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SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 (FEE REQUIRED)
For the fiscal year ended December 31, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
Commission File No. 2-35669
SOUTHERN SECURITY LIFE INSURANCE COMPANY
(Exact name of Company as specified in its charter)
Florida 59-1231733
(State or other jurisdiction (Employer Identification Number)
of incorporation or organization)
755 Rinehart Road, Lake Mary, Florida 32746
(Address of principal executive offices) (Zip Code)
Company's telephone number, including area code:(407) 321-7113
Securities registered pursuant to Section 12(b) of the Act:
Name of Each Exchange on
Title of Each Class Which Registered
None None
Securities registered pursuant to Section 12(g) of the Act:
None
(Title of Class)
Indicate by check mark whether the Company (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 Company
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. X
State the aggregate market value of the voting stock held by nonaffiliates of
the Company: $3,989,366 as of March 31, 1996.
The number of shares of the Company outstanding as April 1, 1996 is as follows:
Number Outstanding at
Title of Class April 1, 1996
Common Stock
Par value $1.00 per share 1,907,989
1
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. The Company obtained authorization in the states of Indiana and
Oklahoma in 1996 and will continue the process of seeking authorization,
directly or through acquisition, to transact business in additional states
during 1997. During 1996, approximately 43% of the premium income of the Company
was from business in force in its state of domicile. The Company's only industry
segment is the ordinary life, accident and health and annuity business.
The Company at present writes universal life policies with various
companion riders as well as a traditional life product. In the past it has
written various forms of ordinary life insurance policies and annuity contracts.
The Company's accident and health insurance business has never been a
significant portion of the Company's business. It does not presently write
industrial life or group life insurance other than through its participation as
a reinsurer in the Servicemen's Group Life Insurance Program ("SGLI"). In 1996,
the Company introduced a new whole life product designed to appeal to the final
expense market.
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 60% and 98% of
the policies written by the Company in 1996 and 1995 respectively, were for the
universal life products.
During first quarter 1996, the Company introduced 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. A lead
generation program was used to support this new product as it was introduced.
New field sales representatives are actively recruiting to market the product.
The Company is continuing to support its traditional universal life
marketing as well. The Company established a lead generation program which has
been coupled with a recruiting program for new sales agents to help rebuild the
market. This has helped to increase opportunities to expand sales of its
universal life products which are designed to provide an insurance program as
well as a savings vehicle through the cash values of the policy.
2
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:
1996 1995 1994
==== ==== ====
Per- Per- Per-
Amount centage Amount centage Amount centage
Life
Insurance-
Ordinary
(1)(2) $9,225,755 92% $10,220,659 93% $11,549,563 95%
Individual
Annuities
(1) 307,618 3% 195,473 2% 102,992 1%
Life
Insurance-
Group
(SGLI) 529,554 5% 518,597 5% 536,880 4%
Other -
Accident &
Health 1,274 0% 1,385 0% 1,628 0%
----------- ---- ------------ ---- ----------- ----
$10,064,201 100% $10,936,114 100% $12,191,063 100%
=========== ==== =========== ==== =========== ====
(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 1995 and 1996 premium income for life insurance-ordinary
are net of reductions of $2,105,768 and $1,767,418,
respectively, in ceded premium paid to all reinsurers,
including Mega Life.
(The remainder of this page is intentionally left blank)
3
The following table gives information [on a generally accepted
accounting principles basis] for the Company concerning operating ratios for the
periods indicated:
1996 1995 1994
---- ---- ----
Total Net Insurance
revenues $7,915,027 $8,158,938 $9,299,789
Benefit Costs:
Amount $3,818,562 $4,061,096 $4,115,257
Ratio to Net Premium
Income 48.2% 49.8% 44.3%
Acquisition Expenses:
Amount $3,364,738 $3,069,742 $3,242,706
Ratio to Net Premium
Income 42.5% 37.6% 34.9%
General Insurance Expenses:
Amount $3,246,552 $2,825,280 $3,276,386
Ratio to Net Premium
Income 41% 34.6% 35.2%
Income Before Income Taxes:
Amount $1,588,505 $1,274,903 $1,543,979
Ratio to Net Premium
Income 20.1% 15.6% 16.6%
Ratio to Total Income 13.1% 11.4% 12.7%
Ratio to Equity 10.1% 8.6% 12.2%
(The remainder of this page is intentionally left blank)
4
The following table provides information about the Company concerning
changes in life insurance in force (shown in thousands -000 omitted) during the
periods indicated (exclusive of acciden tal death benefits):
1996 1995 1994
---- ---- ----
Total life insurance in force at
beginning of period:
Ordinary Whole Life &
Endowment-Participating $584 $583 $750
Ordinary Whole Life &
Endowment-Non-Participating 1,289,250 1,459,149 1,603,358
Term 8,371 9,422 12,051
SGLI 507,552 531,502 564,828
------- ------- -------
Total $1,805,757 $2,000,656 $2,180,987
Additions (including re-insurance assumed):
Ordinary Whole Life &
Endowment-Participating - 0 - - 0 - - 0 -
Ordinary Whole Life &
Endowment-Non-Participating 122,578 125,961 188,622
Term - 0 - - 0 - - 0 -
SGLI 64,071 8 9
------- ------- -------
Total $186,649 $125,969 $188,631
Terminations:
Death $1,756 $2,204 $1,849
Lapse and Expiry 73,919 89,868 114,372
Surrender 212,801 228,334 251,306
Other 280 463 1,435
------- ------- -----
Total $288,756 $320,869 $368,962
Life Insurance in force at end of period:
Ordinary Whole Life &
Endowment-Participating $441 $583 $583
Ordinary Whole Life &
Endowment-Non-Participating 1,157,624 1,289,250 1,459,149
Term 7,884 8,371 9,422
SGLI 537,701 507,552 531,502
------- ------- -------
Total $1,703,650 $1,805,756 $2,000,656
--------- --------- ---------
Reinsurance Ceded (386,084) (448,382) (502,185)
-------- -------- --------
Total after Reinsurance Ceded $1,317,566 $1,357,374 $1,498,471
Lapse Ratio (Reflecting termina-
tion by surrender and lapse;
ordinary life insurance only): 20.5% 21.1% 21.5%
5
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:
Mean Gross Net
Fiscal Investment Investment Investment Net
Year Assets (1) Income(2) Income (3) Yield (4)
- ----- ---------- ---------- ---------- ---------
1996 $51,752,712 $3,508,161 $3,318,267 6.41%
1995 $46,899,142 $3,225,630 $2,998,875 6.39%
1994 $46,573,901 $3,111,186 $2,750,771 5.91%
(1) Computed pursuant to valuations prescribed under generally
accepted accounting principles.
(2) Includes capital gains and net of capital losses.
(3) Net of investment expense and before income taxes or extra
ordinary terms.
(4) Computed on an annualized basis. Represents ratio of net
investment income to mean 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 247 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 the Company's parent, Consolidare Enterprises, Inc.
See "Certain Relationships and Related Transactions" in item 13, Part III of
this Report.
The Company presently employs 37 persons, none of whom are covered
under any collective bargaining agreements. The Company feels it has good
relations with its employees.
6
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 (4%) of total liabilities. The Company's required
statutory minimum surplus calculated in accordance with this section is
approximately $1,800,000. 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, 1996, the Company had statutory capital and surplus of $9,283,928,
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
7
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, 1996,
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, Kentucky, Louisiana, Michigan, Missouri, 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 diver sification 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
8
of Hanover, 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 participation in SGLI.
The Company is required to establish policy benefit and other reserves
which 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 or 4-1/2%. Annuity reserves are based on the 1937 Standard Annuity
Table, with interest on policies computed at 3-1/2 or 4%. Reserves on the
9
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 the California Method
which was approved by the Florida Department of Insurance. Reserves under this
method are the linear average of the policy account value and the policy cash
surrender value (account value less the surrender charge).
In 1994, the Florida Department of Insurance issued a new regulation
that required all companies who are not already using the CRVM method to phase
into that method over a period of five years. As required, the Company has filed
with the Department its plan to comply with the new regulation and implemented
the plan beginning January 1, 1995. This has resolved then pending discussions
with the Florida Insurance Department on the Company's reserving methods. The
CRVM reserving method applies only to the Company's statutory financial
statements. For the year 1995 the increase in the statutory reserve due to the
implementation of this regulation was approximately $404,000, for 1996 the
increase was $158,000.
Estimation and provision for the cost of HIV-related claims covered
under life and accident and health insurance policies of the Company have been
made. The Company utilizes the services of KPMG Peat Marwick, LLP, consulting
actuaries, in calculating such reserves.
In preparing generally accepted accounting principle Financial
Statements, the cost of insurance and expense 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) 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, pre authorized 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
10
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 the entire second floor of the building. The remaining rentable space
is fully leased as of December 31, 1996.
Item 3. Pending Legal Proceedings.
Lawsuits against the Company may have arisen in the course of the
Company's business. However, contingent liabilities arising from litigation and
other matters are not considered material in relation to the financial position
of the Company.
To the best of the Company's knowledge, it has no potential or pending
contingent liabilities that might be material to the Company's financial
condition, results of operations or liquidity, pursuant to product and
environmental liabilities. The Company maintains insurance coverage for
unforeseen events and the insurance carriers, to the best of managements
knowledge, have no solvency issues.
Item 4. Submission of Matters to a Vote of Security Holders.
During the fourth quarter of the Company's fiscal year, no matter was
submitted to a vote of security holders.
11
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 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.
QUARTER ENDED
- ----------------------------------------------------------------------------
1996 1995
- ----------------------------------------------------------------------------
Mar.31 Jun.30 Sep.30 Dec.31 Mar.31 Jun.30 Sep.30 Dec.31
Common
Shares:
High 5 5 5/8 7 1/2 7 7/8 5 7/8 5 3/8 5 3/8 5 3/8
Low 4 7/8 4 7/8 5 3/8 7 1/8 4 5/8 4 7/8 5 4 7/8
(b) Approximate Number of Holders of Common Stock. There
were 1,499 holders of record of the Company's Common Stock at
December 31, 1996.
(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) (i.e.
unassigned surplus) or (b) certain net operating profits and realized net
capital gains 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 which the Company could pay as a dividend during 1997
pursuant to such regulation is $1,022,183.
12
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.
(The remainder of this page is intentionally left blank)
13
YEARS ENDED DECEMBER 31,
1996 1995 1994 1993 1992
---------- --------- ----------- ----------- --------
Revenues:
Life insurance $7,915,027 $8,158,938 $9,299,789 $10,738,921 $9,512,468
Net investment
income 3,318,627 $2,998,875 2,750,771 2,518,005 2,445,460
Realized Gain
(Loss)on
Investments 869,502 60,237 60,732 138,985 169,955
Gain on
Reinsurance
Transaction - - - - 639,455
-------- ----------- ----------- ----------- --------
Total Revenue $12,103,156 $11,218,050 $12,111,292 $13,395,911 $12,767,338
Benefits, Losses
& Expenses:
Insurance
living
benefits $2,420,021 $2,636,851 $2,815,194 $2,848,888 $2,934,734
Insurance death
benefits 1,398,541 1,424,245 1,300,063 1.871,590 1,562,431
in policy
reserves (5,201) (12,971) (67,036) (152,011) (246,642)
Amortization of
deferred policy
acquisition
costs 3,364,738 3,069,742 3,242,706 5,216,871 4,411,788
Commissions and
General
Expenses 3,246,552 2,735,280 3,186,386 2,814,921 2,292,977
Interest expense
with related
party 90,000 90,000 90,000 90,000 91,250
------ ------ ------ ------ ------
Total Expenses: $10,514,651 $9,943,147 $10,567,313 $12,690,259 $11,046,538
----------- ---------- ----------- ----------- -----------
Income before
Income Taxes $1,588,505 $1,274,903 $1,543,979 $705,652 $1,720,800
---------- ---------- ---------- -------- ----------
Income taxes 196,000 $160,000 $530,000 $1,000 $(49,400)
---------- -------- -------- ------ ---------
NET INCOME $1,392,505 $1,114,903 $1,013,979 $704,652 $1,770,200
========== ========== ========== ======== ==========
Weighted average
number of
shares
outstanding 1,907,989 1,907,989 1,907,989 1,844,694 1,844,694
--------- --------- --------- --------- ---------
Net income per
common
share $.73 $.58 $.53 $.38 $.96
--- ---- ---- ---- ----
Shareholders'
Equity $15,661,588 $14,826,610 $12,644,525 $12,238,101 $11,352,540
=========== =========== =========== =========== ===========
Shareholders'
equity per
common
share $8.20 $7.77 $6.63 $6.63 $6.15
===== ====== ===== ===== =====
14
1996 1995 1994 1993 1992
---------- -------------- -------------- ------------- --------
Assets $81,809,360 $81,872,350 $77,185,070 $81,211,540 $64,431,214
----------- ----------- ----------- ----------- -----------
Life Insurance:
Insurance in
force $1,703,650,00 $1,805,756,000 $2,000,656,000 $2,180,987,000 $2,063,910,000
------------- -------------- -------------- -------------- --------------
Individual
insurance
issued during
current
year $121,646,000 $124,222,000 $184,364,000 $325,869,000 $556,570,000
------------ ------------ ------------ ------------ ------------
Long term
obligation $1,000,000 $1,000,000 $1,000,000 $1,000,000 $1,000,000
Dividends
declared per
common share $0.00 $0.00 $0.00 $0.00 $0.00
(The remainder of this page is intentionally left blank)
15
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.
In recent years the Company has primarily issued one type of insurance
product, universal life. Universal life provides insurance coverage with
flexible premiums, within limits, which allow policyholders to accumulate cash
values. These accumulated cash values are credited with tax-deferred interest,
as adjusted by the Company on a periodic basis. Deducted from these cash
accumulations are administrative charges and mortality costs. Should a policy
surrender in its early years, the Company assesses a surrender fee against these
same cash accumulations, based on issue age of the insured, smoker verses
non-smoker status, sex of the insured and the duration of the policy at the time
of surrender.
Pursuant to the accounting methods prescribed by Statement of Financial
Accounting Standards No. 97 (SFAS 97), premiums received from policyholders on
universal life products are credited to policyholder account balances, a
liability, rather than income. Revenues on such products result from the
mortality and administrative fees charged to policyholder balances in addition
to surrender charges assessed at the time of surrender as explained above. Such
costs of insurance, expense charges, and surrender fees are recognized as
revenue as earned. In addition, the Company has adopted policy designs with the
characteristic of having higher expense charges during the first policy year
than in renewal years. Under SFAS 97, the excess of these charges are reported
as unearned revenue. The unearned revenue is then amortized into income over the
life of the policy using the same assumptions and factors used to amortize
capitalized acquisition costs. Interest credited to policyholder balances is
shown as a part of benefit expenses.
In accordance with generally accepted accounting principles, certain
costs directly associated with the issuance of new policies are deferred and
amortized over the lives of the policies. These costs are defined as deferred
policy acquisition costs and are shown in the asset section of the balance sheet
of the Company. Capitalized acquisition costs are amortized over the life of the
business at a constant rate, based on the present value of the estimated gross
profits expected to be realized over the life of the business. SFAS 97 requires
that estimates of expected gross profits used as a basis for amortization be
evaluated on a regular basis, and the total amortization to date be adjusted as
a charge or credit to earnings if actual experience or other evidence suggests
that earlier estimates be revised. Thus, variations in
16
the amortization of the deferred policy acquisition costs, from one period to
the next, are a normal aspect of universal life insurance business and are
generally attributed to the recognition of current and emerging experience in
accordance with the principles of SFAS 97.
Annuity products, of which the Company currently has a minor amount,
are recorded in similar fashion to universal life products. Considerations
received by the Company are credited to the annuity account balances which are
shown as a liability in the balance sheet. Interest is credited to these
accounts as well and shown as an expense of the Company. Income is derived
primarily from surrender charges on this type product.
An additional source of income to the Company is investment revenue.
The Company invests those funds deposited by policy-holders of universal life
and annuity products in debt and equity securities 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 a 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.
(The remainder of this page is intentionally left blank)
17
The following table sets forth certain percentages reflecting financial
data and results of operations (a) for 1996, 1995 and 1994 premium and
investment revenues and (b) for period to period increases and (decreases).
Relationships to
Total Revenues Period to Period
Years Ended December 31 (Increase or Decrease)
1996 1995 1994 96-95 95-94
------ ------ ------ ------- ------
Insurance Revenues 65% 73% 77% (3%) (12%)
Net Investment Income 35 27 23 11% 9%
Other Income
Total Revenues 100% 100% 100% 8% (7%)
Losses, claims and
loss adjustment
expenses 31% 36% 33% 6% (0%)
Acquisition costs 28 27 27 10% 5%
Other operating
costs and
expenses 27 26 27 18% (14%)
---- ---- ---- ---- -----
Total Expenses 86% 89% 87% 6% (4%)
Income before income
taxes 14% 11% 13% 24% (17%)
Provision for
taxes 2 1 5 22% (70%)
--- --- ---- --- -----
Net Income 12% 10% 8% 25% 10%
Results of Operations.
New business written was 122, 124 and 189 million dollars in face value
for 1996, 1995 and 1994, respectively. While the face amount issued declined
again in 1996, new business production actually increased. The company entered a
new market known as the final expense market. Generally, policies issued in this
market are of a lesser face value than those of the Universal Life market. That
being the case, the face amount of insurance appears to have declined, however
the actual number of policies issued increased. In 1995 the Company issued 1,696
new policies. In 1996, 2,702 policies were issued for an increase of 59%. The
Company is encouraged by these results and anticipates a continuation of this
trend throughout 1997.
Premium and policy charges for 1996 was recorded at $7.7 million, 1995
was recorded at $7.9 million and 1994 at $9.1 million. While policy production
was up for 1996, premium and policy cahrges went down.
18
The 1996 premium and policy charges for 1996 was recorded at 7.7%.
Several factors have combined to create this decline. Continued lapsation in the
universal life book of business has resulted in reduced revenues in
administrative and mortality fees. New production has not increased as
significantly as would be needed to be beneficial and the new product currently
being marketed has lower premiums than those of the universal life product.
Surrender fee income declined 13.7% from that of 1995. Surrender fee income is
dependent upon the duration and value of the policies lapsing. Should the
policies be in their early years, the fee is high, however, limited to the value
in the policy which is smaller in the early years. The older policies have lower
surrender fees and greater account values from which to collect those fees.
The 1995 decline of 13% in premium and policy charges was attributed
somewhat to the decline in the Company's insurance in force and therefore an
associated reduction in administrative and mortality fees. Surrender fees for
1995 decreased by approximately 5% from 1994.
The balance of the decline in 1996, 1995 and 1994 premium and policy
charges is related to the unlocking, for current and future experience, of
unearned premium. Unearned premium essentially represents the excess first year
charges in the policy. With the advice and assistance of our consulting
actuaries, each year the Company reviews its current experience rates for
mortality, credited interest spreads, lapse rates, surrender fees and the like,
and adjusts its amortization of deferred acquisition costs and unearned premium
to the appropriate levels for both the current experience and anticipated future
experience. This is an ongoing refinement process.
Increased investment in debt securities coupled with reduced expenses
for student loan processing are responsible for the 10% increase in 1996 and 9%
increase in 1995 investment income. The Company continues to review its
investment strategies to increase its earned interest rate. As a part of this
process of review and refinement, the Company sold its entire stock portfolio
just prior to year end 1996. This created a significant increase in realized
gains for 1996. The resulting funds are to be invested in a more aggressive
stock market fund which should create an increased yield for the Company.
Additional changes in the Company's holdings are being planned for 1997.
Annuity, death and other benefits decreased slightly in both 1996 and
1995. This expense line is a combination of several expenses with death claims,
annuity benefits and surrender benefits comprising the most significant portion
of the total line. In 1996 each of these expenses declined slightly, whereas in
1995 death claims actually rose slightly. A significant increase or decrease in
death claims in any given year can have a marked impact on the
19
results of operations in a small company.
The amortization of deferred acquisition costs increased in 1996,
following a two year decline in 1995 and 1994. The amortization of deferred
acquisition costs is a continuous refinement process which relates to current
experience in connection with revenues, mortality gains and losses, credited
interest rate spreads, expense charges and surrender charges. The change in the
rate of amortization of both deferred acquisition costs and unearned premium
liabilities is due to "unlocking" for current and future experience based on the
results of the changing experience encountered as required under FAS 97.
Operating expenses for the Company were $3.3 million, $2.7 million and
$3.2 million for 1996, 1995 and 1994, respectively. Several items are
responsible for the increased operating costs of 1996. The lead program used to
introduce and promote our new product was not without cost. The Company also
attempted some new marketing procedures in 1996 which added to these costs. In
addition, legal expenses were higher in 1996 than in 1995. The Company has
reviewed its promotional expenses and now that the new product has established a
market, has cut back on these expenses. The increased legal costs were related
to the settlement of another lawsuit whereby the Company received settlement of
approximately $400,000, which flowed through income and paid the associated
attorneys fees. Operating expenses for 1994 also reflect increased legal
expenses, however these expenses were associated with settlements paid rather
than received.
Reinsurance premiums ceded for 1996, 1995 and 1994 were $1,767,418,
$2,112,884 and $2,508,749 respectively. Policy benefits were reduced due to
reinsurance recoveries of $709,643, $405,345 and $679,622 for 1996, 1995 and
1994, respectively. Reinsurance commissions amounted to $308,179 for 1996 and
$397,253 and $679,522 for 1995 and 1994 respectively. In addition, under the
terms of the Company's treaty with Mega Life (formerly United Group Insurance
Company) expenses of $956,143 were transferred for 1996 and $911,452 and
$1,163,843 for 1995 and 1994 respectively. In 1995, the company amortized the
remaining $200,000 of deferred gain, under the aforementioned treaty, against
deferred acquisition costs for 1995.
Income, before income taxes, in 1996 was $1,588,505, inclusive of gain
on equity securities of $873,299, compared to $1,274,903 in 1995 and $1,543,979
in 1994. The 1995 income declined 17% from prior year as a result of reduced
premium income and level amortization expenses.
Liquidity and Capital Resources.
Effective January 1, 1994, the Company adopted Statement of
Financial Accounting Standards No. 115 ("SFAS 115"), "Accounting
20
for Certain Investments in Debt and Equity Securities." SFAS 115 required that
investments in all debt securities and those equity securities with readily
determinable market values be 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 are classified as trading securities. Trading securities are
carried at market value, with unrealized holding gains and losses included in
earnings. 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 market value, with unrealized holding gains
and losses reported as a separate component of stockholders' equity, net of tax
and a valuation allowance against deferred acquisition costs. Adoption of this
statement had no effect on the income of the Company.
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.
Student loans are a service the Company makes 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 1995 the Company renewed its $5,000,000 line of credit with
SLMA in order to meet these seasonal borrowing requirements. The Company made no
draws against this line of credit throughout the seasonal period for 1996. The
Company anticipates continued borrowings to be made through this line of credit
with SLMA to the extent that student loan borrowings are required for 1997. SLMA
offers a more competitive rate of interest on such borrowings than the Company
has been able to obtain through banks.
21
The following table displays pertinent information regarding the
short-term borrowings of the Company as they relate to these credit lines:
1995 SLMA 1994 SLMA
========= =========
Balance @ Year End $1,400,553.30 $891,823.47
Weighted Avg. Interest
@ Year End 6.3705% 6.566%
Maximum Balance $1,891,823.47 $3,823,957.61
Average Balance $1,159,300.15 $1,443,478.84
Weighted Rate 6.3705% 6.1024%
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 1996. In 1995, a similar program was in effect with University Support
Services.
Except as otherwise provided herein, management believes that cash flow
levels in future periods will be such that the Company will be able to continue
its prior growth patterns in writing life insurance policies, fund Federally
insured student loans and meet normal operating expenses.
The National Association of Insurance Commissioners, in order to
enhance the regulation of insurer solvency, issued a model law to implement
risk-based capital (RBC) requirements for life insurance companies, which are
designed to assess capital adequacy. Pursuant to the model law, insurers having
less statutory surplus than required by the RBC calculation will be subject to
varying degrees of regulatory action. While Florida, the Company's state of
domicile, had yet to adopt the provisions of the RBC model law, the Company is
monitoring their RBC results in anticipation of future adoption. At December 31,
1996, the Company had statutory surplus well in excess of any RBC action level
requirements.
The Company has now fully leased all rentable space on the first floor
of its office building. The Company has no material commitments for capital
expenditures throughout the balance of the year 1997.
Item 8. Financial Statements and Supplementary Data.
(The remainder of this page is intentionally left blank)
22
Independent Auditors' Report
Board of Directors
Southern Security Life Insurance Company:
We have audited the accompanying financial statements of Southern Security Life
Insurance Company as listed in the accompanying index under Item 14(a). In
connection with our audit 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)2. These financial statements and financial
statement schedules are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements and
financial statement schedules based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Southern Security Life
Insurance Company as of December 31, 1996 and 1995, and the results of its
operations and its cash flows for each of the years in the three year period
ended December 31, 1996, in conformity with generally accepted accounting
principles. 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.
KPMG Peat Marwick, LLP
Orlando, Florida
April 18, 1997
23
SOUTHERN SECURITY LIFE INSURANCE COMPANY
Balance Sheets
December 31, 1996 and 1995
Assets 1996 1995
------ ---- ----
Investment (note 3):
Fixed maturities held to maturity
(fair value, $15,140,919 and
$15,494,540 at December 31,
1996 and 1995, respectively) $14,974,962 15,165,395
Securities available for sale,
at fair value:
Fixed maturities (cost of
$24,298,618 at December 31,
1996 and $21,077,410 at
December 31, 1995) 24,476,239 21,812,096
Equity securities (cost, $0
and $1,297,041 at
December 31, 1996 and
1995, respectively) - 1,715,386
Policy and student loans 7,315,809 9,971,653
Short-term investments 4,539,106 1,499,100
Other invested assets 13,100 22,578
---------- ----------
51,319,216 50,186,208
Cash and cash equivalents 206,056 406,752
Accrued investment income 687,699 638,809
Deferred policy acquisition costs
(note 4) 16,979,612 18,145,111
Policyholders' account balances on
deposit with reinsurer (Note 7) 8,522,449 8,440,660
Reinsurance receivable (note 7) 379,692 514,341
Receivables:
Agent balances 588,290 345,014
Other 340,680 318,274
Refundable income taxes - -
Property and equipment, net,
at cost (note 5) 2,785,666 2,877,181
$81,809,360 81,872,350
=========== ==========
See accompanying notes to financial statements
24
SOUTHERN SECURITY LIFE INSURANCE COMPANY
Balance Sheets (continued)
December 31, 1996 and 1995
Liabilities and Shareholders' Equity 1996 1995
------------------------------------ ---- ----
Liabilities:
Policy liabilities and accruals (notes 6 and 7):
Future policy benefits $ 985,720 1,050,498
Policyholders' account balances 52,347,996 50,624,276
Unearned premiums 8,249,190 9,116,890
Other policy claims and benefits
payable 293,221 191,955
Other policyholders' funds, dividend
and Endowment accumulations 59,596 57,444
Funds held in reinsurance treaties
with Reinsurers (note 7) 1,193,366 977,416
Note payable (note 8) - 1,400,553
Note payable to related party
(note 9) 1,000,000 1,000,000
Due to affiliated insurance
agency (note 11) 33,411 243,368
General expenses accrued 894,131 1,025,372
Unearned investment income 228,032 188,360
Other liabilities 204,845 248,258
Income taxes payable 70,164 16,350
Deferred income taxes (note 10) 588,100 905,000
------- -------
66,147,772 67,045,740
---------- ----------
Shareholders' equity (notes 2,3 and 12):
Common stock, $1 par, authorized
2,000,000 shares; issued and out-
standing, 1,907,989 shares 1,907,989 1,907,989
Capital in excess of par 4,011,519 4,011,519
Unrealized appreciation (depreciation)
on securities available for sale, net
of adjustment to deferred policy acquisition
costs of $187,196 ($(273,077)
in 1995) and net of deferred Federal
income tax benefit of ($675)
($331,000 expense in 1995) (8,880) 548,647
Retained earnings 9,750,960 8,358,455
--------- ---------
15,661,588 14,826,610
Commitments and contingencies
(notes 7 and 14)
$81,809,360 81,872,350
=========== ==========
25
SOUTHERN SECURITY LIFE INSURANCE COMPANY
Statements of Income
Years ended December 31, 1996, 1995, and 1994
1996 1995 1994
---- ---- ----
Revenues:
Premium and policy
charges $7,702,639 7,919,362 9,122,389
Less reinsurance ceded (1,030,673) (1,201,432) (1,344,907)
Surrender fee income 1,243,061 1,441,008 1,522,307
--------- --------- ---------
Net insurance revenue 7,915,027 8,158,938 9,299,789
Net investment income
(notes 3 & 8) 3,318,627 2,998,875 2,750,771
Realized gain on
investments (note 3) 869,502 60,237 60,732
------- ------ ------
12,103,156 11,218,050 12,111,292
---------- ---------- ----------
Benefits, losses and expenses:
Annuity, death, surrender
and other benefits 3,818,562 4,061,096 4,115,257
Decrease in future policy
benefits (5,201) (12,971) (67,036)
Amortization of deferred
policy acquisition
costs (note 4) 3,364,738 3,069,742 3,242,706
Operating expenses
(note 11) 3,246,552 2,735,280 3,186,386
Interest expense with
related party (Note 9) 90,000 90,000 90,000
------ ------ ------
10,514,651 9,943,147 10,567,313
---------- --------- ----------
Income before income taxes 1,588,505 1,274,903 1,543,979
Income tax expense (benefit) (note 10) 196,000 160,000 530,000
-------- ------- -------
Net income $1,392,505 1,114,903 1,013,979
========== ========= =========
Earnings per share, based on
1,907,989 weighted average
shares outstanding in 1996,
1995 and 1994 $.73 .58 .53
==== === ===
See accompanying notes to financial statements.
26
SOUTHERN SECURITY LIFE INSURANCE COMPANY
Statements of Shareholders' Equity
Years ended December 31, 1996, 1995 and 1994
Unrealized
Appreciation
(depreciation) Agents
Capital of equity Incentive
Common stock in excess security Stock Retained
Shares Amount of par investments Bonus earnings
Balances,
December 31,
1993 1,844,694 1,844,694 3,918,292 120,542 125,000 6,229,573
Capital Stock
issued 63,295 63,295 93,227 - (125,000)
Net income for
the year - - - - - 1,013,979
Unrealized
depreciation
of securities
available
for sale
investments - - - (639,077) - -
------- ------- ------- -------- -------- -----
Balances,
December
31, 1994 1,907,989 1,907,989 $4,011,519 (518,535) - 7,243,552
--------- --------- ---------- --------- -------- ---------
Net income for
the year - - - - - 1,114,903
Unrealized
appreciation
of securities
available
for sale - - - 1,067,182 - -
------- ------- ------- --------- -------- -----
Balances,
December
31, 1995 1,907,989 $1,907,989 4,011,519 548,647 - 8,358,455
--------- --------- --------- ------- -------- ---------
Capital Stock
issued
Net income for
the year to
date - - - - - 1,392,505
Unrealized
depreciation
of securities
available
for sale
investments - - - (557,527) - -
------- ------- ------- --------- -------- ----
Balances,
December 31,
1996 1,907,989 $1,907,989 4,011,519 (8,880) - 9,750,960
========= ========== ========= ====== ======== =========
See accompanying notes to financial statements.
27
SOUTHERN SECURITY LIFE INSURANCE COMPANY
Statements of Cash Flows
Years ended December 31, 1996, 1995 and 1994
1996 1995 1994
---- ---- ----
Cash flows provided by (used in)
operating activities:
Net income (including net realized
gains and losses on investments) $1,392,505 $1,114,903 $1,013,979
Adjustments to reconcile net cash
provided by (used in) operating
activities:
Depreciation 173,601 182,971 190,288
Net realized (gains) or
losses on investments (873,298) (60,237) (60,732)
Loss on disposal of property,
plant & equipment 918 5,326
Deferred income taxes 16,900 (221,000) 430,000
Amortization of deferred
policy acquisition costs 3,364,738 3,069,742 3,242,706
Acquisition costs deferred (2,018,043) (2,779,393) (3,967,255)
Change in assets and liabilities
affecting cash provided by
operations:
Accrued investment income (48,890) (33,958) 842,643
Due from affiliated insurance
agency - 10,419 (50)
Accounts receivable (265,682) 305,725 324,561
Reinsurance Receivable 134,649 (191,157) (11,835)
Other policy claims and
future benefits payable 36,488 (96,568) (403,263)
Policyholders' Account balances 2,332,863 2,388,047 2,325,599
Funds held under reinsurance 215,950 276,715 202,827
Unearned premiums (962,941) (427,955) (525,609)
Dividend and endowment
accumulations 2,152 2,069 838
Payable to affiliated insurance
agent (209,957) 18,155 (123,959)
Income taxes payable 53,814 16,350 -
Other liabilities (134,983) (361,184) (800,006)
-------- -------- --------
Net cash provided by operating
activities 3,209,866 3,214,562 2,686,058
--------- --------- ---------
(continued)
28
SOUTHERN SECURITY LIFE INSURANCE COMPANY
Statements of Cash Flows (continued)
Years ended December 31, 1996, 1995 and 1994
1996 1995 1994
---- ---- ----
Cash flows from (used in) investing activities:
Purchase of investments:
Purchase of investments held to maturity (1,965,240) (3,492,860) (6,471,251)
Purchase of investments available for sale (8,085,785) (3,754,242) (8,599,060)
Proceeds from maturity of held to
maturity securities 2,165,750 1,135,203 1,955,675
Proceeds from maturity of available
for sale securities 635,533 141,150 2,508,813
Proceeds from sale of available for
sale securities (equity and fixed
maturity) 6,367,780 2,664,089 650,294
Net change in short term investments (3,040,006) 376,658 (1,247,532)
Net change in policy and student loans 2,655,845 (1,104,685) 15,693,088
Net change in other investments 7,605 8,476 -
Acquisition of property and equipment (60,559) (204,142) (41,787)
------- -------- -------
Net cash provided by (used in)
investing activities (1,319,077) (4,230,353) 4,448,240
---------- ----------- ---------
Cash flows from financing activities:
Receipts from universal life and
certain annuity policies credited
to policyholder account balances 5,213,760 5,609,910 6,103,433
Return of policyholder account
balances on universal life and
certain annuity policies (5,904,692) (5,334,176) (4,142,868)
Proceeds from short-term borrowings 2,500,000 3,250,000 8,462,932
Repayment of short-term
borrowings (3,900,553) (2,741,270) (17,009,177)
----------- ---------- -----------
Net cash provided by (used in)
financing activities (2,091,485) 784,464 (6,585,680)
----------- ------- ----------
Increase (decrease) in cash and cash
equivalents (200,696) (231,327) 548,618
Cash and cash equivalents at
beginning of year 406,752 638,079 89,461
------- ------- ------
Cash and cash equivalents at
end of year $206,056 $406,752 $638,079
======== ======== ========
29
SOUTHERN SECURITY LIFE INSURANCE COMPANY
Statements of Cash Flows (continued)
Years ended December 31, 1996, 1995 and 1994
1996 1995 1994
---- ---- ----
Supplemental schedule of cash flow
Information:
Interest paid during the year, net 12,094 24,935 164,790
====== ====== =======
Income taxes paid during the year 130,500 249,000 145,000
======= ======= =======
Change in market value adjustments-
investments available for sale:
Fixed maturities (557,065) 2,109,314 (1,374,628)
Equity securities (418,345) 406,612 11,733
Change in deferred acquisition costs 181,196 (1,669,168) 1,100,581
Change in premium deposit funds (95,241) 871,220 (575,711)
Deferred income tax asset (liability) 333,800 (651,000) 320,000
Other (1,872) 204 (510)
------ --- ----
Net change in unrealized appreciation
(depreciation) (557,527) 1,067,182 (518,535)
======== ========= ========
See accompanying notes to financial statements.
30
SOUTHERN SECURITY LIFE INSURANCE COMPANY
Notes to Financial Statements
December 31, 1996, 1995 and 1994
1. Nature of business and summary of significant accounting
policies:
(a) Nature of Business
The primary business purpose of Southern Security Life Insurance
Company (the "Company") is the issuance of long duration
universal life insurance contracts. Prior to 1986, the Company's
business included traditional whole life and annuity contracts.
The majority of the Company's business is conducted in the states
of Florida (43%), Georgia (13%) and Texas (14%). 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.
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 consolidated
financial statements. The Company seeks to mitigate this risk
through geographic marketing of their 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 minimizes
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 or may cause disintermediation.
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
31
SOUTHERN SECURITY LIFE INSURANCE COMPANY
Notes to Financial Statements (continued)
1. Nature of business and summary of significant accounting
policies, continued
(a) 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
generally accepted accounting principles ("GAAP"), which vary
from reporting practices prescribed or permitted by regulatory
authorities.
(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 are classified as trading securities. Trading securities
are carried at fair value, with unrealized holding gains and
losses included in earnings. 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,
32
SOUTHERN SECURITY LIFE INSURANCE COMPANY
Notes to Financial Statements (continued)
1. Nature of business and summary of significant accounting
policies, continued
(d) with unrealized holding gains and losses reported as a
separate component of stockholders' equity, net of tax and a
valuation allowance against deferred acquisition costs. At
December 31, 1996 and 1995, the Company did not have any
investments categorized as trading securities.
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
credited 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.
Policy loans and student loans are carried at the unpaid
principal balance, less any amounts deemed to be uncol-lectible.
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 one month or less to be cash equivalents.
(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
33
SOUTHERN SECURITY LIFE INSURANCE COMPANY
Notes to Financial Statements (continued)
1. Nature of business and summary of significant accounting
policies, continued
(f) to the production of new business, have been deferred.
Deferred policy acquisition costs applicable to non- universal
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 receipt of
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 at a constant rate based on the
present value of the estimated gross profit amounts expected to
be realized over the life of the policies. 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 several 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) Depreciation
Depreciation is being provided on the straight-line method over
the estimated useful lives of the assets.
(h) Future Policy Benefits
The liability for future policy benefits 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.
34
SOUTHERN SECURITY LIFE INSURANCE COMPANY
Notes To Financial Statements (continued)
1. Nature of business and summary of significant accounting
policies, continued
(i) Recognition of Premium Revenue and Related Costs
Premiums are recognized as revenue as follows:
Universal life policies - premiums received from policy-holders
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.
(j) 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.
(k) Earnings Per Share
Earnings per share are computed based on weighted average
outstanding shares for each year.
(l) Reclassification
Certain amounts presented in the 1995 and 1994 financial
statements have been restated to conform to the 1996
presentation.
35
SOUTHERN SECURITY LIFE INSURANCE COMPANY
Notes to Financial Statements (continued)
2. Basis of Financial Statements
The more significant generally accepted accounting principles applied in
the preparation of financial statements that differ from life insurance
statutory accounting practices prescribed or permitted by regulatory
authorities (which are primarily designed to demonstrate solvency) are as
follows:
a. Costs of acquiring new business are deferred and amortized,
rather than being charged to operations as incurred.
b. The liability for future policy benefits and expenses is based on
conservative estimates of expected mortality, morbidity,
interest, withdrawals and future maintenance and settlement
expenses, rather than on statutory rates for mortality and
interest.
c. The liability for policyholder funds associated with universal
life and certain annuity contracts are based on the provisions of
Statement of Financial Accounting Standards Statement No. 97,
rather than on the statutory rates for mortality and interest.
d. Investments in securities are reported as described in Note
1,(c), rather than in accordance with valuations established by
the National Association of Insurance Commissioners ("NAIC").
Pursuant to NAIC valuations, bonds eligible for amortization are
reported at amortized value; other securities are carried at
values prescribed by or deemed acceptable by NAIC including
common stocks, other than stocks of affiliates, at market value.
e. Deferred income taxes, if applicable, are recognized for future
tax consequences attributable to differences between the
financial statement carrying amounts of existing assets and
liabilities and their respective tax bases.
f. The statutory liabilities for the asset valuation reserve and
interest maintenance reserve have not been provided in the
financial statements.
g. Certain assets, principally receivables from agents and
equipment, are reported as assets rather than being charged
directly to surplus.
h. Expenses attributable to the public offering of the common
shares have been reclassified from retained earnings to capital
in excess of par.
36
SOUTHERN SECURITY LIFE INSURANCE COMPANY
Notes to Financial Statements (continued)
2. Basis of financial statements, continued
i. Realized gains or losses on the sale or maturity of investments
are included in the statement of income and not recorded net of
taxes and amounts transferred to the interest maintenance reserve
as required by statutory accounting practices.
j. Certain proceeds from a note payable (note 9) that are treated
as shareholder's equity for statutory purposes are treated as a
liability under generally accepted accounting principles.
k. Reinsurance assets and liabilities are reported on a gross
basis rather than shown on a net basis as permitted by statutory
accounting practices.
A reconciliation of net income (loss) for the years ended December 31,
1996, 1995 and 1994 and shareholders' equity as of December 31, 1996 and
1995 between the amounts reported on a statutory basis and the related
amounts presented on the basis of generally accepted accounting
principles is as follows:
(The remainder of this page is intentionally left blank)
37
SOUTHERN SECURITY LIFE INSURANCE COMPANY
Notes to Financial Statements (continued)
2. Basis of financial statements, continued
Shareholders'
Net income equity
Years ended December 31, December 31,
1996 1995 1994 1996 1995
---- ---- ---- ---- ----
As reported
on a statutory
basis 1,022,183 $232,180 55,816 9,283,928 8,770,411
---------- -------- ------ --------- ---------
Adjustments:
Deferred policy
acquisition
costs, net (1,346,695) (290,344) 724,549 16,979,611 18,145,111
Future policy
benefits, un-
earned premiums
and policy-
holders' funds 1,626,090 1,006,862 586,243 (10,643,224) (12,340,766)
Deferred
income taxes (16,900) 221,000 (430,000) (588,100) (905,000)
Asset valuation
reserve - - - 307,364 807,899
Interest main-
tenance reserve (18,221) 24,909 (4,092) 209,736 227,957
Non-admitted
assets - - - 795,659 265,507
Unrealized gains
-SFAS 115 - - - 177,621 734,686
Capital and
surplus note - - - (1,000,000) (1,000,000)
Other adjustments,
net 126,048 (79,704) 81,463 138,993 120,805
------- ------- ------ ------- -------
Net increase
(decrease) 370,322 882,723 958,163 6,377,660 6,056,199
--------- ------- ------- --------- ---------
As reported on a
GAAP basis $1,392,505 1,114,903 1,013,979 15,661,588 14,826,610
========= ========= ========= ========== ==========
Under applicable laws and regulations, the Company is required to
maintain minimum surplus as to policyholders, determined in accordance
with regulatory accounting practices, in the aggregate amount of
approximately $1,800,000.
The payment of dividends by the Company is subject to the regulation
of the State of Florida Department of Insurance. A dividend may be
declared and paid without prior Florida
38
SOUTHERN SECURITY LIFE INSURANCE COMPANY
Notes to Financial Statements (continued)
2. Basis of financial statements, continued
Insurance Commissioner's approval if the dividend is equal to or less
than the greater of: (a) 10% of the Company's surplus as to
policyholder's derived from realized net operating profits on its
business and net realized capital gains; or (b) the Company's entire net
operating profits and realized net capital gains derived during the
immediately preceding calendar year, if the Company will have surplus as
to policyholders equal to or exceeding 115% of the minimum required
statutory surplus as to policyholders after the dividend is declared and
paid. As a result of such restrictions, the maximum dividend payable by
the Company during 1997 without prior approval is approximately
$1,022,183.
The Risk-Based Capital ("RBC") 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 of
insurers. Based on calculations using the appropriate NAIC formula, the
Company exceeded the RBC requirements at December 31, 1996.
3. Investments
(a) Equity Securities and Fixed Maturities
Equity securities consist of $0 and $1,715,385 of common stock at
December 31, 1996 and 1995 respectively.
Unrealized (depreciation) appreciation in investments in equity
securities for the years ended December 31, 1996, 1995, and 1994 is $0,
$406,611 and ($108,809), respectively.
The amortized cost and estimated market values of investments in debt
securities are as follows:
39
SOUTHERN SECURITY LIFE INSURANCE COMPANY
Notes to Financial Statements (continued)
3. Investments, continued
(a) Continued
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
December 31, 1996:
Held to maturity:
U.S. Treasury securities
and obligations of U.S.
government corporations
and agencies (guaranteed) $ 4,503,477 61,523 - 4,565,000
Corporate securities 9,461,064 120,955 - 9,582,019
Special revenue and
special assessment
obligations and all
nonguaranteed obligations
of agencies and authorities
of governments and their
political subdivisions 1,010,421 - 16,521 993,900
--------- ------ ------ -------
14,974,962 182,478 16,521 15,140,919
---------- ------- ------ ----------
Available for sale:
U.S. Treasury securities
and obligations of U.S.
government corporations
and agencies (guaranteed) 20,383,080 180,672 - 20,563,752
Corporate securities 3,585,084 - 2,084 3,583,000
Special revenue and
special assessment
obligations and all
nonguaranteed obligations
of agencies and authorities
of governments and their
political subdivisions 330,454 - 967 329,487
------- ------- --- -------
24,298,618 180,672 3,051 24,476,239
---------- ------- ----- ----------
$39,273,580 363,150 19,572 39,617,158
=========== ======= ====== ==========
40
SOUTHERN SECURITY LIFE INSURANCE COMPANY
Notes to Financial Statements (continued)
3. Investments, continued
(a) Continued
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
December 31, 1995:
Held to maturity:
U.S. Treasury
securities and
obligations of U.S.
government corpora-
tions and agencies
(guaranteed) 6,410,291 157,709 - 6,568,000
Corporate securities 7,743,286 171,436 - 7,914,722
Special revenue and
special assessment
obligations and all
nonguaranteed obligations
of agencies and
authorities of
governments and
their political
subdivisions 1,011,818 - - 1,011,818
--------- ------- ------ ---------
15,165,395 329,145 0 15,494,540
---------- ------- - ----------
Available for sale:
U.S. Treasury
securities and
obligations of U.S.
government corporations
and agencies (guaranteed) 16,533,564 721,436 - 17,255,000
Corporate securities 3,931,378 16,622 - 3,948,000
Special revenue and
special assessment
obligations and all
nonguaranteed
obligations of agencies
and authorities of
governments and their
political subdivisions 612,468 - 3,372 609,096
------- ------- ----- -------
21,077,410 738,058 3,372 21,812,096
---------- ------- ----- ----------
$36,242,805 1,067,203 3,372 37,306,636
=========== ========= ===== ==========
41
SOUTHERN SECURITY LIFE INSURANCE COMPANY
Notes to Financial Statements (continued)
3. Investments, continued
(a) Continued
Unrealized (depreciation) appre