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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, 1997
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: $5,585,889 as of February 27, 1998.
The number of shares of the Company outstanding as April 1, 1997 is as follows:
Number Outstanding at
Title of Class April 1, 1998
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 1997, approximately 45% 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 43% and 60% of
the policies written by the Company in 1997 and 1996 respectively, were for the
universal life products.
During the 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.
57% of the policies written in 1997 represent this new series. New field sales
representatives are being actively recruited 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
2
as a savings vehicle through the cash values of the policy.
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:
1997 1996 1995
==== ==== ====
Per- Per- Per-
Amount centage Amount centage Amount centage
Life
Insurance-
Ordinary
(1)(2) $8,386,972 94% 9,225,755 92% 10,220,659 93%
Individual
Annuities
(1) 70,809 1% 307,618 3% 195,473 2%
Life
Insurance-
Group
(SGLI) 476,455 5% 529,554 5% 518,597 5%
Other -
Accident &
Health 11,323 0% 1,274 0% 1,385 0%
----------- ---- ------------ ---- ----------- ----
$ 8,945,559 100% 10,064,201 100% 10,936,114 100%
=========== ==== ========== ==== ========== ====
(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 1996 and 1997 premium income for life insurance-ordinary are net of
reductions of $1,773,148 and $1,517,988, 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:
1997 1996 1995
---- ---- ----
Total Net Insurance
revenues $7,643,650 7,915,027 8,158,938
Benefit Costs:
Amount $4,307,013 3,818,562 4,061,096
Ratio to Net Premium
Income 56.4% 48.2% 49.8%
Acquisition Expenses:
Amount $3,542,617 3,364,738 3,069,742
Ratio to Net Premium
Income 46.3% 42.5% 37.6%
General Insurance Expenses:
Amount $3,382,255 3,246,552 2,735,280
Ratio to Net Premium
Income 44.3% 41% 33.5%
Income Before Income Taxes:
Amount $249,410 1,588,505 1,274,903
Ratio to Net Premium
Income 3.3% 20.1% 15.6%
Ratio to Total Income 2.1% 13.1% 11.4%
Ratio to Equity 1.5% 10.1% 8.6%
(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):
1997 1996 1995
---- ---- ----
Total life insurance in force
at beginning of period:
Ordinary Whole Life &
Endowment-Participating $441 584 583
Ordinary Whole Life &
Endowment-Non-Participating 1,157,624 1,289,250 1,459,149
Term 7,884 8,371 9,422
Reinsurance Assumed 537,701 507,552 531,502
------- ------- -------
Total $1,703,650 1,805,757 2,000,656
Additions (including re-
insurance assumed):
Ordinary Whole Life &
Endowment-Participating - 0 - - 0 - - 0 -
Ordinary Whole Life &
Endowment-Non-Participating 82,390 122,578 125,961
Term - 0 - - 0 - - 0 -
Reinsurance Assumed 19,021 64,071 8
------- ------- -------
Total $101,411 186,649 125,969
Terminations:
Death $2,010 1,756 2,204
Lapse and Expiry 57,435 73,919 89,868
Surrender 186,654 212,801 228,334
Other 152 280 463
------- ------- --------
Total $246,251 288,756 320,869
Life Insurance in force at end of period:
Ordinary Whole Life &
Endowment-Participating $381 441 583
Ordinary Whole Life &
Endowment-Non-Participating 1,019,179 1,157,624 1,289,250
Term 6,478 7,884 8,371
Reinsurance Assumed 532,772 537,701 507,552
------- ------- -------
Total $1,558,810 1,703,650 1,805,756
--------- --------- ---------
Reinsurance Ceded (337,901) (386,084) (448,382)
-------- -------- --------
Total after Reinsurance Ceded $1,220,909 1,317,566 1,357,374
========= ========= =========
Lapse Ratio (Reflecting termina-
tion by surrender and lapse;
ordinary life insurance only): 20.0% 20.5% 21.1%
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)
- ----- ---------- ---------- ---------- ---------
1997 $51,094,803 3,565,206 3,545,311 6.94%
1996 $50,752,712 3,508,161 3,318,627 6.54%
1995 $46,899,142 3,225,630 2,998,875 6.39%
(1) Computed pursuant to valuations prescribed under generally accepted
accounting principles.
(2) Includes capital gains 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 295 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 36 persons, none of whom are covered
under any collective bargaining agreements. The Company
6
feels it has good relations with its employees.
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 $1,900,000. 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, 1997 the Company had statutory capital and surplus of $9,316,923,
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.
7
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, 1997,
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.
8
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 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%.
9
Annuity reserves are based on the 1937 Standard Annuity Table, with interest on
policies computed at 3-1/2 or 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 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. The 1997, 1996 and 1995 increase in the statutory reserve due to the
implementation of this regulation was approximately $52,400, $158,000 and
$404,000 respectively.
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 financial statements in accordance with generally accepted
accounting principles, 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
10
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 the entire second floor of the building. The remaining rentable space
is fully leased as of December 31, 1997.
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
- ----------------------------------------------------------------------------
1997 1996
- ----------------------------------------------------------------------------
Mar.31 Jun.30 Sep.30 Dec.31 Mar.31 Jun.30 Sep.30 Dec.31
Common
Shares:
High 7 3/4 9 1/4 8 1/4 8 5 5 5/8 7 1/2 7 7/8
Low 7 1/8 7 3/8 7 3/4 6 1/2 4 7/8 4 7/8 5 3/8 7 1/8
(b) Approximate Number of Holders of Common Stock. There were 1,440
holders of record of the Company's Common Stock at December 31, 1997.
(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 1998
pursuant to such regulation is $183,000.
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,
1997 1996 1995 1994 1993
---------- --------- ----------- ----------- --------
Revenues:
Life insurance $7,643,650 7,915,027 8,158,938 9,299,789 10,738,921
Net investment
income 3,545,311 3,318,627 2,998,875 2,750,771 2,518,005
Realized Gain
(Loss)on
investments 506,795 869,502 60,237 60,732 138,985
------- ------- ------ ------ -------
Total Revenue 11,695,756 12,103,156 11,218,050 12,111,292 13,395,911
Benefits, Losses
& Expenses:
Insurance
living
benefits 2,459,638 2,420,021 2,636,851 2,815,194 2,848,888
Insurance death
benefits 1,847,375 1,398,541 1,424,245 1,300,063 1,871,590
Increase (decrease)
in policy
reserves 124,461 (5,201) (12,971) (67,036) (152,011)
Amortization of
deferred policy
acquisition
costs 3,542,617 3,364,738 3,069,742 3,242,706 5,216,871
Commissions and
general
expenses 3,382,255 3,246,552 2,735,280 3,186,386 2,814,921
Interest expense
with related
party 90,000 90,000 90,000 90,000 90,000
------ ------ ------ ------ ------
Total expenses 11,446,346 10,514,651 9,943,147 10,567,313 12,690,259
---------- ---------- --------- ---------- ----------
Income before
income taxes 249,410 1,588,505 1,274,903 1,543,979 705,652
------- --------- --------- --------- -------
Income taxes 54,200 196,000 160,000 530,000 1,000
------ ------- ------- ------- -----
NET INCOME $195,210 1,392,505 1,114,903 1,013,979 704,652
======== ========= ========= ========= =======
Weighted average
number of
shares
outstanding 1,907,989 1,907,989 1,907,989 1,907,989 1,844,694
--------- --------- --------- --------- ---------
Basic income per
common share $.10 .73 .58 .53 .38
---- --- --- --- ---
Diluted income per
common share $.10 .73 .58 .53 .38
---- --- --- --- ---
Shareholders'
Equity $16,132,018 15,661,588 14,826,610 12,644,525 12,238,101
=========== ========== ========== ========== ==========
Shareholders'
equity per
common
share $8.45 8.20 7.77 6.63 6.63
===== ==== ==== ==== ====
14
1997 1996 1995 1994 1993
---------- -------------- -------------- ------------- --------
Assets $82,142,465 81,809,360 81,872,350 77,185,070 81,211,540
----------- ---------- ---------- ---------- ----------
Life Insurance:
Insurance in
force $1,558,810,000 1,703,650,000 1,805,756,000 2,000,656,000 2,180,987,000
-------------- ------------- ------------- ------------- -------------
Individual
insurance
issued during
current
year $82,390,000 121,646,000 124,222,000 184,364,000 325,869,000
----------- ----------- ----------- ----------- -----------
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
16
suggests that earlier estimates be revised. Thus, variations in 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 1997, 1996 and 1995 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)
1997 1996 1995 97-96 96-95
------ ------ ------ ------- ------
Insurance Revenues 65% 65% 73% (3%) (3%)
Net Investment Income 35 35 27 7% 11%
Other Income
Total Revenues 100% 100% 100% (3%) 8%
Losses, claims and
loss adjustment
expenses 38% 31% 36% 16% 6%
Acquisition costs 30 28 27 5% 10%
Other operating
costs and
expenses 30 27 26 4% 18%
---- ---- ---- ---- ----
Total Expenses 98% 86% 89% 9% 6%
Income before income
taxes 2% 14% 11% (84%) 24%
Provision for income
taxes 0 2 1 (72%) 22%
--- --- ---- ---- ----
Net Income 2% 12% 10% (86%) 25%
= == == === ==
Results of Operations.
New business written was $82, $122 and $124 million in face value for
1997, 1996 and 1995, respectively. The Company's new market is known as the
final expense market. This product is a traditional endowment policy designed to
help offset the financial burdens associated with the death of a family member
and targets the needs of senior citizens. 57% of the policies written in 1997
represent this new product. Recruiting new field sales representatives is
directed at this new plan. 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 1996 and 1997, the Company issued approximately
2,700 new policies.
18
Premium and policy charges for 1997 was $7.5 million, 1996 was $7.7
million, 1995 at $7.9 million. While policy production was up for 1997 and 1996,
premium and policy charges went down.
Premium and policy charges for 1997 were $7.5 million. 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 in 1997
was consistent with the amount of 1996. 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 balance of the decline in 1997, 1996 and 1995 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 6.94% net yield in 1997 and
6.54% net yield in 1996. 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 were invested in a more aggressive stock market fund which
created an increased yield for the Company in 1997. Additional changes in the
Company's holdings are being planned for 1998.
Annuity, death and other benefits increased 16% in 1997. 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 1997 each of these expenses increased with death claims representing
the largest increase. A significant increase or decrease in death claims in any
given year can have a marked impact on the results of operations in a small
company.
The amortization of deferred acquisition costs increased in
19
1997 by 5% as compared to a 10% increase in 1996. 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 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 $3.4 million, $3.3 million and
$2.7 million for 1997, 1996 and 1995, respectively. New products and lead
programs are responsible for the increased operating costs of 1997 and 1996. The
lead generation program used to introduce and promote the new product was not
without cost. The Company also attempted some new marketing procedures in these
two years which added to the costs. The Company has reviewed its promotional
expenses and now that the new product has established a market, has cut back on
these expenses.
Reinsurance premiums ceded for 1997, 1996 and 1995 were $1,516,422,
$1,767,418 and $2,112,884 respectively. Policy benefits were reduced due to
reinsurance recoveries of $301,068, $709,643, and $405,345 for 1997, 1996 and
1995, respectively. Reinsurance commissions amounted to $281,434 for 1997 and
$308,179 and $397,253 for 1996 and 1995 respectively. In addition, under the
terms of the Company's treaty with Mega Life (formerly United Group Insurance
Company) expenses of $1,111,130 were transferred for 1997 and $956,143 and
$911,452 for 1996 and 1995 respectively.
Income, before income taxes, in 1997 was $249,410, inclusive of gain on
equity securities of $506,795, compared to $1,588,505, in 1996 and $1,274,903 in
1995. The 1997 income declined approximately $1,339,000 from the prior year as a
result of reduced total revenue of $407,000 with realized gain on investments
representing $363,000 of this amount. Total expenses increased $932,000 with
death claims representing $449,000 of this amount and the balance of $493,000
attributed to acquisition costs and operating expense of $324,000 and other
policy benefits of $169,000.
Liquidity and Capital Resources.
Statement of Financial Accounting Standards No. 115 ("SFAS 115"),
"Accounting for Certain Investments in Debt and Equity Securities" requires
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.
20
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 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 throughout the seasonal period
for 1997 or 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 1998. SLMA offers a more competitive rate of interest on such
borrowings than the Company has been able to obtain through banks.
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 1997
and 1996.
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
21
of domicile, had yet to adopt the provisions of the RBC model law, the Company
is monitoring its RBC results in anticipation of future adoption. At December
31, 1997, the Company had statutory surplus well in excess of any RBC action
level requirements.
The Company has no material commitments for capital expenditures throughout the
balance of the year 1998 as all rentable space on the first floor of its office
building is fully leased.
The Company is aware of potential problems all computer systems face with
respect to the year 2000, and has investigated various solutions. Present plans
call for the conversion to be completed by the end of 1998. It is estimated to
cost approximately $200,000, which would not have a material impact on the
Company.
Testing for hardware problems will be done during the second quarter of 1999,
although the Company is not expecting any problems which could not be solved
before December 31, 1999.
Item 8. Financial Statements and Supplementary Data.
22
SOUTHERN SECURITY LIFE INSURANCE COMPANY
Financial Statements and Schedules
December 31, 1997, 1996 and 1995
(With Independent Auditors' Report Thereon)
23
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, 1997 and 1996, and the results of its
operations and its cash flows for each of the years in the three year period
ended December 31, 1997, 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 3, 1998
24
SOUTHERN SECURITY LIFE INSURANCE COMPANY
Balance Sheets
December 31, 1997 and 1996
Assets 1997 1996
------ ---- ----
Investment (note 3):
Fixed maturities held to maturity
(fair value, $10,631,003 and
$15,140,919 at December 31,
1997 and 1996, respectively) $10,501,712 14,974,962
Securities available for sale,
at fair value:
Fixed maturities (cost of
$30,880,390 at December 31,
1997 and $24,298,618 at
December 31, 1996) 31,483,324 24,476,239
Equity securities (cost, $800,000
and $0 at December 31, 1997 and
1996, respectively) 839,973 -
Policy and student loans 7,945,381 7,315,809
Short-term investments 100,000 4,539,106
Other invested assets - 13,100
---------- ----------
50,870,390 51,319,216
Cash and cash equivalents 2,448,994 206,056
Accrued investment income 637,460 687,699
Deferred policy acquisition costs
(note 4) 15,451,689 16,979,612
Policyholders' account balances on
deposit with reinsurer (note 7) 8,667,241 8,522,449
Reinsurance receivable (note 7) 359,688 379,692
Receivables:
Agent balances 590,368 588,290
Other 324,752 340,680
Refundable income taxes 121,680 -
Property and equipment, net,
at cost (note 5) 2,670,203 2,785,666
---------- ----------
$82,142,465 81,809,360
See accompanying notes to financial statements
25
SOUTHERN SECURITY LIFE INSURANCE COMPANY
Balance Sheets (continued)
December 31, 1997 and 1996
Liabilities and Shareholders' Equity 1997 1996
------------------------------------ ---- ----
Liabilities:
Policy liabilities and accruals
(notes 6 and 7): $1,409,031 985,720
Future policy benefits:
Policyholders' account balances 52,335,511 52,347,996
Unearned premiums 7,108,662 8,249,190
Other policy claims and benefits
payable 427,649 293,221
Other policyholders' funds, dividend
and endowment accumulations 59,686 59,596
Funds held by reinsurance treaties
with reinsurers (note 7) 1,339,927 1,193,366
Note payable to related party
(note 9) 1,000,000 1,000,000
Due to affiliated insurance
agency (note 11) 68,646 33,411
General expenses accrued 897,627 894,131
Unearned investment income 313,018 228,032
Other liabilities 100,990 204,845
Income taxes payable - 70,164
Deferred income taxes (note 10) 949,700 588,100
------- -------
66,010,447 66,147,772
Shareholders' equity (notes 2,3 and 12):
Common stock, $1 par, authorized
3,000,000 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 $215,867 and $187,196
net of deferred Federal income taxes
of $160,700 and ($675) at December 31,
1997 and 1996, respectively 266,340 (8,880)
Retained earnings 9,946,170 9,750,960
---------- ---------
16,132,018 15,661,588
Commitments and contingencies
(notes 7 and 14) - -
-------- ------
$82,142,465 81,809,360
26
SOUTHERN SECURITY LIFE INSURANCE COMPANY
Statements of Income
Years ended December 31, 1997, 1996, and 1995
1997 1996 1995
---- ---- ----
Revenues:
Premium and policy
charges $7,499,760 7,702,639 7,919,362
Less reinsurance ceded (914,071) (1,030,673) (1,201,432)
Surrender fee income 1,057,961 1,243,061 1,441,008
--------- --------- ---------
Net insurance revenue 7,643,650 7,915,027 8,158,938
Net investment income
(notes 3 & 8) 3,545,311 3,318,627 2,998,875
Realized gain on
investments (note 3) 506,795 869,502 60,237
-------- ------- ------
11,695,756 12,103,156 11,218,050
---------- ---------- ----------
Benefits, losses and expenses:
Annuity, death, surrender
and other benefits 4,307,013 3,818,562 4,061,096
Increase (decrease) in future
policy benefits 124,461 (5,201) (12,971)
Amortization of deferred
policy acquisition
costs (note 4) 3,542,617 3,364,738 3,069,742
Operating expenses
(note 11) 3,382,255 3,246,552 2,735,280
Interest expense with
related party (note 9) 90,000 90,000 90,000
------ ------ ------
11,446,346 10,514,651 9,943,147
---------- ---------- ---------
Income before income taxes 249,410 1,588,505 1,274,903
Income tax expense (note 10) 54,200 196,000 160,000
------ ------- -------
Net income $195,210 1,392,505 1,114,903
======== ========= =========
Basic net income per share of
common stock $.10 .73 .58
==== === ===
Diluted net income per share of
common stock $.10 .73 .58
==== === ===
See accompanying notes to financial statements.
27
SOUTHERN SECURITY LIFE INSURANCE COMPANY
Statements of Shareholders' Equity
Years ended December 31, 1997, 1996 and 1995
Unrealized
Appreciation
(depreciation)
Capital of securities
Common stock in excess available Retained
Shares Amount of par for sale Earnings
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 appre-
ciation of
securities avail-
able 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 - - - - 1,392,505
Unrealized depre-
ciation of
securities avail-
able for sale
investments - - - (557,527) -
------- ------- ------- -------- ----
Balances,
December 31,
1996 1,907,989 $1,907,989 4,011,519 (8,880) 9,750,960
--------- ---------- --------- ------ ---------
Capital Stock
issued
Net income for
the year - - - - 195,210
Unrealized depre-
ciation of
securities avail-
able for sale
investments - - - 275,220 -
------- ------- ------- ------- ----
Balances,
December 31,
1997 1,907,989 $1,907,989 4,011,519 266,340 9,946,170
========= ========== ========= ======= =========
See accompanying notes to financial statements.
28
SOUTHERN SECURITY LIFE INSURANCE COMPANY
Statements of Cash Flows
Years ended December 31, 1997, 1996 and 1995
1997 1996 1995
---- ---- ----
Cash flows provided by (used in)
operating activities:
Net income $195,210 1,392,505 1,114,903
Adjustments to reconcile net cash
provided by (used in) operating
activities:
Depreciation and amortization 232,471 169,681 182,971
Net realized (gains) on
investments (506,795) (869,502) (60,237)
Loss on disposal of property,
plant & equipment 100 124 918
Deferred income taxes 198,100 16,900 (221,000)
Amortization of deferred
policy acquisition costs 3,542,617 3,364,738 3,069,742
Acquisition costs deferred (2,069,778) (2,018,043) (2,779,393)
Change in assets and liabilities
affecting cash provided by
operations:
Accrued investment income 50,239 (48,890) (33,958)
Other invested assets 13,100 - -
Due from affiliated insurance
agency (2,078) - 10,419
Accounts receivable (105,752) (265,682) 305,725
Reinsurance Receivable 20,004 134,649 (191,157)
Other policy claims and
future benefits payable 557,739 36,488 (96,568)
Policyholders' Account balances 2,065,521 2,332,863 2,388,047
Funds held under reinsurance 146,561 215,950 276,715
Unearned premiums (1,114,188) (962,941) (427,955)
Dividend and endowment
accumulations 90 2,152 2,069
Payable to affiliated insurance
agent 35,235 (209,957) 18,155
Income taxes payable (70,164) 53,814 16,350
Other liabilities (15,373) (134,983) (361,184)
------- -------- --------
Net cash provided by operating
activities 3,172,859 3,209,866 3,214,562
--------- --------- ---------
(continued)
29
SOUTHERN SECURITY LIFE INSURANCE COMPANY
Statements of Cash Flows (continued)
Years ended December 31, 1997, 1996 and 1995
1997 1996 1995
---- ---- ----
Cash flows from (used in) investing activities:
Purchase of investments:
Purchase of investments held to maturity - (1,965,240) (3,492,860)
Purchase of investments available
for sale (32,704,906) (8,085,785) (3,754,242)
Purchase of equity securities (3,316,249) - -
Proceeds from maturity of held to
maturity securities 4,488,354 2,165,750 1,135,203
Proceeds from maturity of available
for sale securities - 635,533 141,150
Proceeds from sale of available for
sale securities (equity and fixed
maturity) 29,049,745 6,367,780 2,664,089
Net change in short term investments 4,439,106 (3,040,006) 376,658
Net change in policy and student loans (629,572) 2,655,845 (1,104,685)
Net change in other investments 2,178 7,605 8,476
Acquisition of property and equipment (35,779) (60,559) (204,142)
------- ------- --------
Net cash provided by (used in)
investing activities 1,292,877 (1,319,077) (4,230,353)
--------- ----------- ----------
Cash flows from financing activities:
Receipts from universal life and
certain annuity policies credited
to policyholder account balances 4,042,137 5,213,760 5,609,910
Return of policyholder account
balances on universal life and
certain annuity policies (6,264,935) (5,904,692) (5,334,176)
Proceeds from short-term borrowings - 2,500,000 3,250,000
Repayment of short-term borrowings - (3,900,553) (2,741,270)
---------- ---------- ----------
Net cash provided by (used in)
financing activities (2,222,798) (2,091,485) 784,464
----------- ---------- ----------
Increase (decrease) in cash and
cash equivalents 2,242,938 (200,696) (231,327)
Cash and cash equivalents at
beginning of year 206,056 406,752 638,079
------- ------- -------
Cash and cash equivalents at
end of year $2,448,994 206,056 406,752
========== ======= =======
(continued)
30
SOUTHERN SECURITY LIFE INSURANCE COMPANY
Statements of Cash Flows (continued)
Years ended December 31, 1997, 1996 and 1995
1997 1996 1995
---- ---- ----
Supplemental schedule of cash flow Information:
Interest paid during the year $90,000 102,094 114,935
====== ======= =======
Income taxes paid during the year $115,000 130,500 249,000
======= ======= =======
Change in market value adjustments-
investments available for sale:
Fixed maturities $425,313 (557,065) 2,109,314
Equity securities 39,973 (418,345) 406,612
Change in deferred acquisition costs (55,084) 181,196 (1,669,168)
Change in premium deposit funds 26,340 (95,241) 871,220
Deferred income tax asset (liability) (163,500) 333,800 (651,000)
Other 2,178 (1,872) 204
----- ------ ----
Net change in unrealized appreciation
(depreciation) $275,220 (557,527) 1,067,182
======= ======== =========
See accompanying notes to financial statements.
31
SOUTHERN SECURITY LIFE INSURANCE COMPANY
Notes to Financial Statements
December 31, 1997, 1996 and 1995
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.
Certain executive officers and directors of the Company are
shareholders of approximately 60% of the issued and outstanding
common shares of Consolidare Enterprises, Inc. Consolidare
Enterprises, Inc. owns approximately 57% of the Company's voting
securities at December 31, 1997.
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 attempts to
mitigate this risk by adhering to a conservative investment
strategy, by maintaining sound reinsurance and by providing for any
amounts deemed uncollectible.
32
SOUTHERN SECURITY LIFE INSURANCE COMPANY
Notes to Financial Statements (continued)
1. Nature of business and summary of significant accounting
policies, continued
(a) Nature of Business
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 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
33
SOUTHERN SECURITY LIFE INSURANCE COMPANY
Notes to Financial Statements (continued)
1. Nature of business and summary of significant accounting
policies, continued
(d) Investments
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, 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, 1997 and 1996, 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.
34
SOUTHERN SECURITY LIFE INSURANCE COMPANY
Notes to Financial Statements (continued)
1. Nature of business and summary of significant accounting
policies, continued
(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 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.
35
SOUTHERN SECURITY LIFE INSURANCE COMPANY
Notes To Financial Statements (continued)
1. Nature of business and summary of significant accounting
policies, continued
(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.
(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.
36
SOUTHERN SECURITY LIFE INSURANCE COMPANY
Notes to Financial Statements (continued)
1. Nature of business and summary of significant accounting
policies, continued
(k) Earnings Per Share
In 1997, the Financial Accounting Standards Board issued
Statement No. 128, Earnings per Share. Statement No. 128
replaced the calculation of primary and fully diluted
earnings per share with basic and diluted earnings per
share. Unlike primary earnings per share, basic earnings
per share excludes any dilutive effects of options,
warrants and convertible securities. Diluted earnings per
share is very similar to the previously reported fully
diluted earnings per share. All earnings per share amounts
for all periods presented are restated to conform to
Statement No. 128 requirements.
(l) Reclassification
Certain amounts presented in the 1996 and 1995 financial statements
have been restated to conform to the 1997 presentation.
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
37
SOUTHERN SECURITY LIFE INSURANCE COMPANY
Notes to Financial Statements (continued)
2. Basis of financial statements, continued
d. 1 (d), 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.
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.
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
shareholders' 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,
1997, 1996 and 1995 and shareholders' equity as of December 31, 1997 and
1996 between the amounts reported on a statutory basis and the related
amounts presented on the basis of generally accepted accounting principles
is as follows:
38
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,
1997 1996 1995 1997 1996
---- ---- ---- ---- ----
As reported
on a statutory
basis $45,398 1,022,183 232,180 9,316,923 9,283,928
------ ---------- ------- ---------- ---------
Adjustments:
Deferred policy
acquisition
costs, net (1,472,839) (1,346,695) (290,344) 15,451,689 16,979,611
Future policy
benefits, un-
earned premiums
and policy-
holders' funds 1,644,330 1,626,090 1,006,862 (8,915,443) (10,643,224)
Deferred
income taxes (198,100) (16,900) 221,000 (949,700) (588,100)
Asset valuation
reserve - - - 465,452 307,364
Interest main-
tenance reserve 129,109 (18,221) 24,909 338,845 209,736
Non-admitted
assets - - - 698,024 795,659
Unrealized gains
-SFAS 115 - - - 602,934 177,621
Capital and
surplus note - - - (1,000,000) (1,000,000)
Other adjustments,
net 47,312 126,048 (79,704) 123,294 138,993
------ ------- ------- ------- -------
Net difference 149,812 370,322 882,723 6,815,095 6,377,660
------- ------- ------- --------- ---------
As reported on a
GAAP basis $195,210 1,392,505 1,114,903 16,132,018 15,661,588
======= ========= ========= ========== ==========
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
39
SOUTHERN SECURITY LIFE INSURANCE COMPANY
Notes to Financial Statements (continued)
2. Basis of financial statements, continued
aggregate amount of approximately $1,900,000.
The payment of dividends by the Company is subject to the regulation of
the State of Florida Department of Insurance.
The Insurance Commissioner's approval is not required if the dividend is
equal to or less than the greater of: (a) 10% of the Company's surplus as
to policyholders' 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 $183,000.
Accordingly, GAAP excess earnings over a stat basis are not available for
dividends.
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, 1997.
3. Investments
(a) Equity Securities and Fixed Maturities
Equity securities consist of $839,973 and $0 of common stock at December
31, 1997 and 1996 respectively.
Unrealized (depreciation) appreciation in investments in equity securities
for the years ended December 31, 1997, 1996, and 1995 is $39,973, $0 and
$406,611, respectively.
The amortized cost and estimated fair values of investments in debt
securities are as follows:
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, 1997:
Held to maturity:
U.S. Treasury
securities and
obligations of U.S.
government corpora-
tions and agencies
(guaranteed) $2,516,052 53,948 - 2,570,000
Corporate securities 6,976,738 79,620 4,277 7,052,081
Special revenue and
special assessment
obligations and all non-
guaranteed obligations of
agencies and authorities
of governments and
their political
subdivisions 1,008,922 - - 1,008,922
--------- ------- ------ ---------
10,501,712 133,568 4,277 10,631,003
---------- ------- ----- ----------
Available for sale:
U.S. Treasury
securities and
obligations of U.S.
government corporations
and agencies (guaranteed) 9,301,191 173,517 - 9,474,708
Corporate securities 21,481,892 429,907 - 21,911,799
Special revenue and
special assessment
obligations and all non-
guaranteed obligations of
agencies and authorities
of governments and their
political subdivisions 97,307 - 490 96,817
------- ------- ----- -------
30,880,390 603,424 490 31,483,324
---------- ------- ---- ----------
$41,382,102 736,992 4,767 42,114,327
=========== ======== ===== ==========
41
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 non-
guaranteed 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 non-
guaranteed 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
=========== ======= ====== ==========
42
SOUTHERN SECURITY LIFE INSURANCE COMPANY
Notes to Financial Statements (continued)
3. Investments, continued
(a) Continued
Unrealized appreciation (depreciation) of fixed maturities for years
ending December 31, 1997, 1996 and 1995 is $388,847, ($720,253) and
$2,779,872 respectively.
The amortized cost and estimated fair value of fixed maturities at
December 31, 1997 by contractual maturity, are summarized below.
Expected maturities will differ from contractual maturities because
borrowers may have the right to call or prepay obligations with or
without call or prepayment penalties.
Fixed maturity securities held-to-maturity:
Amortized Estimated
Cost Fair value
Due in one year or less $3,949,982 3,960 500
Due after one year through
five years 5,281,472 5,400,245
Due after five years through
ten years - -
Due after ten years 261,336 261,336
------- -------
9,492,790 9,622,081
Mortgage backed securities 1,008,922 1,008,922
--------- ---------
$10,501,712 10,631,003
Fixed maturity securities available-for-sale:
Due after one year through
5 years $9,130,069 9,229,142
Due after five years through
ten years 15,121,559 15,477,301
Due after ten years 6,531,455 6,680,064
--------- ---------
30,783,083 31,386,507
Mortgage backed securities 97,307 96,817
------- -------
$30,880,390 31,483,324
43
SOUTHERN SECURITY LIFE INSURANCE COMPANY
Notes to Financial Statements (continued)
3. Investments, continued
(a) Continued
Proceeds from sale of equity securities and fixed maturities
available for sale and related realized gains and losses are
summarized as follows:
1997 1996 1995
---------- ---------- -------
Proceeds from sale of
equity securities $2,873,980 2,885,010 854,339
---------- --------- -------
Proceeds from sale of
fixed maturities
available for sale $26,175,765 3,482,770 1,809,750
----------- --------- ---------
Fixed maturities:
Gross realized gains $278,904 15,013 145,136
Gross realized (losses) (150,045) (18,881) (119,908)
Equity securities:
Gross realized gains 357,731 930,919 55,543
Gross realized (losses) - (57,620) (20,540)
-------- ------- -------
$486,590 869,431 60,231
======= ======= ======
Certain of the fixed maturity securities classified as available for sale
and held to maturity were called during the year ended December 31, 1997,
1996 and 1995 resulting in the following realized gains and losses:
1997 1996 1995
---- ---- ----
Held to maturity:
Gross realized gains $20,205 71 6
Available for sale:
Gross realized gains 21,997 - -
------ - -
$42,202 71 6
======= == =
44
SOUTHERN SECURITY LIFE INSURANCE COMPANY
Notes to Financial Statements (continued)
3. Investments, continued
(a) Continued
Investments, aggregated by issuer, in excess of 10% of
shareholders' equity (before net unrealized gains and losses on
available for sale securities) at December 31, 1997, other than
investments issued or guaranteed by the United States government
are as follows:
1997 Carrying Amount
Dean Witter Discover $2,114,643
Federal Express 2,260,000
Lehman Brothers Inc. 2,080,000
Philip Morris Inc. 3,535,000
There were no investments, aggregated by issuer, in excess of 10%
of shareholders' equity at December 31, 1996.
(b) Concentrations of credit risk
At December 31, 1997 and 1996, the Company did not hold any
unrated or less-than-investment grade corporate debt securities.
The Company also invests in subsidized and unsubsidized student
loans totaling $244,361 and $514,483 at December 31, 1997 and
1996, respectively, which are guaranteed by the U.S. government.
Subsequent to December