SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2002, or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Transition Period from to
Commission File Number 2-35669
Southern Security Life Insurance Company
(Exact name of registrant as specified in its Charter)
FLORIDA 59-1231733
(State or other jurisdiction of incorporation (I.R.S. Employer
or organization) Identification Number)
755 Rinehart Road, Lake Mary, Florida 32746
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (407) 321-7113
Securities registered pursuant to Section 12(b) of the Act:
Title of each Class Name of each exchange on which registered
None None
Securities registered pursuant to Section 12(g) of the Act:
Title of each Class Name of each exchange on which registered
None None
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to the filing
requirements for the past 90 days.
X Yes No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Company's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The aggregate market value of the voting stock held by non-affiliates of the
Registrant as of March 28, 2003 was approximately $9,115,415.
As of March 31, 2003, registrant had issued and outstanding 2,003,388 shares of
Common Stock.
DOCUMENTS INCORPORATED BY REFERENCE Portions of the definitive Proxy Statement
for the Registrant's 2002 Annual Meeting of Stockholders' are incorporated by
reference into Part III hereof.
===========================================================================
PART I
Item 1. Business.
Southern Security Life Insurance Company (the "Company") is a legal reserve life
insurance company authorized to transact business in the states of Alabama,
Florida, Georgia, Hawaii, Indiana, Illinois, Kentucky, Louisiana, Michigan,
Missouri, Oklahoma, South Carolina, Tennessee and Texas. It was incorporated
under Florida law in 1966 and was licensed and commenced business in 1969.
During 2002 approximately 43% of the premium income of the Company was from
business in force in Florida, its state of domicile. The Company's only industry
segment is the ordinary life, accident and health, and annuity business.
Effective December 17, 1998, Security National Financial Corporation ("SNFC"),
an SEC registrant, acquired 100% of the assets of Consolidare Enterprises, Inc.
("Consolidare"), which owned 57.4% of the outstanding shares of the Company.
During March 1999, SNFC changed Consolidare's name to SSLIC Holding Company,
Inc.
The Company at present sells universal life policies with various companion
riders as well as traditional life products. The Company's accident and health
insurance business has never been a significant portion of the Company's
business. It does not presently sell industrial life or group life insurance
other than through its participation as a reinsurer in the Servicemen's Group
Life Insurance Program ("SGLI").
The Company introduced its first universal life product in 1986 and currently
has two principal universal life products in force. These universal life
products offer flexibility to the client as well as tax advantages, both
currently and upon the death of the insured. These products allow the Company to
better compete in the current market environment. In excess of 3% and 12% of the
first year premiums collected by the Company in 2002 and 2001, respectively,
were universal life products.
One of the products in the Company's traditional line of life insurance is
10-Pay Whole Life with an Annuity Rider. The savings aspect of the Annuity Rider
is marketed as a tool for parents to help fund their children's higher
education. The product is offered to parents who have children under the age of
25. This represented 64% and 59% of the first year premiums collected in 2002
and 2001, respectively.
The Company introduced in 1996 a new series of products designed for the seniors
market. This new series targets the needs of senior citizens especially as they
plan for their final expenses. These new policies are traditional endowment type
policies. Because they are written to a senior market they are designed to
accommodate adverse health conditions. Because of the size of the policies they
are usually issued with only limited underwriting. The coverage size of the
policy is roughly equivalent to the insured's anticipated funeral costs. This
new series represented 29% and 28% of the first year premiums collected in 2002
and 2001, respectively.
The following table provides information (on a statutory basis) concerning the
amount and percentage of premium income resulting from the principal lines of
insurance written by the Company during the periods indicated:
2002 2001 2000
Amount Percentage Amount Percentage Amount Percentage
Life Insurance-
Ordinary (1)(2) $7,158,696 85% $7,167,157 89% $7,568,550 91%
Individual
Annuities (1) 396,352 5% 149,424 2% 89,623 1%
Life Insurance-
Group (SGLI) 735,987 9% 589,779 7% 497,070 6%
Other -
Accident & Health 123,042 1% 145,134 2% 169,203 2%
$8,414,077 100% $8,051,494 100% $8,324,446 100%
(1) A portion of each of the deposit term policies previously sold by the
Company represents ordinary life insurance and the balance represents an
individual annuity.
(2) The 2002, 2001, and 2000 premium income for life insurance-ordinary are net
of reductions of $794,537, $831,358, and $923,648, respectively, in ceded
premium paid to all reinsurers, including Mega Life.
The following table gives information according to accounting principals
generally accepted in the United States of America concerning operating ratios
of the Company for the periods indicated:
2002 2001 2000
Total Net Insurance Revenues $7,075,257 $6,736,027 $6,698,869
Benefit Costs Paid or Provided:
Amount $5,343,573 $4,482,588 $5,109,411
Ratio to Net Insurance Revenue 75.5% 66.6% 76.3%
Amortization of Deferred Policy
Acquisition Expenses:
Amount $1,969,966 $2,197,399 $1,797,320
Ratio to Net Insurance Revenue 27.8% 32.6% 26.8%
General Insurance Expenses:
Amount $3,678,920 $3,835,165 $3,529,381
Ratio to Net Insurance Revenue 52.0% 56.9% 52.7%
Income (loss) before Income Taxes:
Amount $(82,820) $87,841 $198,365
Ratio to Net Insurance Revenue (1.2)% 1.3% 3.0%
Ratio to Total Revenue and
Investment Income (.8)% .8% 1.9%
Ratio to Equity (.5)% .5% 1.2%
The following table provides information about the Company concerning
changes in life insurance in force during the periods indicated (exclusive
of accidental death benefits):
2002 2001 2000
(In thousands except lapse ratios)
Total life insurance in force
at beginning of period:
Ordinary Whole Life and
Endowment-Participating $ 180 $ 30 238
Ordinary Whole Life and
Endowment-Non-Participating 708,789 732,433 892,962
Term 72,752 78,770 3,646
Reinsurance Assumed 786,273 558,575 558,571
---------- ---------- ----------
Total $1,567,994 $1,369,808 $1,455,417
---------- ---------- ----------
Additions (including reinsurance assumed):
Ordinary Whole Life and
Endowment-Participating $ -- $ -- $ --
Ordinary Whole Life and
Endowment-Non-Participating 52,633 55,785 60,589
Term 1,390 2,487 --
Reinsurance Assumed 10,352 250,240 4,121
---------- --------- ----------
Total $ 64,375 $ 308,512 $ 64,710
---------- --------- ----------
Terminations:
Death $ 3,550 2,822 $ 2,313
Lapse and Expiry 17,888 21,875 22,398
Surrender 83,064 97,483 125,086
Other 1,089 (11,854) 522
---------- --------- ----------
Total $ 105,591 $ 110,326 $ 150,319
---------- --------- ----------
Life Insurance in force at end of period:
Ordinary Whole Life and
Endowment-Participating $ 2,205 $ 180 $ 30
Ordinary Whole Life and
Endowment-Non-Participating 659,718 708,789 732,433
Term 69,135 72,752 78,770
Reinsurance Assumed 795,720 786,273 558,575
---------- --------- ----------
Total 1,526,778 1,567,994 1,369,808
Reinsurance Ceded (164,248) (179,242) (210,365)
---------- ---------- ----------
Total after Reinsurance Ceded $1,362,530 $1,388,752 $1,159,443
========== ========== ==========
Lapse Ratio (Reflecting termina-
tion by surrender and lapse;
ordinary life insurance only): 11.9% 13.8% 16.1%
The Company invests and reinvests portions of its funds in securities,
which are permitted investments under the laws of the State of Florida, and
part of its revenue is derived from this source. Generally, securities
comprising permitted investments include obligations of Federal, state and
local governments; corporate bonds and preferred and common stocks; real
estate mortgages and certain leases. The following table summarizes certain
information regarding the Company's investment activities:
Average Gross Net
Fiscal Investment Investment Investment Net
Year Assets (1) Income(2) Income (3) Yield (4)
- ----- ----------- ------------ ------------ -----------
2002 $51,758,382 $3,846,090 $3,835,420 7.41%
2001 $50,560,334 $3,876,422 $3,866,966 7.65%
2000 $50,444,329 $3,959,061 $3,935,607 7.80%
(1) Computed by summing the beginning and ending investment and cash balances
and dividing by 2.
(2) Excludes investment gains and losses.
(3) Net of investment expense and before income taxes.
(4) Computed on an annualized basis. Represents ratio of net investment income
to average invested assets.
The Company continues its activities as a qualified lender under the Federal
Family Educational Loan Program. Through this program the Company makes various
types of student and parent loans available. All student loans made by the
Company are guaranteed by the Federal Government. As it has in the past, the
Company sells these student loans on a periodic basis to the Student Loan
Marketing Association ("SLMA") thereby keeping these funds liquid.
The Company presently sells its policies on a general agency basis through a
field force consisting of approximately 161 agents. All such agents are licensed
as agents of, and sell for, the Company and are independent contractors who are
paid exclusively on a commission basis for sales of the Company's policies. Some
of the Company's agents are part-time insurance agents. Most of the Company's
agents are associated with Insuradyne Corporation, a wholly-owned subsidiary of
Security National Financial Corporation. See "Certain Relationships and Related
Transactions" in item 13, Part III of this Report.
Effective January 1, 1999, the Company entered into an Administrative Services
Agreement with its ultimate parent Security National Financial Corporation
(Security National). Under the terms of the Administrative Services Agreement,
all of the Company's employees became employees of Security National.
Administrative functions previously performed by the Company are now being
furnished to the Company under this Agreement. The Company will pay to Security
National $250,000 per month or $3 million per year for the Administrative
services.
Section 624.408 of the Florida Statutes requires a stock life insurance company
to maintain minimum surplus on a statutory basis at the greater of $1,500,000 or
four percent of total liabilities. The Company's required statutory minimum
surplus calculated in accordance with this section is approximately $1,874,000.
If the capital and surplus of the Company computed on such basis should fall
below that amount, then the Company's license to transact insurance business in
the State of Florida, the Company's most significant market, could be revoked
unless the deficiency is promptly corrected. As of December 31, 2002, the
Company had statutory capital and surplus of $8,582,968, well in excess of the
required minimum.
The Risk-Based Capital for Life and/or Health Insurers Model Act (the "Model
Act") was adopted by the National Association of Insurance Commissioners (NAIC)
in 1992. The main purpose of the Model Act is to provide a tool for insurance
regulators to evaluate the capital resources of insurers as related to the
specific risks, which they have incurred and is used to determine whether there
is a need for possible corrective action. The Model Act or similar regulations
may have been or may be enacted by the various states.
The Model Act provides for four different levels of regulatory action, each of
which may be triggered if an insurer's Total Adjusted Capital is less than a
corresponding "level" of Risk-Based Capital ("RBC").
The "Company Action Level" is triggered if an insurer's Total Adjusted
Capital is less than 200% of its "Authorized Control Level RBC" (as defined
in the Model Act), or less than 250% of its Authorized Control Level RBC
and the insurer has a negative trend ("the Company Action Level"). At the
Company Action Level, the insurer must submit a comprehensive plan to the
regulatory authority of its state of domicile, which discusses proposed
corrective actions to improve its capital position.
The "Regulatory Action Level" is triggered if an insurer's Total Adjusted
Capital is less than 150% of its Authorized Control Level RBC. At the
Regulatory Action Level, the regulatory authority will perform a special
examination of the insurer and issue an order specifying corrective actions
that must be followed.
The "Authorized Control Level" is triggered if an insurer's Total Adjusted
Capital is less than 100% of its Authorized Control Level RBC, and at that
level the regulatory authority is authorized (although not mandated) to
take regulatory control of the insurer.
The "Mandatory Control Level" is triggered if an insurer's Total Adjusted
Capital is less than 70% of its Authorized Control level RBC, and at that
level the regulatory authority must take regulatory control of the insurer.
Regulatory control may lead to rehabilitation or liquidation of an insurer.
Based on calculations using the NAIC formula as of December 31, 2002, the
Company was well in excess of all four of the control levels listed.
The industry in which the Company is engaged is highly competitive. There are in
excess of 850 life insurance companies licensed in Florida, where a substantial
amount of the Company's premium income is produced, and there are comparable
numbers of insurance companies licensed in Alabama, Georgia, Hawaii, Illinois,
Indiana, Kentucky, Louisiana, Michigan, Missouri, Oklahoma, South Carolina,
Tennessee and Texas. Many of the Company's competitors have been in business for
longer periods of time, have substantially greater financial resources, larger
sales organizations, and have broader diversification of risks. A large number
of the Company's competitors engage in business in many states and advertise
nationally while the Company conducts its business on a regional basis. The
Company is not a significant factor in the life insurance business in any state
where the Company does business.
The states of Alabama, Florida, Georgia, Hawaii, Illinois, Indiana, Kentucky,
Louisiana, Michigan, Missouri, Oklahoma, South Carolina, Tennessee and Texas
require that insurers secure and retain a license or a certificate of authority
based on compliance with established standards of solvency and demonstration of
managerial competence. The Company, like other life insurers, is subject to
extensive regulation and supervision by state insurance regulatory authorities.
Such regulation relates generally to such matters as minimum capitalization, the
nature of and limitations on investments, the licensing of insurers and their
agents, deposits of securities for the benefit and protection of policyholders,
the approval of policy forms and premium rates, periodic examination of the
affairs of insurance companies, the requirement of filing annual reports on a
specified form and the provision for various reserves and accounting standards.
The Company reinsures or places a portion of its insured risks with other
insurers. Reinsurance reduces the amount of risk retained on any particular
policy and, correspondingly, reduces the risk of loss to the Company, thus
giving it greater financial stability. Reinsurance also enables the Company to
write more policies and policies in larger amounts than it would otherwise
consider prudent. On the other hand, reinsurance potentially reduces earnings,
since a portion of the premiums received must be paid to the insurers assuming
the reinsured portion of the risk.
The Company currently cedes its new reinsurance to Businessmen's Assurance
Company ("BMA") and the Reinsurance Company of Hannover, both of which are
unaffiliated reinsurers. Under the terms of the reinsurance agreements, the
Company cedes all risks in excess of the Company's current retention limits.
The Company currently retains a maximum of $75,000 on any one life and lesser
amounts on substandard risks.
Reinsurance for policy amounts in excess of the Company's retention limits is
ceded on a renewable term basis, under which the amount reinsured normally
decreases annually by the amount of increase in the policy reserve. In addition,
the Company has coinsurance agreements with several insurers, under which
premiums are shared based upon the share of the risk assumed.
The Company remains directly liable to policyholders for the full amount of all
insurance directly written by it, even though all or a portion of the risk is
reinsured. Reinsurers, however, are obligated to reimburse the Company for the
reinsured portion of any claims paid. Consequently, if any reinsurer becomes
insolvent or is otherwise unable to make such reimbursement, the Company would
suffer an unexpected loss. The Company has no reason to believe that any of its
reinsurers will be unable to perform their obligations under existing
reinsurance agreements.
On December 31, 1992, the Company entered into a Coinsurance Reinsurance
Agreement with United Group Insurance Company ("UGIC"), now Mega Life. In this
agreement, UGIC agreed to indemnify and the Company agreed to transfer risk to
UGIC in the amount of 18% of all universal life premium paying polices which
were in force on December 31, 1992. Mega Life is an A- rated company with A.M.
Best and is an authorized reinsurer in the State of Florida.
As a result of the 1992 agreement, the Company will continue to pay reinsurance
premiums to Mega Life while receiving ceding commissions. As a part of the
coinsurance agreement, Mega Life agreed to share in the expenses of death
claims, surrenders, commissions, taxes and the funding of policy loans.
The Company does not assume any reinsurance at the present time other than its
minor participation in Servicemembers' Group Life Insurance and other small
blocks of business.
For reporting to state regulatory authorities the Company is required to
establish policy benefit and other reserves that are calculated in accordance
with statutory requirements and standards of actuarial practice and established
at amounts which, with additions from premiums to be received and assumed
interest on policy reserves compounded annually, are believed to be sufficient
to meet policy obligations as they mature. Life reserves for the Company are
based upon the Commissioner's 1958 and 1980 Standard Ordinary Table of
Mortality, with interest on policies computed at 3%, 3 1/2% , 4 1/2% or 5%.
Annuity reserves are based on the 1983 and 2000 Individual Annuity Mortality
Tables, with interest on policies computed at 6 1/2%, 6 3/4%, 7%, 7 3/4%, or 8
1/4%. Reserves on the annuity portion of the Company's deposit term policies are
computed on the accumulation method. Reserves for universal life policies, which
comprise most of the Company's insurance in force, have been valued by using the
CRVM method.
In preparing financial statements in accordance with U.S. generally accepted
accounting principles, the cost of insurance, expense charges and surrender
charges on universal life products are recognized as revenue. For "Annuity
Contracts" with flexible terms, amounts received from policyholders are not
recognized as revenue but are recorded as deposits in a manner similar to
interest-bearing instruments. Accumulations on these universal life and annuity
contracts are held as "Policyholders' Account Balances." For all other policies
(primarily whole-life) premiums are recorded as revenue and reserves are
calculated using the net level premium method. Accumulation values for these
types of policies are held as benefit reserves. See "Future Policy Benefits" in
Note 1 of the Notes to Financial Statements included in this report.
The Company maintains its own policy files, prepares its own policy forms (with
the assistance of its consulting actuaries), selects risks, calculates premiums,
prepares premium notices, preauthorized checks and commission statements, and
maintains all of its accounting records.
The Company is not affected by Federal, state or local provisions relating to
discharge of materials into the environment. The Company has not spent a
material amount of money during the last three fiscal years on research and
development activities. The business of the Company is not seasonal in nature
and is not dependent on the sources and availability of raw materials. The
business of the Company is not dependent upon a single customer or a few
customers, and no material portion of the Company's business is subject to
renegotiation of profits or termination at the election of the Government.
Item 2. Properties.
The Company's corporate headquarters is located in a two story office building
in Lake Mary, Florida, which is owned by the Company. The Company occupies
approximately one-half of the second floor of the building. One-hundred percent
of the remaining rentable space was leased as of December 31, 2002.
Item 3. Legal Proceedings.
An action was brought against the Company in July 1999 by Dorothy Ruth Campbell
in the Circuit Court of Escambia County, Alabama. The action arose out of a
denial of coverage under a $10,000 insurance policy. The claims were for breach
of contract, bad faith and fraudulent misrepresentation. In the action, Campbell
sought compensatory and punitive damages plus interest. The case was dismissed
by order of summary judgment on January 21, 2003. The appeal time, if appeal is
taken, is 42 days.
An action was brought against Southern Security Life Insurance Company by
National Group Underwriters, Inc. ("NGU") in state court in the State of Texas.
The case was removed by the Company to the United States District Court for the
Northern District of Texas, Fort Worth Division, with Civil No. 4:01-CV-403-E.
An Amended Complaint was filed on or about July 18, 2001. The Amended Complaint
asserts that NGU had a contract with the Company wherein NGU would submit
applications for certain policies of insurance to be issued by the Company. It
is alleged that disputes have arisen between NGU and the Company with regard to
the calculation and payment of certain advanced commissions as well as certain
production bonuses.
NGU alleged that it has been damaged far in excess of the $75,000 minimum
jurisdictional limits of this Court. NGU also seeks attorney's fees and costs as
well as prejudgment and postjudgment interest. A second amended complaint and a
third amended complaint that included a fraud claim were filed. A motion was
filed by the Company to dismiss the third amended complaint, including the fraud
claim. The court denied the motion. The Company has counterclaimed for what it
believes to be a debit balance owing to it pursuant to the relationship between
the parties with said counterclaim seeking a
substantial amount from NGU (the amount potentially subject to reduction as
premiums are received). The Company is also seeking to recover attorney's fees
and costs, as well as punitive damages on three of its causes of action. The
change of venue motion of the Company was denied. Certain discovery has taken
place. The federal case was dismissed per stipulation. The matter was refiled in
Texas state court, Tarrant County, Case No. 348 195490 02. The claims of the
respective parties are essentially the same as set forth above, which claims
include fraudulent inducement relative to entering into a contract, fraud,
breach of contract, breach of duty of good faith and fair dealing, attorneys'
fees and exemplary damages. Further discovery involving the parties is
anticipated. The Company intends to vigorously defend the matter as well as
prosecute its counterclaim.
An action was brought by Bernice Johnson against the Company in May, 2002 in the
Circuit Court of Jefferson County, Alabama, Civil Action No. CV02 2963. The face
amount of coverage under the policy is $15,000. The insured died in July 2001.
Claims are made for non-payment of the policy amount. The claims for relief
include misrepresentation, mental anguish and emotional distress, fraud,
intentional and bad faith non payment of the benefit, intentional and bad faith
failure to investigate the claim for benefits, reckless and negligent and wanton
action relative to misrepresentation and/or concealment of facts, negligence and
the wanton hiring, training and supervision of agents. Compensatory and punitive
damages are sought along with interest and costs. An answer has been filed by
the Company and discovery is in process.
The Company is not a party to any other legal proceedings outside the ordinary
course of the Company's business or to any other legal proceedings, which, if
adversely determined, would have a material adverse effect on the Company or its
business.
Item 4. Submission of Matters to a Vote of Security Holders.
None
PART II
Item 5. Market for the Company's Common Stock and Related Stockholder Matters.
(a) Principal Market and Stock Price. The principal market on which the
Company's common stock is traded is the over-the-counter market. Trading
information with respect to the Company's shares is available through the
National Association of Securities Dealers Automated Quotation (NASDAQ) System
under the symbol SSLI.
The table below presents the high and low market closed prices for the Company's
common stock during the calendar quarters indicated, as quoted in the NASDAQ
system. The quotations represent prices between dealers in securities and do not
include retail markups, markdowns or commissions and do not necessarily
represent actual transactions.
Period (Calendar Year) Price Range
-------------
High Low
----- -----
2001
First Quarter $3.57 $2.98
Second Quarter 3.10 2.97
Third Quarter 3.17 2.98
Fourth Quarter 3.33 2.67
2002
First Quarter 3.50 3.01
Second Quarter 3.30 3.15
Third Quarter 3.65 3.19
Fourth Quarter 4.25 3.21
2003
First Quarter 5.96 3.48
The above prices have been adjusted for the effect of annual stock dividends.
(b) Approximate Number of Holders of Common Stock. There were 1,276 holders
of record of the Company's Common Stock at December 31, 2002.
(c) Dividends. The Company has paid no cash dividends to stockholders
during the past two years, and it is not anticipated that any cash dividends
will be paid at any time in the foreseeable future. The payment of dividends by
the Company is subject to the regulation of the State of Florida Department of
Insurance. Under such regulation an insurance company may pay dividends, without
prior approval of the State of Florida Department of Insurance, equal to or less
than the greater of (a) 10% of its accumulated capital gains (losses) and
accumulated operating income (losses) (i.e. unassigned surplus) or (b) certain
net operating profits (losses) and realized capital gains (losses) of the
Company, as defined in the applicable insurance statutes. In no case can such
dividends be paid if the Company will have less than 115% of the minimum
required statutory surplus as to policyholders after the dividend is paid. The
maximum amount that the Company could pay as a dividend during 2003 pursuant to
such regulation is $75,000.
Item 6. Selected Financial Data.
The following table presents selected financial data (on a GAAP basis)
concerning the Company and its financial results during the periods indicated.
YEARS ENDED DECEMBER 31,
2002 2001 2000 1999 1998
Revenues: ----- ----- ------ ------ -----
Net insurance revenues $ 7,075,257 $ 6,736,027 $ 6,698,869 $ 6,901,546 $ 7,228,227
Net investment income 3,835,420 3,866,966 3,935,607 3,909,373 3,587,147
Realized Gain (loss)
on investments (1,038) -- -- -- 525,181
Other revenue, net -- -- -- 715,128 --
-------------- -------------- -------------- -------------- --------------
Total Revenue 10,909,639 10,602,993 10,634,476 11,526,047 11,340,555
Benefits, Losses & Expenses:
Insurance living benefits 2,144,629 2,186,664 2,243,331 2,614,754 2,483,197
Insurance death benefits 2,583,062 2,360,265 1,549,116 1,917,134 1,529,294
Increase (decrease)
in policy reserves 615,882 (64,341) 1,316,964 (78,324) 334,329
Amortization of deferred
policy acquisition costs 1,969,966 2,197,399 1,797,320 3,029,223 3,484,689
Operating expenses 3,678,920 3,835,165 3,529,380 3,261,134 4,134,686
-------------- -------------- -------------- -------------- --------------
Total expenses 10,992,459 10,515,152 10,436,111 10,743,921 11,966,195
Income (loss) before income
taxes (82,820) 87,841 198,365 782,126 (625,640)
Income tax expense (benefit) (12,254) 16,865 38,105 150,168 (241,907)
-------------- -------------- -------------- -------------- --------------
Net Income (loss) $ (70,566) $ 70,976 $ 160,260 $ 631,958 $ (383,733)
============== ============== ============== ============== ==============
Weighted average number of
shares outstanding
(basic and diluted) 1,979,291 1,907,989 1,907,989 1,907,989 1,907,989
-------------- -------------- -------------- -------------- --------------
Basic income (loss)
per common share $(.04) $.04 $.08 $.33 $(.20)
===== ==== ==== ==== =====
Diluted income (loss)
per common share $(.04) $.04 $.08 $.33 $(.20)
===== ==== ==== ==== =====
Shareholders' Equity $ 17,145,770 $ 16,903,270 $ 16,198,535 $ 15,637,320 $ 15,912,106
============== ============== ============== ============== ==============
Shareholders' equity per
Common share $8.56 $8.86 $8.49 $8.20 $8.34
===== ===== ===== ===== =====
Assets $ 77,264,997 $ 77,479,328 $ 77,125,931 $ 77,208,941 $ 81,205,193
-------------- -------------- -------------- -------------- --------------
Life Insurance:
Insurance in force $1,526,778,000 $1,567,994,000 $1,369,808,000 $1,455,417,000 $1,467,529,000
-------------- -------------- -------------- -------------- --------------
Individual insurance
issued during current
year $ 54,216,000 $ 72,083,000 $ 64,710,000 $ 66,591,000 $ 68,935,000
-------------- -------------- -------------- -------------- --------------
Long term obligation $ 1,000,000 $ 1,000,000 $ 1,000,000 $ 1,000,000 $ 1,000,000
-------------- -------------- -------------- -------------- --------------
Cash Dividends declared per
common share $.00 $.00 $.00 $.00 $.00
==== ==== ==== ==== ====
Item 7. Management's discussion and analysis of financial condition and results
of operation.
Overview
This analysis of the results of operations and financial condition of Southern
Security Life should be read in conjunction with the Selected Financial Data and
Financial Statements and Notes to the Financial Statements included in this
report.
The Company has primarily issued three types of insurance products: universal
life, 10-Pay Whole Life with an Annuity Rider, and final expense products.
Universal life provides insurance coverage with flexible premiums, within
limits, which allow policyholders to accumulate cash values. The accumulated
cash values are credited with tax-deferred interest, as adjusted by the Company
on a periodic basis. Deducted from the cash accumulations are administrative
charges and mortality costs. Should a policy surrender in its early years, the
Company assesses a surrender fee against the cash value accumulations based on a
graded formula.
Final expense products are traditional endowment type insurance policies written
for the senior market. Because the products are written to a senior market they
are designed to accommodate adverse health conditions. Because of the size of
the policies, the products are usually issued with only limited underwriting.
The coverage size of the policy is roughly equivalent to the insured's
anticipated funeral costs.
The 10-Pay Whole Life with an Annuity Rider product is designed for the student
loan market. The savings aspect of the Annuity Rider is marketed as a tool for
parents to help fund their children's higher education. The product is offered
to parents who have children under the age of 25.
The Company established a lead generation program that has been coupled with a
recruiting program for new sales agents to help generate new business.
An additional source of income to the Company is investment income. The Company
invests those funds deposited by policyholders of universal life and annuity
products in debt and equity securities, mortgage loans, and warehouse mortgage
loans on a short-term basis before selling the loans to investors in accordance
with the requirements and laws governing life insurance companies, in order to
earn interest and dividend income, a portion of which is credited back to the
policyholders. Interest rates and maturities of the Company's investment
portfolio play an important part in determining the interest rates credited to
policyholders.
Product profitability is affected by several different factors, such as
mortality experience (actual versus expected), interest rate spreads (excess
interest earned over interest credited to policyholders) and controlling policy
acquisition costs and other costs of operation. The results of any one reporting
period may be significantly affected by the level of death claims or other
policyholder benefits incurred due to the Company's relatively small size.
Significant Accounting Policies and Estimates
The following is a brief summary of our significant accounting policies and a
review of our most critical accounting estimates. For a complete description of
our significant accounting policies, see Note 1 to our financial statements.
In accordance with accounting principles generally accepted in the United States
(GAAP), premiums and considerations received for interest sensitive products
such as universal life insurance and ordinary annuities are reflected as
increases in liabilities for policyholder account balances and not as revenues.
Revenues reported for these products consist of policy charges for the cost of
insurance, administration charges, amortization of policy initiation fees and
surrender charges assessed against policyholder account balances. Surrender
benefits paid relating to these products are reflected as decreases in
liabilities for policyholder account balances and not as expenses. The Company
receives investment income earned from the funds deposited into account
balances, a portion of which is passed through to the policyholders in the form
of interest credited. Interest credited to policyholder account balances and
benefit claims in excess of policyholder account balances are reported as
expenses in the financial statements.
Premium revenues reported for traditional life insurance products are recognized
as revenues when due. Future policy benefits are recognized as expenses over the
life of the policy by means of the provision for future policy benefits.
The costs related to acquiring new business, including certain costs of issuing
policies and other variable selling expenses (principally commissions), defined
as deferred policy acquisition costs, are capitalized and amortized into
expense. For traditional life products, these costs 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 are estimated using the same assumption used for computing
liabilities for future policy benefits and are generally "locked in" at the date
the policies are issued. For interest sensitive products, these costs are
amortized generally in proportion to expected gross profits from surrender
charges and investment, mortality and expense margins. This amortization is
adjusted when the Company revises the estimate of current or future gross
profits or margins. For example, deferred policy acquisition costs are amortized
earlier than originally estimated when policy terminations are higher than
originally estimated or when investments backing the related policyholder
liabilities are sold at a gain prior to their anticipated maturity.
Death and other policyholder benefits reflect exposure to mortality risk and
fluctuate from year to year on the level of claims incurred under insurance
retention limits. The profitability of the Company is primarily affected by
fluctuations in mortality, other policyholder benefits, expense levels, interest
spreads (i.e., the difference between interest earned on investments and
interest credited to policyholders) and persistency. We have the ability to
mitigate adverse experience through adjustments to credited interest rates,
policyholder dividends or cost of insurance charges.
The preparation of financial statements in conformity with GAAP requires
management to make estimates and assumptions that affect the reported amounts of
assets, liabilities, revenues and expenses and the disclosure of contingent
assets and liabilities. It is reasonably possible that actual experience could
differ from the estimates and assumptions utilized which could have a material
impact on the financial statements. The following is a summary of our
significant accounting estimates, and critical issues that impact them:
Fixed Maturities Available for Sale
Securities available-for-sale are carried at fair value, with unrealized holding
gains and losses reported in accumulated other comprehensive income which is
included in stockholders' equity after adjustment for deferred income taxes and
deferred acquisition costs related to universal life products.
The Company uses fair market values based on National Association of Insurance
Commissioners (NAIC) values, versus values associated with normal marketing
pricing services. The Company considers the difference to be immaterial.
The Company is required to exercise judgment to determine when a decline in the
value of a security is other than temporary. When the value of a security
declines and the decline is determined to be other than temporary, the carrying
value of the investment is reduced to its fair value and a realized loss is
recorded to the extent of the decline.
Deferred Acquisition Costs
Amortization of deferred policy acquisition costs for interest sensitive
products is dependent upon estimates of current and future gross profits or
margins on this business. Key assumptions used include the following:
o Yield on investments supporting the liabilities
o Amount of interest or dividends credited to the policies
o Amount of policy fees and charges
o Amount of expenses necessary to maintain the policies, and
o Amount of death and surrender benefits and the length of time the policies
will stay in force.
These estimates, which are revised periodically, are based on historical results
and our best estimate of future expenses.
Future Policy Benefits
Reserves for future policy benefits for traditional life insurance products
requires the use of many assumptions, including the duration of the policies,
mortality experience, expenses, investment yield, lapse rates, surrender rates,
and dividend crediting rates.
These assumptions are made based upon historical experience, industry standards
and a best estimate of future results and, for traditional life products,
include a provision for adverse deviation. For traditional life insurance, once
established for a particular series of products, these assumptions are generally
held constant.
Unearned Revenue
The universal life products the Company sells have a significant policy
initiation fees (front-end load), which are deferred and amortized into revenues
over the estimated expected gross profits from surrender charges and investment,
mortality and expense margins. The same issues that impact deferred acquisition
costs would apply to unearned revenue.
Results of Operations
2002 Compared to 2001
Total revenues increased by $307,000, or 2.9%, to $10,910,000 for fiscal year
2002 from $10,603,000 for fiscal year 2001. Offsetting some of the increase in
total revenues was a $32,000 reduction in net investment income.
Net insurance revenues increased by $339,000, or 5.0%, to $7,075,000 for fiscal
year 2002 from $6,736,000 for fiscal year 2001. This increase was primarily the
result of an increase in traditional life sales.
Net investment income decreased by $32,000, or .8%, to $3,835,000 for fiscal
year 2002 from $3,867,000 for fiscal year 2001. Investment yield slightly
decreased for the fiscal year 2002 from 7.65% in 2001 to 7.41% in 2002.
Benefits and claims increased by $861,000, or 19.2%, to $5,344,000 for fiscal
year 2002 from $4,483,000 for the comparable period in 2001. The increase was
primarily due to an increase in traditional life reserves and death claims.
The amortization of deferred policy acquisition costs decreased by $227,000, or
10.3%, to $1,970,000 for fiscal year 2002 from $2,197,000 for the comparable
period in 2001. The decrease in amortization expense was in line with actuarial
assumptions.
Operating expenses decreased by $156,000, or 4.1%, to $3,679,000 for fiscal year
2002 from $3,835,000 for the same period in 2001. The decrease was primarily due
to a reduction in general office expenses.
2001 Compared to 2000
Total revenues decreased by $31,000, or .3%, to $10,603,000 for fiscal year 2001
from $10,634,000 for fiscal year 2000. Contributing to this decrease in total
revenues was a $68,000 reduction in net investment income.
Net insurance revenues increased by $37,000, or .6%, to $6,736,000 for fiscal
year 2001 from $6,699,000 for fiscal year 2000. This increase was primarily the
result of an increase in traditional life sales.
Net investment income decreased by $68,000, or 1.7%, to $3,867,000 for fiscal
year 2001 from $3,935,000 for fiscal year 2000. Investment yield slightly
decreased for the fiscal year 2001 from 7.8% in 2000 to 7.65% in 2001.
Benefits and claims decreased by $626,000, or 12.2%, to $4,483,000 for fiscal
year 2001 from $5,109,000 for the comparable period in 2000. The decrease was
primarily due to a decrease in traditional life reserves.
The amortization of deferred policy acquisition costs increased by $400,000, or
22.3%, to $2,197,000 for fiscal year 2001, from $1,797,000 for the comparable
period in 2000. The increase in amortization expense was in line with actuarial
assumptions.
Operating expenses increased by $305,000, or 8.6%, to $3,835,000 for fiscal year
2001 from $3,530,000 for the same period in 2000. The increase was primarily due
to increased marketing and legal expenses and an increase in the provision for
doubtful accounts.
Liquidity and Capital Resources
The Company attempts to match the duration of invested assets with its
policyholder liabilities. The Company may sell investments other than those
held-to-maturity in the portfolio to help in this timing; however, to date, that
has not been necessary. The Company purchases short-term investments on a
temporary basis to meet the expectations of short-term requirements of the
Company's products. The Company's investment philosophy is intended to provide a
rate of return which will persist during the expected duration of policyholder
liabilities regardless of future interest rate movements.
The Company's investment policy is to invest predominantly in fixed maturity
securities, mortgage loans, and warehouse mortgage loans on a short-term basis
before selling the loans to investors in accordance with the requirements and
laws governing life insurance companies. Bonds owned by the Company amounted to
$22,412,000 as of December 31, 2002 as compared to $24,521,000 as of December
31, 2001. This represents 45.5% and 49.8% of the total investments as of
December 31, 2002 and December 31, 2001, respectively. Generally, all bonds
owned by the Company are rated by the National Association of Insurance
Commissioners. Under this rating system, there are nine categories used for
rating bonds. At December 31, 2002, and at December 31, 2001, the Company had
investments in bonds in rating categories three through nine, which are
considered non-investment grade of $485,000 and $482,000, respectively.
If market conditions were to cause interest rates to change, the market value of
the fixed income portfolio (approximately $24.852 million) could change by the
following amounts based on the respective basis point swing (the change in
market values were calculated using a modeling technique):
(in millions of dollars) -200bps -100bps +100bps +200bps
Change in Market Value $1.395 $.672 $(.624) $(1.205)
The Company has no other financial instruments that would be materially
susceptible to market risk.
The Company's insurance operations have historically provided adequate positive
cash flow enabling the Company to continue to meet operational needs as well as
increase its investment-grade securities to provide ample protection for
policyholders.
The Company has classified certain of its fixed income securities as available
for sale, with the remainder classified as held to maturity. However, in
accordance with Company policy, any such securities purchased in the future will
be classified as held to maturity. Business conditions, however, may develop in
the future which may indicate a need for a higher level of liquidity in the
investment portfolio. In that event the Company believes it could sell
short-term investment grade securities before liquidating higher-yielding
longer-term securities.
The Company is subject to risk based capital guidelines established by statutory
regulators requiring minimum capital levels based on the perceived risk of
assets, liabilities, disintermediation, and business risk. At December 31, 2002
and December 31, 2001, the Company exceeded the regulatory criteria.
Lapse rates measure the amount of insurance terminated during a particular
period. The Company's lapse rate for life insurance in 2002 was 11.9% as
compared to a rate of 13.8% for 2001.
Effective December 17, 1998, the Company entered into an Administrative Services
Agreement with Security National Financial Corporation ("SNFC"). Under the terms
of the agreement, SNFC has agreed to provide the Company with certain defined
administrative and financial services, including accounting services, financial
reports and statements, actuarial, policyholder services, underwriting, data
processing, legal, building management, marketing advisory services and
investment services. In consideration for the services to be provided by SNFC,
the Company shall pay SNFC an administrative services fee of $250,000 per month,
provided, however, that such fee shall be reduced to zero for so long as the
capital and surplus of the Company is less than or equal to $6,000,000, unless
the Company and SNFC otherwise agree in writing and such agreement is approved
by the Florida Department of Insurance.
The administrative services fee may be increased, beginning on January 1, 2001,
to reflect increases in the Consumer Price Index, over the index amount as of
January 1, 2000. The Administrative Services Agreement shall remain in effect
for an initial term expiring on December 16, 2003. The term of the agreement may
be automatically extended for additional one-year terms unless either the
Company or SNFC shall deliver a written notice on or before September 30, of any
year stating to the other its desire not to extend the term of the agreement.
However, in no event can the agreement be terminated prior to December 16, 2003.
Student loans are a service the Company has historically made available to the
public as well as an investment. While the Company anticipates the seasonal
demand for student loan funds and the subsequent sale of such loans to the
Student Loan Marketing Association (SLMA), there are times when additional funds
are required to meet demand for student loans until such time as the sale
thereof to SLMA can be completed. In 1997 the Company renewed its $5,000,000
line of credit with SLMA until 2007 in order to meet these seasonal borrowing
requirements. The Company made no draws against this line of credit through
December 31, 2002.
The Company began a new association with USA Group, CAP Program in 1996, for the
purpose of making more student loan funds available without increased costs to
the Company. This association aided in eliminating borrowings for 2002 and 2001.
The Company has leased approximately 80% of the available space in its principal
office building and does not anticipate significant capital expenditures to the
rental space.
The Private Securities Litigation Reform Act of 1995 (the "Act") provides a
"safe harbor" for forward-looking statements to encourage companies to provide
prospective information about their businesses without fear of litigation so
long as those statements are identified as forward-looking and are accompanied
by meaningful cautionary statements identifying important factors that could
cause actual results to differ materially from those projected in such
statements. The company desires to take advantage of the "safe harbor"
provisions of the Act.
This Annual Report of Form 10-K contains forward-looking statements, together
with related data and projections, about the Company's projected financial
results and its future plans and strategies. However, actual results and needs
of the Company may vary materially from forward-looking statements and
projections made from time to time by the Company on the basis of management's
then-current expectations. The business in which the Company is engaged involves
changing and competitive markets, which may involve a high degree of risk, and
there can be no assurance that forward-looking statements and projections will
prove accurate.
Factors that may cause the Company's actual results to differ materially from
those contemplated or projected, forecast, estimated or budgeted in such forward
looking statements include among others, the following possibilities: (i)
heightened competition, including the intensification of price competition, the
entry of new competitors, and the introduction of new products by new and
existing competitors; (ii) adverse state and federal legislation or regulation,
including decreases in rates, limitations on premium levels, increases in
minimum capital and reserve requirements, benefit mandates and tax treatment of
insurance products; (iii) fluctuations in interest rates causing a reduction of
investment income or increase in interest expense and in the market value of
interest rate sensitive investment; (iv) failure to obtain new customer, retain
existing customers or reductions in policies in force by existing customers; (v)
higher service, administrative, or general expense due to the need for
additional advertising, marketing, administrative or management information
systems expenditures; (vi) loss or retirement of key executives or employees;
(vii) increases in medical costs; (viii) changes in the Company's liquidity due
to changes in asset and liability matching; (ix) restrictions on insurance
underwriting based on genetic testing and other criteria; (x) adverse changes in
the ratings obtained by independent rating agencies; (xi) failure to maintain
adequate reinsurance; (xii) possible claims relating to sales practices for
insurance products and claim denials and (xiii) adverse trends in mortality and
morbidity.
In June 2001, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards ("SFAS") No. 142, "Goodwill and Other
Intangible Assets". Under SFAS No. 142, amortization of goodwill is precluded;
however, its recoverability must be periodically (at least annually) reviewed
and tested for impairment. Goodwill must be tested at the reporting unit level
for impairment in the year of adoption, including an initial test performed
within six months of adoption. If the initial test indicates a potential
impairment, then a more detailed analysis to determine the extent of impairment
must be completed within twelve months of adoption. SFAS No. 142 also requires
that useful lives for intangibles other than goodwill be reassessed and
remaining amortization periods be adjusted accordingly. The adoption of SFAS
No. 142 did not have a material impact on the Company's financial condition or
results of operations.
In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets". SFAS No. 144 establishes an accounting model for
long-lived assets to be disposed of by sale that applies to all long-lived
assets, including discontinued operations. SFAS No. 144 requires that those
long-lived assets be measured at the lower of carrying amount or fair value less
cost to sell, whether reported in continuing operations or in discontinued
operations. The provisions of SFAS No. 144 are effective for financial
statements issued for fiscal years beginning after December 15, 2001. Adoption
of SFAS No. 144 did not have a material impact on the Company's financial
condition or results of operations.
In April 2002, FASB issued SFAS No. 145, "Rescission of FASB Statements No. 4,
44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections".
Under historical guidance, all gains and losses resulting from the
extinguishment of debt were required to be aggregated and, if material,
classified as an extraordinary item, net of related income tax effect. SFAS
No.145 rescinds that guidance and requires that gains and losses from
extinguishments of debt be classified as extraordinary items only if they are
both unusual and infrequent in occurrence. SFAS No. 145 also amends SFAS No. 13,
"Accounting for Leases" for the required accounting treatment of certain lease
modifications that have economic effects similar to sale-leaseback transactions.
SFAS No. 145 requires that those lease modifications be accounted for in the
same manner as sale-leaseback transactions. The provisions of SFAS No. 145
related to SFAS No. 13 are effective for transactions occurring after May 15,
2002. Adoption of the provisions of SFAS No. 145 related to SFAS No. 13 did not
have a material impact on the Company's financial condition or results of
operations.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated
with Exit or Disposal Activities", which addresses financial accounting and
reporting for costs associated with exit or disposal activities and nullifies
EITF Issue No. 94-3, "Liability Recognition for Certain Employee Termination
Benefits and Other Costs to Exit an Action (including Certain Costs Incurred in
a Restructuring)" ("Issue 94-3"). The principal difference between SFAS No. 146
and Issue 94-3 is that SFAS No. 146 requires that a liability for a cost
associated with an exit or disposal activity be recognized when the liability is
incurred, rather than at the date of an entity's commitment to an exit plan.
SFAS No. 146 is effective for exit or disposal activities after December 31,
2002. Based upon a preliminary review, adoption of SFAS No. 146 would not have a
material impact on the Company's financial condition or results of operations.
In November 2002, the FASB issued Interpretation No. 45, "Guarantor's Accounting
and Disclosure Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others" ("FIN 45"). FIN 45 requires certain guarantees to be
recorded at fair value and also requires a guarantor to make new disclosures,
even when the likelihood of making payments under the guarantee is remote. In
general, the interpretation applies to contracts or indemnification agreements
that contingently require the guarantor to make payments to the guaranteed party
based on changes in an underlying that is related to an asset, liability, or an
equity security of the guaranteed party. The recognition provisions of FIN 45
are effective on a prospective basis for guarantees issued or modified after
December 31, 2002. The disclosure requirements are effective for financial
statements of interim and annual periods ending after December 15, 2002. Based
upon a preliminary review, adoption of FIN 45 not have a material impact on the
Company's financial condition or results of operations.
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation - Transition and Disclosure and Amendment to FASB No. 123", which
provides three optional transition methods for entities that decide to
voluntarily adopt the fair value recognition principles of SFAS No. 123,
"Accounting for Stock Issued to Employees", and modifies the disclosure
requirements of that Statement. Under the prospective method, stock-based
compensation expense is recognized for awards granted after the beginning of the
fiscal year in which the change is made. The modified prospective method
recognizes stock-based compensation expense related to new and unvested awards
in the year of change equal to that which would have been recognized had SFAS
No. 123 been adopted as of its effective date, fiscal years beginning after
December 15, 1994. The retrospective restatement method recognizes stock
compensation costs for the year of change and restates financial statements for
all prior periods presented as though the fair value recognition provisions of
SFAS No. 123 had been adopted as of its effective date. Since the Company does
not intend to voluntarily adopt the fair value provisions of FASB 123, adoption
of SFAS 148 would not have a material effect on the financial condition or
results of operations of the Company. However, pro forma disclosures required by
SFAS 148 will be included in the Company's future interim financial statements
when necessary.
In January 2003, the FASB issued Interpretation 46, "Consolidation of Variable
Interest Entities" ("FIN 46"), which requires an enterprise to assess if
consolidation of an entity is appropriate based upon its variable economic
interests in a variable interest entity (VIE). The initial determination of
whether an entity is a VIE shall be made on the date at which an enterprise
becomes involved with the entity. A VIE is an entity in which the equity
investors do not have the characteristics of a controlling financial interest or
do not have sufficient equity at risk for the entity to finance its activities
without additional subordinated financial support from other parties. An
enterprise shall consolidate a VIE if it has a variable interest that will
absorb a majority of the VIE's expected losses if they occur, receive a majority
of the entity's expected residual returns if they occur or both. A direct or
indirect ability to make decisions that significantly affect the results of the
activities of a VIE is a strong indication that an enterprise has one or both of
the characteristics that would require consolidation of the VIE.
FIN 46 is effective for new VIE's established subsequent to January 31, 2003 and
for existing VIE's as of July 1, 2003. Based upon a preliminary review, the
adoption of FIN 46 would not have a material impact on the Company's financial
condition or results of operations as there were no material VIE's identified
which would require consolidation. FIN 46 further requires the disclosure of
certain information related to VIE's in which the Company holds a significant
variable interest. The Company does not believe that it owns any such interests
that require disclosure at this time.
Item 8. Financial Statements and Supplementary Data.
The following financial statements of Southern Security Life Insurance Company
are included in Part II, Item 8:
Page
Number
Independent Auditors' Report......................................19
Balance Sheet-December 31, 2002 and 2001..........................20
Statement of Operations - years ended
December 31, 2002, 2001 and 2000..................................22
Statement of Shareholders' Equity-years
ended December 31, 2002, 2001 and 2000............................23
Statement of Cash Flows - years ended
December 31, 2002, 2001 and 2000..................................24
Notes to Financial Statements.....................................26
Report of Independent Auditors
Board of Directors & Shareholders
Southern Security Life Insurance Company:
We have audited the accompanying balance sheet of Southern Security Life
Insurance Company as of December 31, 2002 and 2001 and the related statements of
operations, shareholders' equity, and cash flows for the three years in the
period ended December 31, 2002. In connection with our audits of the financial
statements, we have also audited the amounts included in the financial statement
schedules as listed in the accompanying index under Item 14(a). 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 auditing standards generally accepted
in the United States of America. 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 financial position of Southern Security Life
Insurance Company at December 31, 2002 and 2001, and the results of its
operations and its cash flows for the three years in the period ended December
31, 2002, in conformity with accounting principles generally accepted in the
United States of America. Also in our opinion, the related financial statement
schedules, when considered in relation to the basic financial statements taken
as a whole, present fairly, in all material respects, the information set forth
therein.
Tanner + Co.
Salt Lake City, Utah
March 27, 2003
SOUTHERN SECURITY LIFE INSURANCE COMPANY
Balance Sheet
December 31, 2002 and 2001
Assets 2002 2001
Investments (note 3):
Fixed maturities held-to-maturity
(fair value, $4,167,028 and
$3,250,894 at December 31,
2002 and 2001, respectively) $3,971,539 $3,156,650
Securities available-for-sale,
at fair value:
Fixed maturities (cost of
$17,078,241at December 31,
2002 and $20,459,833 at
December 31, 2001) 18,439,961 21,364,731
Equity securities
(cost, $316,293 and
$316,293 at December 31,
2002 and 2001, respectively) 309,218 372,183
Mortgage loans 2,244,597 2,268,292
Policy and student loans 8,027,736 8,181,223
Short-term investments (note 11) 16,283,759 13,860,534
----------- -----------
Total Investments 49,276,810 49,203,613
----------- -----------
Cash and cash equivalents 3,067,284 1,969,055
Accrued investment income 473,789 613,280
Deferred policy acquisition costs
(note 4) 13,391,535 12,974,390
Policyholders' account balances on
deposit with reinsurer (note 7) 6,955,691 7,148,068
Reinsurance receivable (note 7) 279,090 569,163
Receivables:
Agent balances, net 776,244 1,005,535
Other 614,150 722,075
Property and equipment, net,
at cost (note 5) 2,430,404 2,491,062
Investment in affiliate at cost -- 783,087
----------- -----------
Total Assets $77,264,997 $77,479,328
=========== ===========
See accompanying notes to financial statements.
SOUTHERN SECURITY LIFE INSURANCE COMPANY
Balance Sheet (continued)
December 31, 2002 and 2001
Liabilities and Shareholders' Equity 2002 2001
Liabilities:
Policy liabilities and accruals (notes 6 and 7): $3,517,481 $2,901,599
Future policy benefits:
Policyholders' account balances 47,222,857 47,601,259
Unearned revenue 4,551,265 4,694,563
Other policy claims and benefits payable 701,312 1,147,403
Other policyholders' funds, dividend
and endowment accumulations 78,811 64,045
Funds held related to reinsurance
treaties (note 7) 1,334,963 1,379,640
Note payable to related party
(note 9) 1,000,000 1,000,000
Due to affiliated insurance
agency (note 11) 83,941 193,689
General expenses accrued 98,480 93,436
Unearned investment income 355,529 357,322
Other liabilities 111,786 247,665
Income taxes (note 10) 1,062,802 895,437
----------- -----------
Total liabilities 60,119,227 60,576,058
----------- -----------
Shareholders' equity (notes 2,3 and 12):
Common stock, $1 par, authorized
3,000,000 shares; issued and out-
standing, 2,003,388 shares in 2002
and 1,907,989 in 2001 2,003,388 1,907,989
Capital in excess of par 4,267,189 4,011,519
Accumulated other comprehensive
income 871,197 558,131
Retained earnings 10,003,996 10,425,631
----------- -----------
Total shareholders' equity 17,145,770 16,903,270
Commitments and contingencies
(notes 7 and 15) -- --
----------- -----------
Total liabilities and shareholders' equity $77,264,997 $77,479,328
=========== ===========
See accompanying notes to financial statements.
SOUTHERN SECURITY LIFE INSURANCE COMPANY
Statement of Operations
Years ended December 31, 2002, 2001 and 2000
2002 2001 2000
Revenues:
Net insurance revenues $7,075,257 $6,736,027 $6,698,869
Net investment income
(notes 3 and 11) 3,835,420 3,866,966 3,935,607
Realized loss on investments (1,038) -- --
------------ ----------- -----------
Total revenues 10,909,639 10,602,993 10,634,476
------------ ----------- -----------
Benefits, claims and expenses:
Benefits and claims 5,343,573 4,482,588 5,109,411
Amortization of deferred
policy acquisition costs
(note 4) 1,969,966 2,197,399 1,797,320
Operating expenses
(notes 9 and 11) 3,678,920 3,835,165 3,529,380
----------- ----------- -----------
Total benefits, claims
and expenses 10,992,459 10,515,152 10,436,111
----------- ----------- -----------
Income (loss) before
income taxes (82,820) 87,841 198,365
Income tax (benefit) expense
(note 10) (12,254) 16,865 38,105
--------- ----------- -----------
Net income (loss) $ (70,566) $ 70,976 $ 160,260
========= =========== ===========
Basic and diluted net income
(loss) per share
of common stock (note 12) $(.04) $.04 $.08
===== ==== ====
See accompanying notes to financial statements.
SOUTHERN SECURITY LIFE INSURANCE COMPANY
Statement of Shareholders' Equity
Years ended December 31, 2002, 2001 and 2000
Accumulated
Capital other
Common Stock in excess comprehensive Retained
Shares Amount of par income earnings Total
----------- ----------- ------------ -------------- ------------ ------------
Balances, January 1, 2000 1,907,989 $1,907,989 $4,011,519 $(476,583) $10,194,395 $15,637,320
Comprehensive Income (loss):
Net income for the year -- -- -- -- 160,260 160,260
Unrealized appreciation of
securities available for sale -- -- -- 400,955 -- 400,955
---------- ------------ ----------- ---------- ------------ ------------
Total comprehensive gain 561,215
Balances, December 31, 2000 1,907,989 1,907,989 4,011,519 (75,628) 10,354,655 16,198,535
---------- ---------- ---------- ---------- ----------- -----------
Comprehensive Income (loss):
Net income for the year -- -- -- -- 70,976 70,976
Unrealized appreciation of
securities available for sale -- -- -- 633,759 -- 633,759
---------- ----------- ---------- ----------- ------------ -----------
Total comprehensive gain 704,735
-----------
Balances, December 31, 2001 1,907,989 1,907,989 4,011,519 558,131 10,425,631 16,903,270
---------- ----------- ---------- ---------- ----------- -----------
Comprehensive Income (loss):
Net loss for the year -- -- -- -- (70,566) (70,566)
Unrealized appreciation of
securities available for sale -- -- -- 313,066 -- 313,066
----------- ------------ ----------- --------- ------------ -----------
Total comprehensive gain 242,500
-----------
Stock dividend 95,399 95,399 255,670 -- (351,069) --
---------- ----------- ----------- ---------- ------------ -----------
Balances, December 31, 2002 2,003,388 $2,003,388 $4,267,189 $871,197 $10,003,996 $17,145,770
========== =========== ========== ========== =========== ===========
See accompanying notes to financial statements.
SOUTHERN SECURITY LIFE INSURANCE COMPANY
Statement of Cash Flows
Years ended December 31, 2002, 2001 and 2000
2002 2001 2000
Cash flows provided by (used in)
operating activities:
Net income (loss) $(70,566) $70,976 $160,260
Adjustments to reconcile net income
(loss) to net cash provided
by operating activities:
Depreciation and amortization 196,497 270,792 260,956
Net realized loss 1,038 -- --
Loss on disposal of property,
plant & equipment -- -- 1,886
Deferred income taxes (benefit) (16,500) 22,623 (9,426)
Amortization of deferred
policy acquisition costs 1,969,966 2,197,399 1,797,320
Acquisition costs deferred (2,129,428) (1,898,971) (2,206,125)
Change in assets and liabilities
affecting cash provided by operations:
Accrued investment income 139,491 (2,806) (27,566)
Accounts receivable 337,216 (239,665) (78,683)
Reinsurance receivable 290,073 (244,370) 48,666
Other policy claims and
future benefits payable 169,791 502,866 1,356,753
Policyholders'
account balances 2,107,681 2,119,312 2,080,769
Funds held under
reinsurance (44,677) (37,576) (58,296)
Unearned premiums (297,910) (291,269) (331,998)
Dividend and endowment
accumulations 14,766 (8,845) 3,101
Payable to affiliated
insurance agent (109,748) 47,894 (44,096)
Income taxes payable -- (57,470) (46,738)
Other liabilities (132,625) 182,378 (16,125)
---------- ---------- ----------
Net cash provided by
operating activities $2,425,065 $2,633,268 $2,890,658
---------- ---------- ----------
Cash flows from (used in) investing activities:
Purchase of investments:
Purchase of investments
held-to-maturity $ (1,784,283) $ -- $(2,606,749)
Purchase of equity securities -- -- (916,815)
Proceeds from maturity of
held-to maturity
securities 983,820 2,220,802 1,210,272
Proceeds from maturity of
available-for-sale
securities 3,300,000 2,814,816 1,225,522
Proceeds from sale of available-
for-sale securities
(equity and
fixed maturity) 782,048 794,356 --
Purchase of mortgage loan -- -- (825,000)
Repayment of mortgage loans 23,695 29,871 24,525
Net change in short-term
investments (2,423,225) (6,045,721) 780,280
Net change in policy and
student loans 153,487 39,513 238,236
Acquisition of property
and equipment (68,672) (78,009) (224,129)
---------- --------- -----------
Net cash provided ( used in)
investing activities $ 966,870 $(224,372)$(1,093,858)
---------- --------- -----------
SOUTHERN SECURITY LIFE INSURANCE COMPANY
Statement of Cash Flows
Years ended December 31, 2002, 2001 and2000
2002 2001 2000
Cash flows from financing activities:
Receipts from universal life and
certain annuity policies
credited to policyholder
account balances $4,816,639 $5,037,521 $5,765,790
Return of policyholder account
balances on universal life
and certain annuity policies (7,110,345) (7,991,030) (9,129,406)
----------- ----------- -----------
Net cash used in financing
Activities $(2,293,706)$(2,953,509) $(3,363,616)
----------- ----------- -----------
Increase (decrease) in cash and
cash equivalents 1,098,229 (544,613) (1,566,816)
Cash and cash equivalents at
beginning of year 1,969,055 2,513,668 4,080,484
----------- ---------- ----------
Cash and cash equivalents at
end of year $ 3,067,284 $1,969,055 $2,513,668
=========== ========== ==========
Supplemental schedule of cash flow
information:
Interest paid during the year $ 90,000 $ 97,240 $ 105,000
=========== ========== ==========
Income taxes paid during the year $ 4,246 $ 57,470 $ 94,365
=========== ========== ==========
Change in market value adjustments-
investments available-for-sale:
Fixed maturities $456,823 $956,773 $786,282
Equity securities (62,965) 24,632 (121,202)
Change in deferred acquisition costs 257,686 61,405 (71,611)
Change in premium deposit funds (154,613) (36,843) 42,967
Deferred income tax asset (liability) (183,865) (372,208) (235,481)
----------- --------- -----------
Accumulated comprehensive income
Net change in unrealized appreciation $313,066 $633,759 $400,955
========= ========= =========
See accompanying notes to financial statements.
SOUTHERN SECURITY LIFE INSURANCE COMPANY
Notes to Financial Statements
December 31, 2002, 2001 and 2000
1. Nature of business and summary of significant accounting policies:
(a) Nature of business
------------------
The primary business of Southern Security Life Insurance Company
(the "Company") is the issuance of long duration universal life
insurance contracts. The majority of the Company's business is
conducted in the states of Alabama (12%), Florida (43%), and
Georgia (11%). None of the remaining eleven states in which the
Company is licensed to conduct business account for over 10% of
the Company's total business.
Prior to December 17, 1998, certain executive officers and
directors of the Company were shareholders of approximately 60
percent of the shares of SSLIC Holding Company, Inc., (formerly
Consolidare Enterprises, Inc.). SSLIC Holding Company, Inc. owns
75.0% of the Company's voting securities at December 31, 2002.
Effective December 17, 1998, 100% of the common stock of SSLIC
Holding Company, Inc. was acquired by Security National Financial
Corporation ("SNFC"). Accordingly, from December 17, 1998, the
Company is a 75.0% owned, indirect subsidiary of SNFC.
The following is a description of the most significant risks
facing life and health insurers and how the Company mitigates
those risks:
Legal/regulatory risk is the risk that changes in the legal or
regulatory environment in which an insurer operates will create
additional expenses not anticipated by the insurer in pricing its
products. That is, regulatory initiatives designed to reduce
insurer profits, new legal theories or insurance company
insolvencies through guaranty fund assessments may create costs
for the insurer beyond those recorded in the financial
statements. The Company seeks to mitigate this risk through
geographic marketing of these insurance products.
Credit risk is the risk that issuers of securities owned by the
Company will default or that other parties, including reinsurers,
which owe the Company money, will not pay. The Company attempts
to mitigate this risk by adhering to a conservative investment
strategy, by maintaining sound reinsurance and by providing for
any amounts deemed uncollectible.
Interest rate risk is the risk that interest rates will change
and cause a decrease in the value of an insurer's investments.
This change in rates may cause certain interest-sensitive
products to become uncompetitive, may cause disintermediation, or
may cause the Company to not achieve its target interest margins
between interest earned on invested assets and interest required
to be credited to policyholder account balances. The Company
mitigates this risk by charging fees for nonconformance with
certain policy provisions, by offering products that transfer
this risk to the purchaser, and/or by attempting to match the
maturity schedule of its assets with the expected payouts of its
liabilities. To the extent that liabilities come due more quickly
than assets mature, an insurer would have to sell assets prior to
maturity and potentially recognize a gain or loss.
(b) Basis of financial statements
-----------------------------
The financial statements have been prepared on the basis of U.S.
generally accepted accounting principles ("GAAP"), which vary
from reporting practices prescribed or permitted by regulatory
authorities.
The accompanying financial statements have been prepared using
the historic cost basis of accounting and do not reflect any
adjustments related to allocation of the purchase price of the
Company's parent, SSLIC Holding (Formerly Consolidare) by
Security National Financial Corporation at December 17, 1998.
SOUTHERN SECURITY LIFE INSURANCE COMPANY
Notes to Financial Statements (Continued)
(c) Use of estimates
----------------
In preparing the financial statements, management is required to
make estimates and assumptions that affect the reported amounts
of assets and liabilities. Actual results could differ
significantly from those estimates.
The estimates susceptible to significant change are those used in
determining the liability for future policy benefits and claims,
deferred income taxes and deferred policy acquisition costs.
Although some variability is inherent in these estimates,
management believes that the amounts provided are adequate.
(d) Investments
-----------
Investments in all debt securities and those equity securities
with readily determinable market values are classified into one
of three categories: held-to-maturity, trading or
available-for-sale. Classification of investments is based upon
management's current intent. Debt securities which management has
a positive intent and ability to hold until maturity are
classified as securities held-to-maturity and are carried at
amortized cost. Unrealized holding gains and losses on securities
held-to-maturity are not reflected in the financial statements.
Debt and equity securities that are purchased for short-term
resale would be classified as trading securities. Trading
securities would be carried at fair value, with unrealized
holding gains and losses included in earnings; the Company has no
securities classified as trading securities. All other debt and
equity securities not included in the above two categories are
classified as securities available-for-sale. Securities
available-for-sale are carried at fair value, with unrealized
holding gains and losses reported in accumulated other
comprehensive income which is included in shareholders' equity
after adjustment for deferred income taxes and deferred
acquisition costs related to universal life products.
The Company's carrying value for investments in the
held-to-maturity and available-for-sale categories is reduced to
its estimated realizable value if a decline in the market value
is deemed other than temporary. Such reductions in carrying
values are recognized as realized losses and charged to income.
Interest on fixed maturities and short-term investments is
recognized to income as it accrues on the principal amounts
outstanding adjusted for amortization of premiums and discounts
computed by the scientific method which approximates the
effective yield method. Realized gains and losses on disposition
of investments are included in net income. The cost of
investments sold is determined on the specific identification
method. Dividends are recorded as income on the ex-dividend
dates.
Mortgage loans on real estate and mortgage loans held as short
term investments are reported at the unpaid principal balances,
adjusted for amortization of premium or accretion of discount,
less allowance for possible losses.
Policy loans and student loans are carried at the unpaid
principal balance, less any amounts deemed to be uncollectible.
The Company's policy is that policy loans are not made for
amounts in excess of the cash surrender value of the related
policy. Accordingly, policy loans are fully collateralized by the
related liability for future policy benefits for traditional
insurance policies and by the policyholders' account balance for
interest sensitive policies.
(e) Cash and cash equivalents
-------------------------
For purposes of the statements of cash flows, the Company
considers all highly liquid debt instruments purchased with an
original maturity of three months or less to be cash equivalents.
SOUTHERN SECURITY LIFE INSURANCE COMPANY
Notes to Financial Statements (Continued)
(f) Deferred policy acquisition costs
---------------------------------
The costs of acquiring new business, net of the effects of
reinsurance, principally commissions and those home office
expenses that tend to vary with and are primarily related to the
production of new business, have been deferred to the extent
recoverable from future profit margins. Deferred policy
acquisition costs applicable to traditional life policies are
being amortized over the premium-paying period of the related
policies in a manner that will charge each year's operations in
direct proportion to the estimated premium revenue over the life
of the policies. Premium revenue estimates are made using the
same interest, mortality and withdrawal assumptions as are used
for computing liabilities for future policy benefits. Acquisition
costs relating to universal life policies are being amortized in
relation to the incidence of expected gross profits over the life
of the policies. Gross profits for universal life contracts
consist of revenue representing policy charges for the cost of
insurance, administration of the contracts and surrender charges
plus investment income less expenses for interest credited to
policyholder account balances, policy administrative expenses and
expected benefit payments in excess of policy account balances.
Deferred policy acquisition costs are adjusted to reflect the
impact of unrealized gains and losses on fixed maturity
securities available for sale.
The Company has performed tests concerning the recoverability of
deferred acquisition costs. These methods include those typically
used by many companies in the life insurance industry. Further,
the Company conducts a sensitivity analysis of its assumptions
that are used to estimate the future expected gross profits,
which management has used to determine the future recoverability
of the deferred acquisition costs.
(g) Property and Equipment
----------------------
Property and equipment are recorded at cost, less accumulated
depreciation. Depreciation and amortization on capital leases and
property and equipment are determined using the straight-line
method over the estimated useful lives of the assets or terms of
the lease. Expenditures for maintenance and repairs are expensed
when incurred and betterments are capitalized. Gains and losses
on sale of property and equipment are reflected in operations.
(h) Investment in affiliate
-----------------------
Prior to 2002 the Company held investments in its parent
company's common stock. This reciprocal stockholding is accounted
for based on the treasury stock approach. The value of the
investment is recorded at cost and will be classified as treasury
stock upon consolidation with its parent company.
(i) Future policy benefits
----------------------
The liability for future policy benefits for traditional life
policies has been provided on a net level premium basis based
upon estimated investment yields, withdrawals, mortality and
other assumptions that were appropriate at the time the policies
were issued. Such estimates are based upon industry data and the
Company's past experience as adjusted to provide for possible
adverse deviation from the estimates.
(j) Policyholders' account balances
-------------------------------
Insurance reserves for universal life policies are determined
following the retrospective deposit method and consist of policy
values that accrue to the benefit of the policyholder, unreduced
by surrender charges.
(k) Recognition of premium revenue and related costs
------------------------------------------------
Premiums are recognized as revenue as follows:
SOUTHERN SECURITY LIFE INSURANCE COMPANY
Notes to Financial Statements (continued)
Universal life policies - premiums received from policyholders
are reported as deposits. Cost of insurance, policy
administration and surrender charges which are charged against
the policyholder account balance during the period, are
recognized as revenue as earned. Amounts assessed against the
policyholder account balance that represent compensation to the
Company for services to be provided in future periods are
reported as unearned revenue and recognized in income using the
same assumptions and factors used to amortize acquisition costs
capitalized.
Annuity contracts with flexible terms - premiums received from
policyholders are reported as deposits.
All other policies - recognized as revenue over the premium
paying period.
(l) Income taxes
------------
Deferred tax assets and liabilities are recognized for the future
tax consequences attributable to differences between the
financial statement carrying amounts of existing assets and
liabilities and their respective tax bases. Deferred tax assets
and liabilities are measured using enacted tax rates expected to
apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. The effect
on deferred tax assets and liabilities of a change in tax rates
is recognized in income in the period that includes the enactment
date.
(m) Impairment of Long-Lived Assets
-------------------------------
The Company reviews its long-lived assets for impairment whenever
events or changes in circumstances indicate that the carrying
amount of the assets may not be recoverable through undiscounted
future cash flows. If it is determined that an impairment loss
has occurred based on expected cash flows, such loss is
recognized in the statement of operations.
(n) Earnings (Loss) Per Common Share
--------------------------------
The computation of basic earnings (loss) per common share is
based on the weighted average number of shares outstanding during
each year.
The computation of diluted earnings per common share is based on
the weighted average number of shares outstanding during the
year, plus the common stock equivalents that would arise from the
exercise of stock options outstanding, using the treasury stock
method and the average market price per share during the year.
There were no common stock equivalents outstanding during the
years ended December 31, 2002 and 2001. Common stock equivalents
are not included in the diluted earnings (loss) per share
calculation when their effect is antidilutive.
(o) Stock-based Compensation
------------------------
The Company measures expense for stock-based employee
compensation using the intrinsic value method and provides
pro-forma disclosures of net income (loss) and net income (loss)
per common share as if the fair value method had been applied in
measuring compensation expense.
(p) Concentration of Credit Risk
----------------------------
The Company maintains its cash in bank deposit accounts, which at
times may exceed federally insured limits. The Company has not
experienced any losses in such accounts and believes it is not
exposed to any significant credit risk on cash and cash
equivalents.
SOUTHERN SECURITY LIFE INSURANCE COMPANY
Notes to Financial Statements (continued)
(q) Reclassification
Certain amounts presented in the 2001 and 2000 financial
statements have been reclassified to conform to the 2002
presentation.
(r) Recent Account Pronouncements
In June 2001, the Financial Accounting Standards Board ("FASB")
issued Statement of Financial Accounting Standards ("SFAS")
No. 142, "Goodwill and Other Intangible Assets". Under SFAS
No. 142, amortization of goodwill is precluded, however, its
recoverability must be periodically (at least annually) reviewed
and tested for impairment. Goodwill must be tested at the
reporting unit level for impairment in the year of adoption,
including an initial test performed within six months of
adoption. If the initial test indicates a potential impairment,
then a more detailed analysis to determine the extent of
impairment must be completed within twelve months of adoption.
SFAS No. 142 also requires that useful lives for intangibles
other than goodwill be reassessed and remaining amortization
periods be adjusted accordingly. The adoption of SFAS No. 142 did
not have a material impact on the Company's financial condition
or results of operations.
In August 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets". SFAS No. 144
establishes an accounting model for long-lived assets to be
disposed of by sale that applies to all long-lived assets,
including discontinued operations. SFAS No. 144 requires that
those long-lived assets be measured at the lower of carrying
amount or fair value less cost to sell, whether reported in
continuing operations or in discontinued operations. The
provisions of SFAS No. 144 are effective for financial statements
issued for fiscal years beginning after December 15, 2001.
Adoption of SFAS No. 144 did not have a material impact on the
Company's financial condition or results of operations.
In April 2002, FASB issued SFAS No. 145, "Rescission of FASB
Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13,
and Technical Corrections". Under historical guidance, all gains
and losses resulting from the extinguishment of debt were
required to be aggregated and, if material, classified as an
extraordinary item, net of related income tax effect. SFAS
No. 145 rescinds that guidance and requires that gains and losses
from extinguishments of debt be classified as extraordinary items
only if they are both unusual and infrequent in occurrence. SFAS
No. 145 also amends SFAS No. 13, "Accounting for Leases" for the
required accounting treatment of certain lease modifications that
have economic effects similar to sale-leaseback transactions.
SFAS No. 145 requires that those lease modifications be accounted
for in the same manner as sale-leaseback transactions. The
provisions of SFAS No. 145 related to SFAS No. 13 are effective
for transactions occurring after May 15, 2002. Adoption of the
provisions of SFAS No. 145 related to SFAS No. 13 did not have a
material impact on the Company's financial condition or results
of operations.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities", which addresses
financial accounting and reporting for costs associated with exit
or disposal activities and nullifies EITF Issue No. 94-3,
"Liability Recognition for Certain Employee Termination Benefits
and Other Costs to Exit an Action (including Certain Costs
Incurred in a Restructuring)" ("Issue 94-3"). The principal
difference between SFAS No. 146 and Issue 94-3 is that SFAS
No. 146 requires that a for a cost associated with an exit or
disposal activity be recognized when the liability is incurred,
rather than at the date of an entity's commitment to an exit
plan. SFAS No. 146 is effective for exit or disposal activities
after December 31, 2002. Based upon a preliminary review,
adoption of SFAS No. 146 would not have a material impact on the
Company's financial condition or results of operations.
SOUTHERN SECURITY LIFE INSURANCE COMPANY
Notes to Financial Statements (continued)
In November 2002, the FASB issued Interpretation No. 45,
"Guarantor's Accounting and Disclosure Requirements for
Guarantees, Including Indirect Guarantees of Indebtedness of
Others" ("FIN 45"). FIN 45 requires certain guarantees to be
recorded at fair value and also requires a guarantor to make new
disclosures, even when the likelihood of making payments under
the guarantee is remote. In general, the Interpretation applies
to contracts or indemnification agreements that contingently
require the guarantor to make payments to the guaranteed party
based on changes in an underlying that is related to an asset,
liability, or an equity security of the guaranteed party. The
recognition provisions of FIN 45 are effective on a prospective
basis for guarantees issued or modified after December 31, 2002.
The disclosure requirements are effective for financial
statements of interim and annual periods ending after
December 15, 2002. Based upon a preliminary review, adoption of
FIN 45 would not have a material impact on the Company's
financial condition or results of operations.
In December 2002, the FASB issued SFAS No. 148, "Accounting for
Stock-Based Compensation - Transition and Disclosure and
Amendment to FASB No. 123", which provides three optional
transition methods for entities that decide to voluntarily adopt
the fair value recognition principles of SFAS No. 123,
"Accounting for Stock Issued to Employees", and modifies the
disclosure requirements of that Statement. Under the prospective
method, stock-based compensation expense is recognized for awards
granted after the beginning of the fiscal year in which the
change is made. The modified prospective method recognizes
stock-based compensation expense related to new and unvested
awards in the year of change equal to that which would have been
recognized had SFAS No. 123 been adopted as of its effective
date, fiscal years beginning after December 15, 1994. The
retrospective restatement method recognizes stock compensation
costs for the year of change and restates financial statements
for all prior periods presented as though the fair value
recognition provisions of SFAS No. 123 had been adopted as of its
effective date. Since the Company does not intend to voluntarily
adopt the fair value provisions of FASB 123, adoption of SFAS 148
would not have a material effect on the financial condition or
results of operations of the Company. However, pro forma
disclosures required by SFAS 148 will be included in the
Company's future interim financial statements when necessary.
In January 2003, the FASB issued Interpretation 46,
"Consolidation of Variable Interest Entities" ("FIN 46"), which
requires an enterprise to assess if consolidation of an entity is
appropriate based upon its variable economic interests in a
variable interest entity (VIE). The initial determination of
whether an entity is a VIE shall be made on the date at which an
enterprise becomes involved with the entity. A VIE is an entity
in which the equity investors do not have the characteristics of
a controlling financial interest or do not have sufficient equity
at risk for the entity to finance its activities without
additional subordinated financial support from other parties. An
enterprise shall consolidate a VIE if it has a variable interest
that will absorb a majority of the VIE's expected losses if they
occur, receive a majority of the entity's expected residual
returns if they occur or both. A direct or indirect ability to
make decisions that significantly affect the results of the
activities of a VIE is a strong indication that an enterprise has
one or both of the characteristics that would require
consolidation of the VIE.
FIN 46 is effective for new VIE's established subsequent to
January 31, 2003 and for existing VIE's as of July 1, 2003. Based
upon a preliminary review, the adoption of FIN 46 would not have
a material impact on the Company's financial condition or results
of operations as there were no material VIE's identified which
would require consol