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SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-K
(Conformed)
(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, 1998 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 registrant as specified in its charter)
Florida 59-1231733
(State or other jurisdiction (I.R.S. Employer Identification No.)
of incorporation or organization)
755 Rinehart Road, Lake Mary, Florida 32746
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code:(407) 321-7113
Securities registered pursuant to Section 12(b) of the Act:
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 Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to the
filing requirements for the past 90 days. X Yes No
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of Company's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-
K or any amendment to this Form 10-K. X
The aggregate market value of the voting stock held by nonaffiliates
of the Registrant as of March 31, 1999 was approximately $3,047,000.
As of March 31, 1999, registrant had issued and outstanding 1,907,989
shares of common stock.
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 1999. During 1998 approximately 44% 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.
Effective December 17, 1998, Security National Financial Corporation
(SNFC), an SEC registrant, acquired 100 percent of the assets of Consolidare
Enterprises, Inc. which owned 57.4 percent of the outstanding shares of the
Company. During March 1999 SNFC changed Consolidare's name to SSLIC Holding
Company, Inc.
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 23% and 43% of
the life policies written by the Company in 1998 and 1997 respectively, were
universal life products.
During 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. These new policies are
traditional endowment type policies. Because they are written to a senior market
they are designed to accommodate adverse health conditions. Because of the size
of the policies they are usually issued with only limited underwriting. The
coverage size of the policy is roughly
2
equivalent to the insured's anticipated funeral costs. This new series
represented 77% of the life policies written in 1998. 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 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:
1998 1997 1996
==== ==== ====
Per- Per- Per-
Amount centage Amount centage Amount centage
Life
Insurance-
Ordinary
(1)(2) $7,602,811 91% $8,386,972 94% $9,225,755 92%
Individual
Annuities
(1) 90,289 1% 70,809 1% 307,618 3%
Life
Insurance-
Group
(SGLI) 460,029 6% 476,455 5% 529,554 5%
Other -
Accident &
Health 158,882 2% 11,323 0% 1,274 0%
---------- ---- ---------- ---- ----------- ----
$8,312,011 100% $8,945,559 100% $10,064,201 100%
========== ==== ========== ==== =========== ====
(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 1998, 1997, and 1996 premium income for life insurance-ordinary
are net of reductions of $1,329,814, $1,517,988, and $1,773,148,
respectively, in ceded premium paid to all reinsurers, including Mega
Life.
3
The following table gives information on a generally accepted
accounting principles basis concerning operating ratios of the Company for the
periods indicated:
1998 1997 1996
----- ---- ----
Total Net Insurance
Revenues $7,228,227 $7,643,650 $7,915,027
Benefit Costs Paid or
Provided:
Amount $4,346,820 $4,431,474 $3,813,301
Ratio to Net Insurance
Revenue 60.1% 58.0% 48.2%
Amortization of Deferred Policy
Acquisition Expenses:
Amount $3,484,689 $3,542,617 $3,364,738
Ratio to Net Insurance
Revenue 48.2% 46.3% 42.5%
General Insurance Expenses:
Amount $4,044,686 $3,382,255 $3,246,552
Ratio to Net Insurance
Revenue 55.9% 44.3% 41%
Income (Loss) Before Income
Taxes:
Amount $(625,640) $249,410 $1,588,505
Ratio to Net Insurance
Revenue (8.7%) 3.3% 20.1%
Ratio to Total Revenue and
Investment Income (5.5%) 2.1% 13.1%
Ratio to Equity (4.0%) 1.5% 10.1%
4
The following table provides information about the Company concerning
changes in life insurance in force during the periods indicated (exclusive of
accidental death benefits):
1998 1997 1996
---- ---- ----
(In thousands except lapse ratios)
Total life insurance in force at beginning of period:
Ordinary Whole Life &
Endowment-Participating $381 $441 $584
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 $1,805,757
Additions (including re-insurance assumed):
Ordinary Whole Life &
Endowment-Participating $ - $ - $ -
Ordinary Whole Life &
Endowment-Non-Participating 68,935 82,390 122,578
Term - - -
Reinsurance Assumed 21,617 19,021 64,071
------- ------- -------
Total $90,552 $101,411 $186,649
Terminations:
Death $1,605 $2,010 $1,756
Lapse and Expiry 48,034 57,435 73,919
Surrender 132,184 186,654 212,801
Other 10 152 280
------- ------- -----
Total $181,833 $246,251 $288,756
Life Insurance in force at end of period:
Ordinary Whole Life &
Endowment-Participating $532 $381 $441
Ordinary Whole Life &
Endowment-Non-Participating 913,683 1,019,179 1,157,624
Term 4,799 6,478 7,884
Reinsurance Assumed 548,515 532,772 537,701
------- ------- -------
Total $1,467,529 $1,558,810 $1,703,650
--------- ---------- ----------
Reinsurance Ceded (297,913) (337,901) (386,084)
-------- -------- --------
Total after Reinsurance Ceded $1,169,616 $1,220,909 $1,317,566
========= ========== ==========
Lapse Ratio (Reflecting termina-
tion by surrender and lapse;
ordinary life insurance only): 17.4% 20.0% 20.5%
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:
Average Gross Net
Fiscal Investment Investment Investment Net
Year Assets (1) Income(2) Income (3) Yield (4)
- ----- ---------- ---------- ---------- ---------
1998 $52,227,057 $3,599,547 $3,587,147 6.87%
1997 $51,094,803 $3,565,206 $3,545,311 6.94%
1996 $50,752,712 $3,508,161 $3,318,627 6.54%
(1) Computed by summing the beginning and ending investment balances and
dividing by 2.
(2) Excludes investment gains and losses.
(3) Net of investment expense and before income taxes.
(4) Computed on an annualized basis. Represents ratio of net investment
income to average invested assets.
The Company continues its activities as a qualified lender under the
Federal Family Educational Loan Program. Through this program the Company makes
various types of student and parent loans available. All student loans made by
the Company are guaranteed by the Federal Government. As it has in the past, the
Company sells these student loans on a periodic basis to the Student Loan
Marketing Association ("SLMA") thereby keeping these funds liquid.
The Company presently sells its policies on a general agency basis
through a field force consisting of approximately 676 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, SSLIC Holding Company, formerly
Consolidare Enterprises, Inc. See "Certain Relationships and Related
Transactions" in item 13, Part III of this Report.
The Company presently employs 32 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 $1,930,000. 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, 1998 the Company had statutory capital and surplus of $8,627,251,
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, 1998,
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 minor participation in Servicemembers' Group Life Insurance and other
small blocks of business.
For reporting to state regulatory authorities the Company is required
to establish policy benefit and other reserves 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
9
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 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 1998, 1997 and 1996 (decrease)/increase in the statutory reserve
due to the implementation of this regulation was approximately $(66,820),
$52,400 and $158,000 respectively.
In preparing financial statements in accordance with generally accepted
accounting principles, the cost of insurance, expense charges and surrender
charges on universal life products are recognized as revenue. For "Annuity
Contracts" with flexible terms, amounts received from policyholders are not
recognized as revenue but are recorded as deposits in a manner similar to
interest-bearing instruments. Accumulations on these universal life and annuity
contracts are held as "Policyholders' Account Balances." For all other policies
(primarily whole-life) premiums are recorded as revenue and reserves are
calculated using the net level premium method. Accumulation values for these
types of policies are held as benefit reserves. See "Future Policy Benefits" in
Note 1 of the Notes to Financial Statements included in this report.
The Company maintains its own policy files, prepares its own policy
forms (with the assistance of its consulting actuaries), selects risks,
calculates premiums, prepares premium notices, 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.
10
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, 1998.
Item 3. Legal Proceedings.
The Company has been named as a party in connection with two actions
pending in the Circuit Court of Loundes County, Alabama by Willie May Oliver and
Eugene Oliver, Jr. in the first action and Eva Mae Howard in the second action.
The complaints filed in these actions against the Company and certain insurance
agents assert claims for fraud, misrepresentation, and negligent hiring,
training and supervision by the Company and seek compensatory and punitive
damages, interest and costs. The Company believes that there is no basis to the
claims in the complaints and intends to vigorously defend against these actions.
The Company is also a party in an action being filed against PFL Life
Insurance Company, AEGON USA and William Thomas in the Circuit Court for the
Second Judicial Circuit in Leon County, Florida. This action has been settled
with respect to PFL Life Insurance Company, and AEGON USA, and the Company has
dismissed the action with respect to William Thomas. The court entered an order
in this action finding that the Company and others participated in a violation
of the discovery rules and imposing a fine. The court reserved judgment on the
amount of the fine until after a verdict.
The court held a hearing on February 23, 1999 to determine the amount
of the fine, if any, which would be awarded. The attorneys for William Thomas
have requested that the court impose a fine of $150,000 on the Company and
$50,000 on Ross M. Godmen, the attorney who was representing the Company at the
time of the alleged discovery violations. The court has taken the matter under
advisement and has promised a prompt decision. The Company believes that there
is no basis for the court to impose a fine against the Company in the amount
requested by the attorneys for Mr. Thomas and has strongly opposed the
imposition of this fine.
The Company is not a party to any other legal proceedings outside the
ordinary course the Company's business or to any other legal proceedings which,
if adversely determined, would have a
11
material adverse effect on the Company or its business.
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.
12
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
- ----------------------------------------------------------------------------
1998 1997
- ----------------------------------------------------------------------------
Mar.31 Jun.30 Sep.30 Dec.31 Mar.31 Jun.30 Sep.30 Dec.31
Common
Shares:
High 7 1/4 7 5/8 4 1/8 4 1/4 7 3/4 9 1/4 8 1/4 8
Low 6 7/8 6 5/8 3 1/2 3 3/4 7 1/8 7 3/8 7 3/4 6 1/2
(b) Approximate Number of Holders of Common Stock. There were 1,377
holders of record of the Company's Common Stock at December 31, 1998.
(c) Dividends. The Company has paid no cash dividends to stockholders
during the past two years, and it is not anticipated that any cash dividends
will be paid at any time in the foreseeable future. The payment of dividends by
the Company is subject to the regulation of the State of Florida Department of
Insurance. Under such regulation an insurance company may pay dividends, without
prior approval of the State of Florida Department of Insurance, equal to or less
than the greater of (a) 10% of its accumulated capital gains (losses) and
accumulated operating income (losses) (i.e. unassigned surplus) or (b) certain
net operating profits (losses) and realized capital gains (losses) of the
Company, as defined in the applicable insurance statutes. In no case can such
dividends be paid if the Company will have less than 115% of the minimum
required statutory surplus as to policyholders after the dividend is paid. The
maximum amount which the Company could pay as a dividend during 1999 pursuant to
such regulation is approximately $114,000.
13
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.
14
YEARS ENDED DECEMBER 31,
1998 1997 1996 1995 1994
---------- --------- ----------- ----------- --------
Revenues:
Life insurance
premiums and
policy charges $7,228,227 $7,643,650 $7,915,027 $8,158,938 $9,299,789
Net investment
income 3,587,147 3,545,311 3,318,627 2,998,875 2,750,771
Realized Gain
(Loss)on
investments 525,181 506,795 869,502 60,237 60,732
------- ------- ------ ------ ------
Total Revenue 11,340,555 11,695,756 12,103,156 11,218,050 12,111,292
Benefits, Losses
& Expenses:
Insurance
living
benefits 2,483,197 2,459,638 2,420,021 2,636,851 2,815,194
Insurance death
benefits 1,529,294 1,847,375 1,398,541 1,424,245 1,300,063
Increase (decrease)
in policy
reserves 334,329 124,461 (5,201) (12,971) (67,036)
Amortization of
deferred policy
acquisition
costs 3,484,689 3,542,617 3,364,738 3,069,742 3,242,706
Commissions and
general
expenses 4,044,686 3,382,255 3,246,552 2,735,280 3,186,386
Interest expense
with related
party 90,000 90,000 90,000 90,000 90,000
------ ------ ------ ------ ------
Total expenses 11,966,195 11,446,346 10,514,651 9,943,147 10,567,313
---------- ---------- ---------- --------- ----------
Income (loss)
before income
taxes (625,640) 249,410 1,588,505 1,274,903 1,543,979
------- ------- --------- --------- ---------
Income tax expense
(benefit) (241 907) 54,200 196,000 160,000 530,000
------- ------ ------- ------- -------
NET INCOME (LOSS) $(383,733) $195,210 $1,392,505 $1,114,903 $1,013,979
========== ======== ========== ========== ==========
Weighted average
number of
shares
outstanding 1,907,989 1,907,989 1,907,989 1,907,989 1,907,989
--------- --------- --------- --------- ---------
Basic income (loss)
per common share $(.20) $.10 $.73 $.58 $.53
----- ---- ---- ---- ----
Diluted income (loss)
per common share $(.20) $.10 $.73 $.58 $.53
----- ---- ---- ---- ----
Shareholders'
Equity $15,912,106 $16,132,018 $15,661,588 $14,826,610 $12,644,525
=========== =========== =========== =========== ===========
Shareholders'
equity per
common
share $8.34 $8.45 $8.20 $7.77 $6.63
===== ===== ===== ===== =====
15
1998 1997 1996 1995 1994
---------- -------------- -------------- ------------- --------
Assets $81,205,193 $82,142,465 $81,809,360 $81,872,350 $77,185,070
----------- ----------- ----------- ----------- -----------
Life Insurance:
Insurance in
force $1,467,529,000 $1,558,810,000 $1,703,650,000 $1,805,756,000 $2,000,656,000
-------------- -------------- -------------- -------------- --------------
Individual
insurance
issued during
current
year $68,935,000 $82,390,000 $121,646,000 $124,222,000 $184,364,000
----------- ----------- ------------ ------------ ------------
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
----- ----- ----- ----- -----
16
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 two types of insurance
products, universal life and final expense products. Universal life provides
insurance coverage with flexible premiums, within limits, which allow
policyholders to accumulate cash values. The accumulated cash values are
credited with tax-deferred interest, as adjusted by the Company on a periodic
basis. Deducted from the cash accumulations are administrative charges and
mortality costs. Should a policy surrender in its early years, the Company
assesses a surrender fee against the cash value accumulations based on a graded
formula. Final expense products are traditional endowment type insurance
policies written for the senior market. Because they are written to a senior
market they are designed to accommodate adverse health conditions. Because of
the size of the policies they are usually issued with only limited underwriting.
The coverage size of the policy is roughly equivalent to the insured's
anticipated funeral costs.
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 and
treated as 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 charges are
recognized as revenue is 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. Premiums received
from final expense products are treated as revenue when received.
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.
17
Capitalized acquisition costs for universal life and annuity policies 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 the amortization of the deferred policy acquisition costs, from
one period to the next, are a normal aspect of the 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.
18
The following table sets forth certain percentages reflecting financial
data and results of operations (a) for 1998, 1997 and 1996 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)
1998 1997 1996 98-97 97-96
------ ------ ------ ------- ------
Insurance Revenues 64% 65% 65% (5%) (3%)
Net Investment Income 32 30 27 2% 7%
Realized Investment
Gains 4 5 8
---- ---- ---
Total Revenues 100% 100% 100% (3%) (3%)
Benefits and claims 38% 38% 31% 2% 16%
Amortization of
Acquisition costs 31 30 28 2% 5%
Other operating
costs and
expenses 36 30 27 19% 4%
---- ---- ----
Total Expenses 106% 98% 86% 5% 9%
Income (loss) before
income taxes (6%) 2% 14% (351%) (84%)
Provision for income
taxes (2) 0 2 (546%) (72%)
---- --- ----
Net Income (Loss) (4%) 2% 12% (297%) (86%)
==== === ====
Results of Operations.
New business written was $69 million, $82 million and $122 million in
face value for 1998, 1997 and 1996, 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. The product
represented 77% of the life policies written in 1998. 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. The Company issued approximately 2,700 new
policies in 1997 and approximately 3,100 new policies in 1998.
19
Net insurance revenue was $7.2 million in 1998, $7.6 million in 1997,
and $7.9 million in 1996. While policy production was up for 1998 and 1997,
premium and policy charges were down due to the type and size of plans written
in the respective years.
Several factors have combined to create the decline in net insurance
revenue in 1998 as compared to 1997 and 1996. 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 offset policy lapses and the new product
currently being marketed has lower premiums due to the size of policies
currently issued as compared to the universal life product. Surrender fee income
in 1998 decreased by approximately $300,000 compared to 1997 due to the decrease
in surrender charges applicable to the Company's older universal life products.
The balance of the decline in 1998, 1997 and 1996 premium and policy
charges is related to the unlocking, for current and future experience, of
unearned revenue. Unearned revenue essentially represents the excess first year
charges in the policy. With the advice and assistance of consulting actuaries,
each year the Company reviews its current experience for mortality, credited
interest spreads, lapses, surrender fees and adjusts its amortization of
deferred acquisition costs and unearned revenue 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 6.9% net yield in 1998, 6.9%
in 1997 and 6.5% in 1996. No substantive changes occurred in 1998 compared to
previous years. 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 reinvested in common stocks and fixed maturities which
created an increased yield for the Company in 1998 and 1997.
Annuity, death and other benefits decreased $85,000 or 2% in 1998 as
compared to an increase of 16% in 1997. The decrease in death claims in 1998
represent the majority of this reduction. This expense line is a combination of
several benefit types 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.
20
The amortization of deferred acquisition costs increased in 1997 by 5%
as compared to a 10% increase in 1996. No substantive change occurred in 1998 as
compared to the previous years. 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 unearned
revenue liabilities is also 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 $4 million, $3.4 million and
$3.3 million for 1998, 1997 and 1996, respectively. New products and lead
programs are responsible for the increased operating costs of 1997 and 1996. The
increase in 1998 of $660,000 or 20% was primarily attributed to a lump sum
settlement to the Company's former President to fulfil the obligations of his
employment agreement.
Effective December 17, 1998, the Company entered into an Administrative
Services Agreement with Security National Financial Corporation ("SNFC"). Under
the terms of the agreement, SNFC has agreed to provide the Company with certain
defined administrative and financial services, including accounting services,
financial reports and statements, actuarial, policyholder services,
underwriting, data processing, legal, building management, marketing advisory
services and investment services. In consideration for the services to be
provided by SNFC, the Company shall pay SNFC and administrative services fee of
$250,000 per month, provided, however, that such fee shall be reduced to zero
for so long as the capital and surplus of the Company is less than or equal to
$6,000,000, unless the Company and SNFC otherwise agree in writing and such
agreement is approved by the Florida Department of Insurance.
The administrative services fee may be increased, beginning on January
1, 2001, to reflect increases in the Consumer Price Index, over the index amount
as of January 1, 2000. The Administrative Services Agreement shall remain in
effect for an initial term expiring on December 16, 2003. The term of the
agreement may be automatically extended for additional one-year terms unless
either the Company or SNFC shall deliver a written notice on or before September
30, of any year stating to the other its desire not to extend the term of the
agreement. However, in no event can the agreement be terminated prior to
December 16, 2003. It is anticipated that the Company will realize a reduced
level of general and administrative costs in the future as a result of the
Administrative Services Agreement.
Reinsurance premiums ceded for 1998, 1997 and 1996 were (on a GAAP
basis) $863,436, $914,071 and $1,030,673 respectively. Policy benefits were
reduced due to reinsurance recoveries of $169,892,
21
$336,068, and $206,428 for 1998, 1997 and 1996, respectively. Reinsurance
commissions amounted to $252,154, $281,434, and $308,179 for 1998, 1997 and 1996
respectively. In addition, under the terms of the Company's treaty with Mega
Life (formerly United Group Insurance Company) expenses of $984,356, $1,111,130
and $956,143 for 1998, 1997 and 1996, respectively.
Loss, before income taxes, in 1998 was $625,640 compared to a gain of
$249,410 and $1,588,505 in 1997 and 1996 respectively. The 1998 loss resulted
principally from a decrease in net insurance revenue of $415,000 and an increase
in operating expenses related to payment to the Company's former president under
his employment agreement.
Increased production of new policies also increased future policy
benefits by $210,000, these were offset by a decrease in annuity, death and
other benefits of approximately $294,000 and amortization of deferred policy
acquisition costs of $58,000.
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 to 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. The Company has no trading securities. All other debt and equity
securities not included in the above two categories are classified as securities
available-for-sale. Securities available-for-sale are carried at market value,
with unrealized holding gains and losses reported in other comprehensive income
and included in stockholders' equity, net of tax and adjustments to deferred
acquisition costs. Adoption of this statement had no effect on the income of the
Company.
The Company maintains invested assets for purposes of fulfilling
policyholder obligations which are often susceptible to market risk. These
assets and other financial instruments are maintained in accordance with the
Company's investment policy which is designed to match corresponding
policyholder obligations to relative maturities of the invested assets.
22
During 1998, economic and financial market conditions had the effect of
depressing yields on the company's portfolio through lowering the yield to
maturity on corporate and other fixed securities.
If market conditions were to cause interest rates to change, the market
value of the available-for-sale fixed security portfolio (approximately $28.479
million) could change by the following amounts based on the respective basis
point swing (the change in market values were calculated using a modeling
technique):
(in millions of dollars) -200bps -100bps +100bps +200bps
Change in Market Value $3.140 $1.511 $(1.405) $(2.712)
The Company has no other financial instruments which would be
materially susceptible to market risk.
The Company's insurance operations have historically provided adequate
positive cash flow enabling the Company to continue to meet operational needs as
well as increase its investment-grade securities to provide ample protection for
policyholders.
Student loans are a service the Company has historically made available
to the public as well as an investment. While the Company anticipates the
seasonal demand for student loan funds and the subsequent sale of such loans to
the Student Loan Marketing Association (SLMA), there are times when additional
funds are required to meet demand for student loans until such time as the sale
thereof to SLMA can be completed. In 1997 the Company renewed its $5,000,000
line of credit with SLMA until 2007 in order to meet these seasonal borrowing
requirements. The Company made no draws against this line of credit throughout
the seasonal period for 1998 or 1997. The Company anticipates borrowings to be
made through this line of credit with SLMA if student loan borrowings are
required for the 1999 seasonal period. 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 1998 and 1997.
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
23
degrees of regulatory action. At December 31, 1998, the Company had statutory
surplus well in excess of any RBC action level requirements.
The Company has fully leased all available rental space in its
principal office building and does not anticipate further capital expenditures
to the rental space.
Year 2000
The Company is currently completing its efforts to resolve the
potential impact of the year 2000 on the processing of information by the
Company's insurance systems. The year 2000 problem is the result of computer
programs being written using two digits (rather than four) to define the
applicable year. Any of the company's systems that have time-sensitive software
may recognize a date using "00" as the year 1900 rather than year 2000, which
could result in miscalculations or system failures.
The Company has substantially completed necessary system upgrades and
compliance testing and expects to be entirely complete by September 30, 1999.
The Company's most significant operational system is currently being
replaced through conversion pursuant to an Administrative Services Agreement.
Under the Administrative Services Agreement entered into by the Company
effective December 17, 1998, Security National made available a new LifePro
Administration system. Life-Pro is a subsidiary of IBM. Since May of 1998,
Security National has invested in excess of $1 million to implement a system
conversion for the Company. For further discussion on the Administrative
Services Agreement, see the "Results of Operations" section discussion on
operating expenses.
Anticipated future costs of addressing potential problems are not
currently expected to have a material adverse impact on the Company's financial
position, results of operations or cash flows in future periods. However, if the
Company, its customers or vendors are unable to resolve such processing issues
in a timely manner, it could result in a material financial risk. Management
believes that manual policy and claims administration could be performed in the
unlikely event that one or more of its systems did not function. The Company
plans to devote the necessary resources to test and remediate all remaining Year
2000 issues in a timely manner.
The cost that has been incurred and paid in achieving Year 2000
compliance is approximately $1 million as discussed above. As of December 31,
1998, management does not anticipate any other significant costs to be incurred
associated with its year 2000 initiatives.
24
The Private Securities Litigation Reform Act of 1995 (the "Act")
provides a "safe harbor" for forward-looking statements to encourage companies
to provide prospective information about their businesses without fear of
litigation so long as those statements are identified as forward-looking and are
accompanied by meaningful cautionary statements identifying important factors
that could cause actual results to differ materially from those projected in
such statements. The company desires to take advantage of the "safe harbor"
provisions of the Act.
This Annual Report of Form 10-K contains forward-looking statements,
together with related data and projections, about the Company's projected
financial results and its future plans and strategies. However, actual results
and needs of the Company may vary materially from forward-looking statements and
projections made from time to time by the Company on the basis of management's
then-current expectations. The business in which the Company is engaged involves
changing and competitive markets, which may involve a high degree of risk, and
there can be no assurance that forward-looking statements and projections will
prove accurate.
Factors that may cause the Company's actual results to differ
materially from those contemplated or projected, forecast, estimated or budgeted
in such forward looking statements include among others, the following
possibilities: (i) heightened competition, including the intensification of
price competition, the entry of new competitors, and the introduction of new
products by new and existing competitors; (ii) adverse state and federal
legislation or regulation, including decreases in rates, limitations on premium
levels, increases in minimum capital and reserve requirements, benefit mandates
and tax treatment of insurance products; (iii) fluctuations in interest rates
causing a reduction of investment income or increase in interest expense and in
the market value of interest rate sensitive investment; (iv) failure to obtain
new customer, retain existing customers or reductions in policies in force by
existing customers; (v) higher service, administrative, or general expense due
to the need for additional advertising, marketing, administrative or management
information systems expenditures; (vi) loss or retirement of key executives or
employees; (vii) increases in medical costs; (viii) changes in the Company's
liquidity due to changes in asset and liability matching; (ix) restrictions on
insurance underwriting based on genetic testing and other criteria; (x) adverse
changes in the ratings obtained by independent rating agencies; (xi) failure to
maintain adequate reinsurance; (xii) possible claims relating to sales practices
for insurance products and claim denials and (xiii) adverse trends in morality
and morbidity.
25
Item 8. Financial Statements and Supplementary Data.
The following financial statements of Southern Security Life Insurance Company
are included in Part II, Item 8:
Page Number
Independent Auditors' Report............ 27
Balance Sheets-December 31, 1998 & 1997. 29
Statements of Operations - years ended
December 31, 1998, 1997 and 1996........ 31
Statements of Shareholders' Equity-years
ended December 31, 1998, 1997 and 1996.. 32
Statements of Cash Flows - years ended
December 31, 1998, 1997 and 1996........ 33
Notes to Financial Statements........... 36
26
Report of Independent Auditors
Board of Directors & Shareholders
Southern Security Life Insurance Company:
We have audited the accompanying balance sheet of Southern Security Life
Insurance Company as of December 31, 1998 and the related statements of
operations, shareholders' equity, and cash flow for the year then ended. 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). 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 audit.
We conducted our audit 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 audit provides a reasonable basis for our opinion.
In our opinion, the 1998 financial statements referred to above present fairly,
in all material respects, the financial position of Southern Security Life
Insurance Company as of December 31, 1998, and the results of its operations and
its cash flows for the year ended 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.
Ernst & Young LLP
Jacksonville, Florida
March 12, 1999
27
Independent Auditors' Report
Board of Directors & Shareholders
Southern Security Life Insurance Company:
We have audited the accompanying balance sheet of Southern Security Life
Insurance Company as of December 31, 1997 and related statements of income,
shareholders' equity and cash flows for each of the years in the two year period
ended December 31, 1997. 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 as of and for
each of the years in the two year period ended December 31, 1997. 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 the results of its operations and
its cash flows for each of the years in the two-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 LLP
Orlando, Florida
April 3, 1998
28
SOUTHERN SECURITY LIFE INSURANCE COMPANY
Balance Sheets
December 31, 1998 and 1997
Assets 1998 1997
------ ---- ----
Investments (note 3):
Fixed maturities held-to-maturity
(fair value, $ 5,064,541 and
$10,631,003 at December 31,
1998 and 1997, respectively) $4,956,910 $10,501,712
Securities available-for-sale,
at fair value:
Fixed maturities (cost of
$27,671,425 at December 31,
1998 and $30,880,390 at
December 31, 1997) 28,479,161 31,483,324
Equity securities (cost, $210,370
and $800,000 at December 31,
1998 and 1997, respectively) 250,232 839,973
Policy and student loans 8,462,438 7,945,381
Short-term investments 11,434,983 100,000
---------- ----------
53,583,724 50,870,390
Cash and cash equivalents 682,389 2,448,994
Accrued investment income 564,118 637,460
Deferred policy acquisition costs
(note 4) 13,583,956 15,451,689
Policyholders' account balances on
deposit with reinsurer (note 7) 8,518,571 8,667,241
Reinsurance receivable (note 7) 306,258 359,688
Receivables:
Agent balances 994,493 590,368
Other 351,478 324,752
Refundable income taxes 34,951 121,680
Property and equipment, net,
at cost (note 5) 2,585,255 2,670,203
----------- -----------
$81,205,193 $82,142,465
=========== ===========
See accompanying notes to financial statements
29
SOUTHERN SECURITY LIFE INSURANCE COMPANY
Balance Sheets (continued)
December 31, 1998 and 1997
Liabilities and Shareholders' Equity 1998 1997
------------------------------------ ---- ----
Liabilities:
Policy liabilities and accruals
(notes 6 and 7): $1,727,300 $1,409,031
Future policy benefits:
Policyholders' account balances 52,520,300 52,335,511
Unearned revenue 6,023,399 7,108,662
Other policy claims and benefits
payable 540,789 427,649
Other policyholders' funds, dividend
and endowment accumulations 64,738 59,686
Funds held related to reinsurance
treaties (note 7) 1,419,357 1,339,927
Note payable to related party
(note 9) 1,000,000 1,000,000
Due to affiliated insurance
agency (note 11) 22,871 68,646
General expenses accrued 747,148 897,627
Unearned investment income 340,622 313,018
Other liabilities 90,489 100,990
Deferred income taxes (note 10) 796,074 949,700
--------- -------
65,293,087 66,010,447
---------- ----------
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
Accumulated other comprehensive income 430,161 266,340
Retained earnings 9,562,437 9,946,170
---------- ---------
15,912,106 16,132,018
Commitments and contingencies
(notes 7 and 14) - -
-------- ------
$81,205,193 $82,142,465
=========== ===========
30
SOUTHERN SECURITY LIFE INSURANCE COMPANY
Statements of Operations
Years ended December 31, 1998, 1997, and 1996
1998 1997 1996
---- ---- ----
Revenues:
Net insurance revenues $7,228,227 $7,643,650 $7,915,027
Net investment income
(notes 3 and 8) 3,587,147 3,545,311 3,318,627
Realized gain on
investments (note 3) 525,181 506,795 869,502
-------- ------- -------
11,340,555 11,695,756 12,103,156
---------- ---------- ----------
Benefits, claims and expenses:
Benefits and claims 4,346,820 4,431,474 3,813,361
Amortization of deferred
policy acquisition
costs (note 4) 3,484,689 3,542,617 3,364,738
Operating expenses
(note 11) 4,044,686 3,382,255 3,246,552
Interest expense with
related party (note 9) 90,000 90,000 90,000
------ ------ ------
11,966,195 11,446,346 10,514,651
---------- ---------- ----------
Income(Loss) before income taxes (625,640) 249,410 1,588,505
Income tax expense (benefit)
(note 10) ( 241,907) 54,200 196,000
-------- ------- -------
Net income(loss) $(383,733) $195,210 $1,392,505
========= ======== ==========
Basic net income(loss) per share of
common stock $(.20) $.10 $.73
===== ==== ====
Diluted net income per share of
common stock $(.20) $.10 $.73
===== ==== ====
See accompanying notes to financialn statements.
31
SOUTHERN SECURITY LIFE INSURANCE COMPANY
Statements of Shareholders' Equity
Years ended December 31, 1998, 1997 and 1996
Accumulated
Capital other
Common stock in excess comprehensive Retained
Shares Amount of par income earnings
Balances,
December 31,
1995 1,907,989 $1,907,989 $4,011,519 $548,647 $8,358,455
--------- ---------- ---------- ------- ----------
Net income for
the year - - - - 1,392,505
Unrealized depre-
ciation of
securities avail-
able for sale - - - (557,527) -
------- ------- ------- -------- ----
Balances,
December 31,
1996 1,907,989 $1,907,989 $4,011,519 $(8,880) $9,750,960
--------- ---------- ---------- ------- ----------
Net income for
the year - - - - 195,210
Unrealized apprecia-
tion of securities
available for sale - - - 275,220 -
------- ------- ------- ------- ----
Balances,
December 31,
1997 1,907,989 $1,907,989 $4,011,519 $266,340 $9,946,170
========= ========== ========== ======== ==========
Net loss for
the year - - - - (383,733)
Unrealized appre-
ciation of
securities avail-
able for sale - - - 163,821 -
------- ------- ------- -------- -----
Balances,
December 31,
1998 1,907,989 $1,907,989 $4,011,519 $430,161 $9,562,437
-======== ---------- ---------- -------- ----------
See accompanying notes to financial statements.
32
SOUTHERN SECURITY LIFE INSURANCE COMPANY
Statements of Cash Flows
Years ended December 31, 1998, 1997 and 1996
1998 1997 1996
---- ---- ----
Cash flows provided by (used in) operating activities:
Net income (loss) $(383,733) $195,210 $1,392,505
Adjustments to reconcile net cash
provided by (used in) operating
activities:
Depreciation and amortization 301,970 232,471 169,681
Net realized (gains) on
investments (525,182) (506,795) (869,502)
Loss on disposal of property,
plant & equipment 2,956 100 124
Deferred income taxes 175,274 198,100 16,900
Amortization of deferred
policy acquisition costs 3,484,689 3,542,617 3,364,738
Acquisition costs deferred (1,911,282) (2,069,778) (2,018,043)
Change in assets and liabilities
affecting cash provided by
operations:
Accrued investment income 73,342 50,239 (48,890)
Other invested assets - 13,100 -
Due from affiliated insurance
agency - (2,078) -
Accounts receivable (344,122) (105,752) (265,682)
Reinsurance receivable 53,430 20,004 134,649
Other policy claims and
future benefits payable 431,409 557,739 36,488
Policyholders' account balances 2,356,804 2,065,521 2,332,863
Funds held under reinsurance 79,430 146,561 215,950
Unearned premiums (1,160,706) (1,114,188) (962,941)
Dividend and endowment
accumulations 5,052 90 2,152
Payable to affiliated insurance
agent (45,775) 35,235 (209,957)
Income taxes payable - (70,164) 53,814
Other liabilities (133,376) ( 15,373) (134,983)
-------- -------- --------
Net cash provided by operating
activities $2,460,180 $3,172,859 $3,209,866
---------- ---------- ----------
(continued)
33
SOUTHERN SECURITY LIFE INSURANCE COMPANY
Statements of Cash Flows (continued)
Years ended December 31, 1998, 1997 and 1996
1998 1997 1996
---- ---- ----
Cash flowsfrom (used in) investing activities:
Purchase of investments:
Purchase of investments held-to-maturity $- $- $(1,965,240)
Purchase of investments available-
for-sale (6,180,178) (32,704,906) (8,085,785)
Purchase of equity securities (610,370) (3,316,249) -
Proceeds from maturity of held-to-
maturity securities 5,536,006 4,488,354 2,165,750
Proceeds from maturity of available-
for-sale securities 299,281 - 635,533
Proceeds from sale of available-for-
sale securities (equity and fixed
maturity) 10,675,217 29,049,745 6,367,780
Net change in short-term investments (11,334,983) 4,439,106 (3,040,006)
Net change in policy and student loans (517,057) (629,572) 2,655,845
Net change in other investments - 2,178 7,605
Acquisition of property and equipment (71,356) (35,779) ( 60,559)
------- ------- --------
Net cash provided by (used in)
investing activities $(2,203,440) $1,292,877 $(1,319,077)
----------- ----------- -----------
Cash flows from financing activities:
Receipts from universal life and
certain annuity policies credited
to policyholder account balances 7,524,375 4,042,137 5,213,760
Return of policyholder account
balances on universal life and
certain annuity policies (9,547,720) (6,264,935) (5,904,692)
Proceeds from short-term borrowings - 2,500,000
Repayment of short-term borrowings - (3,900,553)
---------- ---------- ----------
Net cash provided by (used in)
financing activities $(2,023,345) $(2,222,798) $(2,091,485)
------------ ----------- -----------
Increase (decrease) in cash and
cash equivalents (1,766,605) 2,242,938 (200,696)
Cash and cash equivalents at
beginning of year $2,448,994 $206,056 $406,752
---------- -------- --------
Cash and cash equivalents at
end of year $682,389 $2,448,994 $206,056
======== ========== ========
34
SOUTHERN SECURITY LIFE INSURANCE COMPANY
Statements of Cash Flows (continued)
Years ended December 31, 1998, 1997 and 1996
1998 1997 1996
---- ---- ----
Supplemental schedule of cash flow information:
Interest paid during the year $90,000 $90,000 $102,094
====== ======= =======
Income taxes paid during the year $45,500 $115,000 $130,500
====== ======== ========
Change in market value adjustments-investments available-for-sale:
Fixed maturities $204,802 $425,313 $(557,065)
Equity securities (111) 39,973 (418,345)
Change in deferred acquisition costs (294,326) (55,084) 181,196
Change in premium deposit funds 79,440 26,340 (95,241)
Deferred income tax asset (liability) (153,626) (163,500) 333,800
Other - 2,178 (1,872)
------- ------ ------
Accumulated comprehensive income
Net change in unrealized appreciation
(depreciation) $(163,821) $275,220 $(557,527)
======= ======== =========
See accompanying notes to financial statements.
35
SOUTHERN SECURITY LIFE INSURANCE COMPANY
Notes to Financial Statements
December 31, 1998, 1997 and 1996
1. Nature of business and summary of significant accounting policies:
(a) Nature of business
The primary business of Southern Security Life Insurance Company
(the "Company") is the issuance of long duration universal life
insurance contracts. The majority of the Company's business is
conducted in the states of Florida (44%), Georgia (10%) and Texas
(15%). None of the remaining eleven states in which the Company
is licensed to conduct business account for over 10% of the
Company's total business.
Prior to December 17, 1998, certain executive officers and
directors of the Company were shareholders of approximately 60
percent of the shares of SSLIC Holding Company, Inc., (formerly
Consolidare Enterprises, Inc.). SSLIC Holding Company, Inc. owns
57.4 percent of the Company's voting
securities at December 31, 1998.
Effective December 17, 1998, 100 percent of the common stock of
SSLIC Holding Company, Inc. was acquired by Security National
Financial Corporation ("SNFC"). Accordingly, from December 17,
1998, the Company is a 57.4 percent owned, indirect subsidiary of
SNFC.
The following is a description of the most significant risks
facing life and health insurers and how the Company mitigates
those risks:
Legal/regulatory risk is the risk that changes in the legal or
regulatory environment in which an insurer operates will create
additional expenses not anticipated by the insurer in pricing its
products. That is, regulatory initiatives designed to reduce
insurer profits, new legal theories or insurance company
insolvencies through guaranty fund assessments may create costs
for the insurer beyond those recorded in the 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
36
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
reinsurance and by providing for any amounts deemed
uncollectible.
Interest rate risk is the risk that interest rates will change
and cause a decrease in the value of an insurer's investments.
This change in rates may cause certain interest-sensitive
products to become uncompetitive, may cause disintermediation, or
may cause the Company to not achieve its target interest margins
between interest earned on invested assets and interest required
to be credited to policyholder account balances. The Company
mitigates this risk by charging fees for nonconformance with
certain policy provisions, by offering products that transfer
this risk to the purchaser, and/or by attempting to match the
maturity schedule of its assets with the expected payouts of its
liabilities. To the extent that liabilities come due more quickly
than assets mature, an insurer would have to sell assets prior to
maturity and potentially recognize a gain or loss.
(b) Basis of financial statements
The financial statements have been prepared on the basis of
generally accepted accounting principles ("GAAP"), which vary
from reporting practices prescribed or permitted by regulatory
authorities.
The accompanying financial statements have been prepared using
the historic cost basis of accounting and do not reflect any
adjustments related to allocation of the purchase price of the
Company's parent, SSLIC Holding (Formerly Consolidare) by
Security National Financial
Corporation at December 17, 1998.
(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
37
SOUTHERN SECURITY LIFE INSURANCE COMPANY
Notes to Financial Statements (continued)
1. Nature of business and summary of significant accounting policies,
continued
used in determining the liability for future policy benefits and
claims, deferred income taxes and deferred policy acquisition
costs. Although some variability is inherent in these estimates,
management believes that the amounts provided are adequate.
(d) Investments
Investments in all debt securities and those equity securities
with readily determinable market values are classified into one
of three categories: held-to-maturity, trading or
available-for-sale. Classification of investments is based upon
management's current intent. Debt securities which management has
a positive intent and ability to hold until maturity are
classified as securities held-to-maturity and are carried at
amortized cost. Unrealized holding gains and losses on securities
held-to-maturity are not reflected in the financial statements.
Debt and equity securities that are purchased for short-term
resale would be classified as trading securities. Trading
securities would be carried at fair value, with unrealized
holding gains and losses included in earnings; the Company has no
securities classified as trading securities. All other debt and
equity securities not included in the above two categories are
classified as securities available-for-sale. Securities
available-for-sale are carried at fair value, with unrealized
holding gains and losses reported in accumulated other
comprehensive income which is included in stockholders' equity
after adjustment for deferred income taxes and deferred
acquisition costs related to universal life products.
The Company's carrying value for investments in the
held-to-maturity and available-for-sale categories is reduced to
its estimated realizable value if a decline in the market value
is deemed other than temporary. Such reductions in carrying
values are recognized as realized losses and charged to income.
Interest on fixed maturities and short-term investments is
recognized to income as it accrues on the principal amounts
outstanding adjusted for amortization of premiums and discounts
computed by the scientific method which approx-
38
SOUTHERN SECURITY LIFE INSURANCE COMPANY
Notes to Financial Statements (continued)
1. Nature of business and summary of significant accounting policies,
continued
(d) Investments
imates 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 to the
production of new business, have been deferred to the extent
recoverable from future profit margins. Deferred policy
acquisition costs applicable to traditional life policies are
being amortized over the premium-paying period of the related
policies in a manner that will charge each year's operations in
direct proportion to the estimated premium revenue over the life
of the policies. Premium revenue estimates are made using the
same interest, mortality and withdrawal assumptions as are used
for computing liabilities for future policy benefits. Acquisition
costs relating to universal life policies are being amortized in
relation to the incidence of expected gross profits over the life
of the policies. Gross profits for universal life contracts
consist of revenue representing policy charges for the cost of
insurance,
39
SOUTHERN SECURITY LIFE INSURANCE COMPANY
Notes To Financial Statements (continued)
1. Nature of business and summary of significant accounting
policies, continued
administration of the contracts and surrender charges plus
investment income less expenses for interest credited to
policyholder account balances, policy administrative expenses and
expected benefit payments in excess of policy account balances.
Deferred policy acquisition costs are adjusted to reflect the
impact of unrealized gains and losses on fixed maturity
securities available for sale.
The Company has performed tests concerning the recoverability of
deferred acquisition costs. These methods include those typically
used by many companies in the life insurance industry. Further,
the Company conducts a sensitivity analysis of its assumptions
that are used to estimate the future expected gross profits,
which management has used to determine the future recoverability
of the deferred acquisition costs.
(g) 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 for traditional life
policies has been provided on a net level premium basis based
upon estimated investment yields, withdrawals, mortality and
other assumptions that were appropriate at the time the policies
were issued. Such estimates are based upon industry data and the
Company's past experience as adjusted to provide for possible
adverse deviation from the estimates.
(i) Policyholder account balance
Insurance reserves for universal life policies are determined
following the retrospective deposit method and consist of policy
values that accrue to the benefit of the policyholder, unreduced
by surrender charges.
(j) Recognition of premium revenue and related costs
Premiums are recognized as revenue as follows:
Universal life policies - premiums received from policy-
40
SOUTHERN SECURITY LIFE INSURANCE COMPANY
Notes to Financial Statements (continued)
1. Nature of business and summary of significant accounting policies,
continued
h