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
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).
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.
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.
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.
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.
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.
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.
The National Association of Insurance Commissioners, in order to enhance the regulation of insurer solvency, issued a model law to implement risk-based capital (RBC) requirements for life insurance companies, which are designed to assess capital adequacy. Pursuant to the model law, insurers having less statutory surplus than required by the RBC calculation will be subject to varying degrees of regulatory action. While Florida, the Company's state
of domicile, had yet to adopt the provisions of the RBC model law, the Company is monitoring 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.
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.
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.
Credit Risk is the risk that issuers of securities owned by the Company will default or that other parties, including reinsurers, which owe the Company money, will not pay. The Company attempts to mitigate this risk by adhering to a conservative investment strategy, by maintaining sound reinsurance and by providing for any amounts deemed uncollectible.
Interest 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.
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. Certain assets, principally receivables from agents and equipment, are reported as assets rather than being charged directly to surplus.
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.
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.
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 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.
There were no investments, aggregated by issuer, in excess of 10% of shareholders' equity at December 31, 1996.
Net investment income for the years ended December 31, 1997, 1996, and 1995 consists of the following:
In order to comply with statutory regulations, investments were on deposit with the Insurance Departments of certain states as follows:
Depreciation expense for the years ended December 31, 1997, 1996 and 1995 totaled $145,912, $151,950, and $150,213, respectively.
Life insurance in-force aggregated approximately $1.2 billion and $1.3 billion at December 31, 1997, and 1996, respectively.
bears interest at a variable rate per annum payable monthly and expires on September 18, 2007.
Interest expense relating to these notes payable during the three years ended December 31, 1997, 1996 and 1995 totaled $0, $12,094, and $26,240, respectively and is included in net investment income.
Total income taxes for the years ended December 31, 1997, 1996, and 1995 were as follows:
Income taxes for the years ended December 31, 1997, 1996 and 1995 is summarized as follows:
b. Distributions, other than stock dividends, are made to shareholders in excess of Shareholders' Surplus, as defined by prior law, or;
c. The entity ceases to qualify for taxation as a life insurance company.
At December 31, 1997, the balance of the Policyholders' Surplus account aggregated approximately $236,000. The Company has not recorded deferred income taxes totaling approximately $80,000 relating to this amount as it has no plan to distribute the amounts in Policyholders' Surplus in the foreseeable future.
The Tax Reform Act of 1986 enacted a new separate parallel tax system referred to as the Alternative Minimum Tax (AMT) system. AMT is based on a flat rate applied to a broader tax base. It is calculated separately from the regular Federal income tax and the higher of the two taxes is paid. The excess of the AMT over regular tax is a tax credit, which can be carried forward indefinitely to reduce regular tax liabilities of future years. In 1997, 1996 and 1995, AMT exceeded regular tax by $11,100, $64,900, and $62,600, respectively. At December 31, 1997, the AMT tax credit available to reduce future regular tax totaled $409,600.
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.
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.