Loan -- Income Recognition and Disclosures' (SFAS 118), which
LAURENTIAN CAPITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(ALL DOLLAR AMOUNTS IN TABLES ARE IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) establishes accounting standards for creditors when a loan is deemed impaired. These statements are primarily applicable to the Company's commercial loan portfolio, as residential loans are excluded. The Company has determined that the adoption of these statements will not have a material effect on the Company's financial position or results of operations, as the Company's impaired loan portfolio is not material. The Company will adopt these statements effective January 1, 1995.
Reclassifications -- Certain reclassifications have been made in the previously reported financial statements to make the prior year amounts comparable to those of the current year.
2. INVESTMENTS
Major categories of net investment income for the years ended December 31 are summarized as follows:
Realized investment gains (losses) for the years ended December 31 are summarized as follows:
Included in realized investment gains (losses) for the years ended December 31 are adjustments for other than temporary impairments to the carrying value of investments, as follows:
LAURENTIAN CAPITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(ALL DOLLAR AMOUNTS IN TABLES ARE IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
2. INVESTMENTS (CONTINUED) The increase (decrease) in unrealized gains (losses) on fixed maturities and equity securities for the years ended December 31 is summarized as follows:
Gross unrealized gains pertaining to equity securities were $0.1 million and $2.4 million and gross unrealized losses were $0.8 million and $0.5 million, before tax effect, at December 31, 1994 and 1993, respectively.
Certain investments, principally fixed maturities and mortgage loans on which the accrual of interest has been discontinued, amounted to $0.2 million and $1.3 million at December 31, 1994 and 1993, respectively.
Certain investments totalling $358.7 million and $324.9 million, principally fixed maturities and mortgage loans, were on deposit with insurance departments of various states for the protection of policyholders at December 31, 1994 and 1993, respectively.
Of the fixed maturity investments, $3.4 million at amortized cost, less other than temporary impairments, were rated as below investment grade as of December 31, 1994. These investments have an associated market value of $3.1 million. As of December 31, 1993, $8.8 million at amortized cost, with an associated market value of $9.1 million, were rated as below investment grade. Most of these securities have been evaluated by the National Association of Insurance Commissioners and found to be suitable for reporting at amortized cost. The Company does not expect these investment holdings to result in a material adverse effect on either the financial condition or results of operations. The Company's investment strategy is to hold fixed income instruments to maturity and to recognize other than temporary impairments on those investments where reduction in amounts to be received at maturity is likely.
The amortized cost and fair values of investments in fixed maturities as of December 31, 1994 are as follows:
Fixed Maturities Held to Maturity
LAURENTIAN CAPITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(ALL DOLLAR AMOUNTS IN TABLES ARE IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
2. INVESTMENTS (CONTINUED) Included in U.S. government obligations are $94.0 million of mortgage-backed securities at amortized cost, with an associated fair value of $81.4 million, of which $67.0 million carry a U.S. government or quasi-government guarantee.
Fixed Maturities Available for Sale
Included in U.S. government obligations are $64.2 million of mortgage-backed securities at amortized cost, with an associated fair value of $62.5 million, of which $50.2 million carry a U.S. government or quasi-government guarantee. Included in obligations of states and political subdivisions are $3.2 million of mortgage-backed securities at amortized cost, with an associated fair value of $2.8 million, which carry guarantees of various states.
The amortized cost and fair value of fixed maturities as of December 31, 1994, by contractual maturity, are as follows. Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.
Fixed Maturities Held to Maturity
LAURENTIAN CAPITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(ALL DOLLAR AMOUNTS IN TABLES ARE IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
2. INVESTMENTS (CONTINUED) Fixed Maturities Available for Sale
The amortized cost and fair values of investments in fixed maturities as of December 31, 1993 are as follows:
Included in U.S. government obligations are $128.5 million of mortgage-backed securities, with an associated fair value of $130.3 million, of which $91.0 million carry a U.S. government or quasi-government guarantee. Included in obligations of states and political subdivisions are $3.3 million of mortgage-backed securities, with an associated fair value of $3.3 million, which carry guarantees of various states.
Proceeds from sales, maturities and repayments of investments in fixed maturities for 1994, 1993 and 1992 totalled $79.6 million, $192.2 million, and $168.3 million, respectively. Related gross investment gains and losses for the period were as follows:
LAURENTIAN CAPITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(ALL DOLLAR AMOUNTS IN TABLES ARE IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
3. OTHER FINANCIAL INSTRUMENTS
The following estimated fair value disclosures are limited to the reasonable estimates of the fair value of the Company's financial instruments, whether or not recognized in the balance sheet. In cases where quoted market prices are not available, fair values are based on estimates using present value or other valuation techniques. Those techniques are significantly affected by the assumptions used, including the discount rate and estimates of future cash flows. In that regard, the derived fair value estimates cannot necessarily be substantiated by comparison to independent markets and, in many cases, could not be realized in immediate settlement of the instrument. The disclosures exclude certain financial instruments. Therefore, presentation of the estimated fair value of assets based on the above methodology without a corresponding revaluation of liabilities associated with insurance contracts can be misinterpreted.
Policy Loans
Policy loans are issued with interest rates that range from 3 1/2% to 8%, depending on the terms of the insurance policy. Future cash flows of policy loans are uncertain and difficult to predict. As a result, management deems it impractical to calculate the fair value of policy loans.
Mortgage Loans and Real Estate
Mortgage loans are valued at unpaid balances, net of valuation allowances and adjusted for amortization of discount or premium. The Company has not been active in mortgage lending for some time, and the carrying value of the loan portfolio has decreased from $73.0 million at December 31, 1986 to the current balance of $21.4 million. Approximately 75% of the portfolio consists of commercial loans. After comparing the yield and maturity make-up of the portfolio with current offerings of mortgage-backed securities (both residential and commercial), the Company believes that the fair value of its mortgage loans approximates its current carrying value. Real estate is valued at cost less accumulated depreciation. Appraisals are obtained on a periodic basis and adjustments are made when necessary to ensure carrying values are not in excess of the underlying market values of the property.
4. DEBT
Debt as of December 31 is summarized as follows:
On April 25, 1994, the Company entered into a revolving credit facility in the amount of $45 million which matures on April 25, 1999 to refinance part of its previously outstanding Revolving Underwriting Facility ('RUF') which matured at that date. The new credit facility, together with the payment of $10 million by the Company, satisfied the repayment of the RUF. Pursuant to the terms of the new credit facility, the Company will pay interest at a variable rate equal to 1.125% above the London Interbank Offered Rate (LIBOR). The debt is collateralized by the Company's stock in one of its insurance subsidiaries. There are covenants relating to the Company's activities and financial condition, including a requirement that the Company maintain a minimum net worth, as defined under the new credit facility, of $75 million.
As of December 31, 1993, the Company's indebtedness under the RUF amounted to $54.8 million. Pursuant to the terms of the RUF, the Company paid interest at a variable rate, with a maximum rate equal to 0.30% above LIBOR. On March 6, 1991, the Company had entered into an Interest Rate Swap Agreement which fixed the LIBOR component of the RUF at 7.94% beginning April 29, 1991 through April 25, 1994.
4. DEBT (CONTINUED)
Interest expense included in the consolidated statements of operations was $3.6 million, $4.9 million, and $5.0 million for 1994, 1993 and 1992, respectively.
Cash paid for interest was $4.0 million, $4.9 million, and $5.3 million for 1994, 1993 and 1992, respectively.
Repayment of the revolving credit facility is scheduled as follows:
5. FEDERAL INCOME TAXES
Deferred tax assets and liabilities computed at the statutory rate related to temporary differences as of December 31 are as follows:
A valuation allowance of $7.2 million and $8.7 million has been established as of December 31, 1994 and 1993, respectively, for certain capital and operating loss carryforwards and temporary differences due to the uncertainty of their eventual realization. The valuation allowance was reduced by $1.5 million during 1994 for the realization of benefits associated with the deferred tax assets related to certain real estate sold during 1994, net operating losses utilized in 1994, and temporary differences of the non-life companies. The valuation allowance was reduced by $0.6 million during 1993 for the realization of benefits associated with the sale of certain real estate assets. The valuation
LAURENTIAN CAPITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(ALL DOLLAR AMOUNTS IN TABLES ARE IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
5. FEDERAL INCOME TAXES (CONTINUED)
allowance against deferred tax assets will be continually evaluated and adjustments will be reflected in the Statement of Operations as an increase or decrease in income tax expense.
For 1992, under previously enacted GAAP, the total provision for federal income tax differed from amounts currently payable due to providing deferred taxes on certain items reported for financial statement purposes in periods which differed from those in which they were reported for tax purposes.
Details of the deferred tax provision for the year ended December 31, 1992 are as follows:
The Company's effective income tax rate varied from the statutory federal income tax rate for the years ended December 31 as follows:
Under previous life insurance company tax laws, a portion of the Company's gain from operations which was not subject to current income taxation was accumulated for tax purposes in memoranda accounts designated as the Policyholders' Surplus Accounts. The aggregate accumulation in these accounts at December 31, 1994 was approximately $8.6 million. The unrecognized deferred tax liability related to this temporary difference is $3.0 million. During 1994, the Company recognized a tax liability of $0.3 million on Prairie States' Policyholders' Surplus Account due to distributions in excess of its Shareholders' Surplus Account balance. With respect to the other Policyholders' Surplus Accounts, should the accumulation in the Policyholders' Surplus Accounts exceed certain stated maximums, or if certain other events occur, all or a portion of the Policyholders' Surplus Accounts may be subject to federal income taxes at rates then in effect. Deferred taxes have not been established for such amounts since the Company does not anticipate paying taxes on the Policyholders' Surplus Accounts.
LAURENTIAN CAPITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(ALL DOLLAR AMOUNTS IN TABLES ARE IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
5. FEDERAL INCOME TAXES (CONTINUED) For federal income tax return purposes, the Company has total estimated unused tax loss carryforwards at December 31, 1994 as follows:
For federal income tax purposes, the Company has total estimated investment tax credit carryforwards of $0.2 million which expire in years 1997 through 1999. The Company has a total estimated alternative minimum tax (AMT) carryforwards of $1.8 million which can be utilized in future tax years to reduce current taxes payable. Utilization of this AMT credit is limited to the excess, if any, of the Company's regular tax liability over its AMT liability. However, this credit can be carried forward indefinitely into future tax years. Included in the tax loss and credit carryforwards are certain amounts that may only be utilized by the company that generated the loss.
The Company recognized tax benefits of $2.7 million in 1992 associated with certain tax loss carryforwards related to previous acquisitions. For 1992, under the then enacted GAAP pronouncements, these benefits were recorded as an adjustment to the purchase price allocation and were reflected as decreases in Deferred Income Taxes, Costs In Excess of Net Assets Acquired, and Deferred Policy Acquisition Costs in the consolidated balance sheets. For 1994 and 1993, under SFAS 109, deferred tax assets have been established for the benefits arising from net loss and credit carryforwards of the Company and its subsidiaries. Future utilization of the net loss and credit carryforwards of the life insurance companies will not affect the Company's effective tax rate in those years because the full tax benefit for these items has been reflected in the financial statements. A portion of the benefit realized from the future utilization of the net losses of the non-life companies will affect the Company's effective tax rates in those years because a valuation allowance has been established against some of these deferred tax assets.
Cash paid for federal income taxes was $1.0 million, $0.3 million, and $0.4 million for 1994, 1993 and 1992, respectively.
6. REDEEMABLE PREFERRED STOCK
The Company has authorized 5 million shares of preferred stock of which approximately 58,000 shares were issued on July 7, 1987. Each share of Series A Redeemable Preferred Stock is entitled to receive cumulative annual dividends of $6 per share. Each share of the Series A Redeemable Preferred Stock was convertible into 3.75 shares of the Company's common stock until July 7, 1994, and is convertible into 2.75 shares until July 7, 1997, subject to adjustment in certain events. The stock has a liquidation preference of $100 per share plus accrued dividends and is subject to mandatory redemption provisions which provide that no more than 80% of the original issue will be outstanding at the end of the sixth year after the issuance, with further reductions of 20% of the original issue being required in each of the following four years. During 1993, the Company completed a tender offer
LAURENTIAN CAPITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(ALL DOLLAR AMOUNTS IN TABLES ARE IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
6. REDEEMABLE PREFERRED STOCK (CONTINUED)
wherein 4,534 shares of the redeemable preferred stock were purchased for $87 per share and subsequently retired. During 1994, the Company redeemed 8,524 shares of the preferred stock at $100 per share, in accordance with the mandatory redemption provision, and subsequently retired the stock. In order to satisfy the 1995 mandatory redemption provision, the Company must redeem 9,832 additional shares by July 7, 1995.
The remaining 4.97 million unissued shares of preferred stock may be divided into series with rights and preferences established at the discretion of the Board of Directors.
7. STOCKHOLDERS' EQUITY AND RESTRICTIONS
Dividend payments to the Company from its insurance subsidiaries are restricted by state insurance law as to the amount that may be paid without prior notice or approval by insurance regulatory authorities. The maximum dividend distribution which can be made to the Company by Loyal during 1995 without prior notice or approval is $3.4 million. Upon prior notice to state regulatory authorities, the maximum dividend distribution which can be made by Prairie States to Prairie National during 1995 under current insurance law is $5.6 million. This distribution would then be available to Prairie National to remit interest and principal payments due under its surplus debenture to the Company, subject to prior approval of the state regulatory authorities. The unpaid balance of the surplus debenture is $24 million at December 31, 1994.
Dividend payments of $4.3 million and $2.1 million were made to the Company by its insurance subsidiaries during the years ended December 31, 1993 and 1992, respectively. Surplus debenture interest and principal payments were $8.4 million, $6.8 million and $1.2 million for the years ended December 31, 1994, 1993 and 1992, respectively.
In connection with the 1989 acquisition of Rushmore, the policyholders of Rushmore are entitled to 90% of the statutory accounting earnings arising from the existing participating business during the ten years after the acquisition. In addition, the statutory surplus which was in existence at the date of acquisition has been distributed to the policyholders.
Approximately 14% of the Company's insurance in force is related to participating insurance policies. A portion of the Company's earnings is allocated to these policies based on excess interest earnings, mortality savings and premium loading experience. Premium income and dividends allocated to participating policies during the past three years were as follows:
LAURENTIAN CAPITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(ALL DOLLAR AMOUNTS IN TABLES ARE IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
8. STOCK OPTION AND OTHER INCENTIVE PLANS
STOCK OPTION PLAN
Under the terms of the Company's Amended and Restated Executive Stock Option Plan (Plan), options to purchase up to the greater of 800,000 shares or 10.3% of the Company's outstanding common stock may be granted to officers and key employees. Options are granted at not less than market value on the date of grant and are exercisable during the term fixed by the Company, but not earlier than six months, nor later than ten years after the date of the grant.
Transactions for 1994, 1993, and 1992 are as follows:
The Plan allows the Company to grant up to 800,000 Rights to officers and key employees. Rights entitle the grantee to receive the appreciation in value of the shares (the difference between market price of a common share at the time of exercise of the Rights and the base price) in cash. The Rights are exercisable during the term fixed by the Company, but in no case sooner than six months or later than ten years after the date of grant.
No Rights were exercised or cancelled during 1994. There are currently 349,044 rights granted at exercise prices ranging from $2.125 to $5.50 per share. Compensation expense recorded in 1994, 1993 and 1992 with respect to these Rights was approximately $1.3 million, $0.7 million and $1.0 million, respectively.
DEFERRED AND INCENTIVE COMPENSATION PLANS
The Company has various incentive and deferred compensation plans administered by the Human Resources Committee of the Board of Directors. In 1994, 1993 and 1992, the Company recognized associated expenses of approximately $680,000, $698,000, and $532,000, respectively.
LAURENTIAN CAPITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(ALL DOLLAR AMOUNTS IN TABLES ARE IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
9. RELATED PARTY MATTERS
The Company paid or accrued approximately $152,000, $209,000, and $214,000, to Desjardins Laurentian and its affiliates for various services in 1994, 1993, and 1992, respectively.
10. EMPLOYEE BENEFIT PLANS
The Company maintains a 401(k) profit sharing savings plan for employees who meet certain eligibility requirements. This plan provides for a Company matching contribution of 25-50% of eligible employee contributions up to 6% of salary. Supplemental Company contributions are provided based on consolidated earnings. The Company contributed approximately $152,000, $148,000 and $98,000 to the 401(k) profit sharing savings plan during 1994, 1993 and 1992, respectively, for employee matching. Effective January 1, 1993, the Company instituted a profit sharing element which provides for contributions by the Company ranging from 2-6% of the annual salary of eligible employees. Additionally, $437,000 and $425,000 were accrued in 1994 and 1993 for the plan's profit sharing element.
In January 1993, the Company filed a standard termination notice with the Pension Benefit Guaranty Corporation (PBGC) for the purpose of terminating the Company's former defined benefit pension plan. The Company ceased to accrue benefits for service cost as of December 31, 1992, and all participants in the plan became fully vested at that date. On March 22, 1993 a favorable determination was issued by the Internal Revenue Service on the plan termination. The Company then distributed plan assets to vested participants in accordance with PBGC established formulas. The Company made funding contributions of $1.1 million during 1993 to satisfy all plan obligations. Distributions were in the form of either a rollover to the Company 401(k) profit sharing savings plan, a purchase of a non-participating annuity contract, or a lump sum cash payment.
11. REINSURANCE
The Company is contingently liable with respect to reinsurance ceded in that the liability for such reinsurance would become that of the Company upon the failure of any reinsurer to meet its obligations under a particular reinsurance agreement. The maximum liability which the Company retains on any one life is $125,000 under ordinary and group policies.
The Company had reinsured approximately $0.8 billion of life insurance in force at December 31, 1994 and 1993. Total premium income ceded during the years ended December 31, 1994, 1993, and 1992 was $5.8 million, $6.8 million, and $6.4 million, respectively. Reinsurance recoveries for the years ended December 31, 1994, 1993 and 1992 were $7.6 million, $6.8 million and $5.7 million, respectively.
Included in reinsurance receivables are $1.1 million and $1.7 million representing amounts recoverable for claims ceded to reinsurers as of December 31, 1994 and 1993, respectively. Included in other liabilities are $0.9 million and $0.4 million representing amounts payable for premiums ceded to reinsurers as of December 31, 1994 and 1993, respectively.
At December 31, 1994 and 1993, reinsurance receivables amounted to $92.2 million and $39.0 million, respectively. Of the 1994 amount, $50.0 million is applicable to reinsurance activities at Assured (which was acquired by Prairie States during 1994) and is associated with two reinsurers. Excluding the amount applicable to Assured, reinsurance receivables with carrying values of $23.8 million and $25.1 million were associated with two additional reinsurers at December 31, 1994 and 1993, respectively.
LAURENTIAN CAPITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(ALL DOLLAR AMOUNTS IN TABLES ARE IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
12. COMMITMENTS AND CONTINGENCIES
LEASES
Other liabilities include a capitalized lease obligation associated with the financing and leasing of Prairie States' home office. In addition, the Company leases office space, data processing equipment and certain other equipment under operating leases.
Aggregate maturities of the capitalized lease obligation and future minimum aggregate rental payments required under non-cancelable operating leases as of December 31, 1994, are as follows:
Rental expense for operating leases was approximately $0.6 million in 1994, $0.7 million in 1993, and $1.7 million in 1992.
FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK
The Company had been a party to financial instruments with off-balance-sheet risk in the normal course of business to reduce its own exposure to fluctuations in interest rates. At December 31, 1993, the Company was a party to a five year Revolving Underwriting Facility (RUF) for maximum unsecured borrowings of $54.8 million maturing in April of 1994. Pursuant to the RUF, the Company paid interest at a variable rate, with a maximum rate equal to 0.30% above the London Interbank Offered Rate (LIBOR). On March 6, 1991, the Company entered into an Interest Rate Swap Agreement (Swap Agreement) to reduce the impact of changes in interest rates on its floating long-term debt. The Swap Agreement was with a commercial bank for a notional amount of $55 million. This agreement effectively changed the Company's interest rate exposure on the RUF from a floating LIBOR rate to a fixed LIBOR rate of 7.94%. The Company had been exposed to interest rate risk in the event of nonperformance by the commercial bank. The Swap Agreement matured at the time of the RUF maturity. The Company has not entered into a Swap Agreement or any other agreement which would effectively fix the interest rate on the Company's refinanced debt.
INVESTMENT PORTFOLIO CREDIT RISK
Bonds:
The Company's bond investment portfolio is predominately comprised of investment grade securities. At December 31, 1994, approximately $3.4 million in debt securities, at amortized cost (0.7% of debt securities) are considered 'below investment grade'. Securities are classified as 'below investment grade' by utilizing rating criteria employed by independent bond rating agencies.
The Company has approximately 88% of its $508 million fixed maturity portfolio (amortized cost basis) invested in assets of either U.S. government agency pass-through mortgages (GNMA, FNMA, or FHLMC) or 'private-label' mortgage-backed securities as of December 31, 1994.
LAURENTIAN CAPITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(ALL DOLLAR AMOUNTS IN TABLES ARE IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
12. COMMITMENTS AND CONTINGENCIES (CONTINUED) Mortgage Loans:
Mortgage loans are primarily related to underlying real property investments in office and apartment buildings and retail/commercial and industrial facilities.
At December 31, 1994, delinquent mortgage loans (i.e., loans where payments on principal and/or interest are over 60 days past due) amounted to $0.4 million, or 1.9% of the loan portfolio. The Company had loans outstanding in the states of Colorado and Florida, with combined principal balances in the aggregate approximating $9.8 million.
LITIGATION
The Company is involved in certain litigation arising in the ordinary course of business. Management does not anticipate any judgments against the Company in excess of liabilities already established which would have a material impact, individually or in the aggregate, on the financial position or results of operations of the Company.
13. STATUTORY FINANCIAL STATEMENTS
Insurance subsidiaries of the Company are required to file statutory financial statements with state insurance regulatory authorities. Accounting principles used to prepare these financial statements differ from GAAP. Consolidated net income and shareholders' equity on a statutory basis for the insurance companies for the years ended December 31 are as follows:
LAURENTIAN CAPITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(ALL DOLLAR AMOUNTS IN TABLES ARE IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
14. SELECTED CONSOLIDATED QUARTERLY FINANCIAL DATA (UNAUDITED)
LAURENTIAN CAPITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(ALL DOLLAR AMOUNTS IN TABLES ARE IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
14. SELECTED CONSOLIDATED QUARTERLY FINANCIAL DATA (UNAUDITED) (CONTINUED)
SCHEDULE III -- CONDENSED FINANCIAL INFORMATION OF REGISTRANT BALANCE SHEETS
LAURENTIAN CAPITAL CORPORATION (PARENT COMPANY) (DOLLARS IN THOUSANDS)
------------------ *Eliminated in consolidation.
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SCHEDULE III -- CONDENSED FINANCIAL INFORMATION OF REGISTRANT STATEMENTS OF OPERATIONS
LAURENTIAN CAPITAL CORPORATION (PARENT COMPANY) (DOLLARS IN THOUSANDS)
------------------ *Eliminated in consolidation.
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SCHEDULE III -- CONDENSED FINANCIAL INFORMATION OF REGISTRANT STATEMENTS OF CASH FLOWS
LAURENTIAN CAPITAL CORPORATION (PARENT COMPANY) (DOLLARS IN THOUSANDS)
------------------ *Eliminated in consolidation.
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LAURENTIAN CAPITAL CORPORATION (PARENT COMPANY) NOTES TO CONDENSED FINANCIAL STATEMENTS
The condensed financial statements of Laurentian Capital Corporation (the 'parent company') should be read in conjunction with the Laurentian Capital Corporation and Subsidiaries consolidated financial statements and notes thereto.
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accompanying parent company financial statements reflect only the accounts of Laurentian Capital Corporation. The parent company's investment in its subsidiaries is reflected on the equity basis. Intercompany accounts and transactions have not been eliminated since consolidated financial statements are not presented.
2. RELATED PARTY TRANSACTIONS
During 1992, the Company restructured its holding in Prairie States Life Insurance Company (Prairie). Following approval by the Division of Insurance for the State of South Dakota, 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 parent company. Interest and repayment of principal on the debenture is subject to prior approval by the South Dakota Division of Insurance. The Division of Insurance has approved $1.9 million and $2.2 million in interest payments associated with the surplus debenture for the years ended December 31, 1994 and 1993, respectively. Principal payments of $6.5 million and $4.5 million were approved by the Division of Insurance during 1994 and 1993, respectively.
During 1994 and 1992, the parent company sold equity securities to its insurance subsidiaries at fair market value at the dates of sale. Total proceeds, which consisted of cash and fixed maturities, amounted to $2.4 million and $7.9 million, respectively and resulted in a gain on transfer of $0.1 million in 1994 and a loss on transfer of $1.5 million in 1992. The effects of these transactions were eliminated in consolidation.
S-4
SCHEDULE VI -- REINSURANCE
LAURENTIAN CAPITAL CORPORATION AND SUBSIDIARIES (DOLLARS IN THOUSANDS)
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INDEX OF
EXHIBITS TO
FORM 10-K
ANNUAL REPORT
FOR THE YEAR ENDED DECEMBER 31, 1994
LAURENTIAN CAPITAL CORPORATION
EXHIBIT
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