Net insurance revenues increased by $37,000, or .6%, to $6,736,000 for fiscal year 2001, from $6,699,000 for fiscal year 2000. This increase was primarily the result of an increase in traditional life sales.
Benefits and claims decreased by $626,000, or 12.2%, to $4,483,000 for fiscal year 2001, from $5,109,000 for the comparable period in 2000. The decrease was primarily due to a decrease in traditional life reserves.
Operating expenses increased by $305,000, or 8.6%, to $3,835,000 for fiscal year 2001 from $3,530,000 for the same period in 2000. The increase was primarily due to increased marketing, legal expenses and provision for doubtful accounts.
Total revenues decreased by $892,000, or 7.7%, to $10,634,000 for fiscal year 2000 from $11,526,000 for fiscal year 1999. Contributing to this decrease in total revenues was a $203,000 reduction in net insurance revenues and a $715,000 reduction in other revenue.
Operating expenses increased by $269,000, or 8.3%, to $3,530,000 for fiscal year 2000 from $3,261,000 for the same period in 1999. The increase was primarily due to increased marketing and home office building expenses.
The Company's investment policy is to invest predominantly in fixed maturity securities, mortgage loans, and warehouse mortgage loans on a short-term basis before selling the loans to investors in accordance with the requirements and laws governing life insurance companies. Bonds owned by the Company amounted to $24,521,000 as of December 31, 2001 as compared to $28,742,000 as of December 31, 2000. This represents 49.8% and 60.6% of the total investments as of December 31, 2001 and December 31, 2000, respectively. Generally, all bonds owned by the Company are rated by the National Association of Insurance Commissioners. Under this rating system, there are nine categories used for rating bonds. At December 31, 2001, and at December 31, 2000, the Company had investments in bonds in rating categories three through nine, which are considered non-investment grade of $482,000 and $0, respectively.
Lapse rates measure the amount of insurance terminated during a particular period. The Company's lapse rate for life insurance in 2001 was 13.8% as compared to a rate of 16.1% for 2000.
In August 2001, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 144, "Accounting for the Impairment of Long- Lived Assets". This Statement addresses financial accounting and reporting for the impairment of long-lived assets and for long-lived assets to be disposed of. This Statement supersedes FASB Statement 121 and APB Opinion No. 30. However, this Statement retains certain fundamental provisions of Statement 121, namely; recognition and measurement of the impairment of long-lived assets to be held and used, and measurement of long-lived assets to be disposed of by sale. The Statement also retains the requirement of Opinion 30 to report discontinued operations separately from continuing operations. This Statement also Amends ARB No. 51 to eliminate the exception of consolidation for a temporarily controlled subsidiary. The provisions of this statement are effective for financial statements issued for fiscal years beginning after December 15, 2001.
Statement of Shareholders' Equity-years ended December 31, 2001, 2000 and 1999..................................20
We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide reasonable basis for our opinion.
Assets 2001 2000 - ------ ---- ---- Investments (note 3): Fixed maturities held-to-maturity (fair value, $3,250,894 and $5,273,032 at December 31, 2001 and 2000, respectively) $ 3,156,650 $ 5,374,204 Securities available-for-sale, at fair value: Fixed maturities (cost of $20,459,833 at December 31, 2001 and $23,419,358 at December 31, 2000) 21,364,731 23,367,483 Equity securities (cost, $316,293 and $327,674 at December 31, 2001 and 2000, respectively) 372,183 358,932 Mortgage loans 2,268,292 2,298,163 Policy and student loans 8,181,223 8,220,736 Short-term investments (note 11) 13,860,534 7,814,813 ----------- ----------- 49,203,613 47,434,331
Cash and cash equivalents 1,969,055 2,513,668 Accrued investment income 613,280 610,474 Deferred policy acquisition costs (note 4) 12,974,390 13,211,413 Policyholders' account balances on deposit with reinsurer (note 7) 7,148,068 7,434,750 Reinsurance receivable (note 7) 569,163 324,793 Receivables: Agent balances, net 1,005,535 1,208,378 Other 722,075 279,567 Property and equipment, net, at cost (note 5) 2,491,062 2,542,384 Investment in affiliate at cost 783,087 1,566,173 ----------- -----------
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 (loss) 558,131 (75,628) Retained earnings 10,425,631 10,354,655 ------------ ------------
16,903,270 16,198,535 Commitments and contingencies (notes 7 and 15) -- -- ------------ ------------
Benefits and claims 4,482,588 5,109,411 4,453,564 Amortization of deferred policy acquisition costs (note 4) 2,197,399 1,797,320 3,029,223 Operating expenses (notes 9 and 11) 3,835,165 3,529,380 3,261,134 ----------- ----------- -----------
SOUTHERN SECURITY LIFE INSURANCE COMPANY Notes to Financial Statements December 31, 2001, 2000, 1999
The primary business of Southern Security Life Insurance Company (the "Company") is the issuance of long duration universal life insurance contracts. The majority of the Company's business is conducted in the states of Alabama (13%), Florida (40%), Georgia (10%), and Texas (11%). None of the remaining ten states in which the Company is licensed to conduct business account for over 10% of the Company's total business.
Prior to December 17, 1998, certain executive officers and directors of the Company were shareholders of approximately 60 percent of the shares of SSLIC Holding Company, Inc., (formerly Consolidare Enterprises, Inc.). SSLIC Holding Company, Inc. owns 75.0% of the Company's voting securities at December 31, 2001.
All other policies - recognized as revenue over the premium paying period.
The computation of basic earnings (loss) per common share is based on the weighted average number of shares outstanding during each year.
The computation of diluted earnings per common share is based on the weighted average number of shares outstanding during the year, plus the common stock equivalents that would arise from the exercise of stock options outstanding, using the treasury stock method and the average market price per share during the year. There were no common stock equivalents outstanding during the years ended December 31, 2001 and 2000. Common stock equivalents are not included in the diluted earnings (loss) per share calculation when their effect is antidilutive.
A reconciliation of net income (loss) for the years ended December 31, 2001, 2000, 1999 and shareholders' equity as of December 31, 2001 and 2000 between the amounts reported on a statutory basis and the related amounts presented on the basis of U.S. generally accepted accounting principles is as follows:
Equity securities consist of $372,183 and $358,932 of common stock at fair value at December 31, 2001 and 2000 respectively.
Unrealized appreciation (depreciation) of fixed maturities for years ending December 31, 2001, 2000, 1999 is $1,152,189, $678,644, and $(1,747,058) respectively.
The amortized cost and estimated fair value of fixed maturities at December 31, 2001, 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.
Amortized Estimated Cost Fair value Due in 2002 $ 750,000 $ 752,435 Due in 2003 through 2006 379,251 406,099 Due in 2007 through 2011 957,321 953,958 Due after 2011 505,532 549,317
Mortgage-backed securities 564,546 589,085 ----------- ----------- $ 3,156,650 $ 3,250,894 =========== ===========
Due in 2002 $ 3,321,893 $ 3,359,944 Due in 2003 through 2006 13,341,257 14,001,917 Due in 2007 through 2011 3,698,902 3,896,995 Due after 2011 97,781 105,875
2001 2000 1999 ---------- ---------- ---------- Proceeds from sale of equity securities $ 794,356 $ -- $ -- ---------- ---------- ----------
2001 2000 1999 ---- ---- ---- Held-to-maturity: Gross realized gains $ -- $ -- $ -- Available-for-sale: Gross realized gains -- -- -- ------ ----- ----- $ -- $ -- $ -- ====== ===== =====
Investments, aggregated by issuer, in excess of 10% of shareholders' equity (before net unrealized gains and losses on available-for-sale securities) at December 31, 2001 and 2000, other than investments issued or guaranteed by the United States government are as follows:
Federal Express $2,072,820 Dean Witter Discover 4,105,788 Philip Morris, Inc. 5,469,305
At December 31, 2001 and 2000, the Company owned $482,000 and $0, respectively, of less-than-investment grade corporate debt securities. The Company also invests in subsidized and unsubsidized student loans totaling $95,819 and $61,576 at December 31, 2001 and 2000, respectively, which are guaranteed by the U.S. government. Subsequent to December 31, 2001, all of these loans were sold at their unpaid principal balance.
Florida $1,707,042 $1,708,735 $1,708,530 Alabama 100,737 100,199 100,702 South Carolina 302,210 300,595 302,106 Georgia 252,933 250,496 251,755 Indiana 202,347 200,000 199,855 ---------- ---------- ----------
Certain of these assets, totaling approximately $850,000 for each of the years ended December 31, 2001 and 2000, are restricted for the future benefit of policyholders in a particular state.
Deferred policy acquisition costs at December 31, 2001, 2000, 1999 consist of the following:
December 31, December 31, 2001 2000 ------------ ------------ Land $ 982,027 $ 982,027 Building and improvements 2,397,325 2,348,973 Furniture and equipment 956,533 945,345 ----------- ----------- 4,335,885 4,276,345 Less accumulated depreciation (1,844,823) (1,733,961) ----------- ----------- $ 2,491,062 $ 2,542,384 =========== ===========
At December 31, 2001 and 2000, future policy benefits, exclusive of universal life and flexible term annuities consist of the following:
Life insurance in-force aggregated approximately $1.4 billion and $1.2 billion at December 31, 2001, and 2000, respectively. Mortality and withdrawal assumptions are based upon the Company's experience and actuarial judgment with an allowance for possible unfavorable deviations from the expected experience.
For non-universal life policies written during 1983 through 1988, interest rates used are 8.0 percent for policy years one through five, decreasing by .1 percent per year for policy years six through twenty, to 6.5 percent for policy years twenty-one and thereafter. For certain non universal life contracts written in 1996-2001, interest rates of 6.75% level have been assumed. For non-universal life policies written in 1982 and prior, interest rates vary, depending on policy type, from 7 percent for all policy years to 6 percent for policy years one through five and 5 percent for years six and thereafter. For universal life policies written since 1988, the interest rate used is a credited rate generally based upon the Company's investment yield less 1.25%.
As of December 31, 2001, ordinary insurance coverage in excess of $75,000 is reinsured; however for some policies previously issued, the first $30,000, $40,000 or $50,000 was retained and the excess ceded. The retention limit for some substandard risks is less than $75,000. Reinsured risks would give rise to liability to the Company in the event that the reinsuring company were unable to
meet its obligations under the reinsurance agreement in force, as the Company remains primarily liable for such obligations. Under reinsurance agreements exclusive of the MEGA agreement discussed below, the Company has ceded premium of $278,828, $275,288, and $424,255 included in reinsurance premiums ceded, and received recoveries of $624,314, $131,886 and $162,871, included in annuity, death and other benefits for the years ended December 31, 2001, 2000, 1999, respectively.
A note payable to a related party consists of amounts due on demand to Security National Life Insurance Company. The note qualifies as shareholders' equity for statutory accounting purposes in accordance with Section 628.401 of the Florida Statutes. At December 31, 2001, the note bears interest at 9.0% percent (payable monthly); principal repayment is contingent upon the Company maintaining statutory surplus in excess of $1,900,000 and obtaining approval in advance by the Florida Department of Insurance. Interest expense relating to the balance of the note payable to the related party during 2001, 2000, 1999 aggregated $97,000, $105,000, and $90,000 respectively.
Total income taxes including taxes on the change in the value of investments for the years ended December 31, 2001, 2000, and 1999 were as follows:
Current: Federal $ (5,759) $ 40,812 $ 123,268 State -- 6,719 15,891 --------- --------- ---------
2001 2000 1999 ---- ---- ---- Computed "expected" tax expense (benefit) $ 29,866 $ 67,444 $ 265,923 Increase (reduction) in income taxes resulting from: Small life insurance company deduction (7,162) (3,485) (139,195) Changes in the valuation allowance for deferred tax assets, allocated to income tax expense (7,115) (27,338) 17,590 State taxes, net of federal income tax benefit 1,276 1,484 5,850 --------- --------- --------- $ 16,865 $ 38,105 $ 150,168 ========= ========= =========
At December 31, 2001, 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 2001, 2000, 1999, AMT exceeded regular tax by $-0-, $19,854, and $27,338, respectively. At December 31, 2001, the AMT tax credit available to reduce future regular tax totaled $262,528.
Deferred tax assets: Unearned revenue, due to deferral of "front-end" fee $ 1,829,505 $ 1,939,023 Policy liabilities and accruals, principally due to adjustments to reserves for tax purposes 1,683,457 2,003,251 Deferred policy acquisition costs related to unrealized appreciation (depreciation) 128,365 137,601
Total gross deferred tax assets 3,910,970 4,342,403 Less valuation allowance (269,643) (262,528) ----------- -----------
The net change in the total valuation allowance for the years ended December 31, 2001 and 2000 was an increase of $7,115 and $27,338, respectively.
In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Management considers the scheduled reversal of deferred tax liabilities, projected future taxable income, and tax planning strategies in making this assessment. Based upon the level of historical taxable income and projections for future taxable income over the periods which the deferred tax assets are deductible, management believes it is more likely than not the Company will realize the benefits of these deductible differences, net of the existing valuation allowances at December 31, 2001.
The Company's general agent, Insuradyne Corporation, is a wholly-owned subsidiary of Security National Financial Corporation. The balances due to an affiliated insurance agency reflected in the accompanying balance sheets principally represent earned commission due to Insuradyne. The Company incurred commission expense to Insuradyne aggregating $122,787, $180,941 and $175,409, in 2001, 2000, and 1999, respectively. These amounts are included as components of acquisition costs deferred and related amortization. Insuradyne incurred insurance-related expenses aggregating $77, $1,147, and $495 in 2001, 2000, 1999, respectively.
2001 2000 1999 ---- ---- ---- Numerator for basic and diluted Earnings per share: Net income $ 70,976 $ 160,260 $ 631,958 Denominator: Denominator for basic earnings per share weighted average shares 1,907,989 1,907,989 1,907,989
The Company has an incentive bonus plan for agents that was adopted January 1, 1995 by the Company's Board of Directors and effective through December 31, 2001. Agents that qualify under the plan have the option to purchase shares of common stock. The number of shares of common stock is determined on the date of the award as the number of whole shares equal to the award based on the applicable stock price on December 31 of the year the agent has qualified for the bonus. For each share of common stock purchased by the agent, the Company will concurrently award an equivalent number of shares to the agent. Awards were granted in 1999 under this plan. The Company incurred expenses of approximately $5,010 relating to the Company's matching number of shares. There were no awards granted in 2001 and 2000. If the agent does not purchase the shares within the designated period, then the agent forfeits their rights to purchase the shares of common stock as well as the matching number of shares to be contributed by the Company.
The following table presents the carrying amounts and estimated fair values of financial instruments held at December 31, 2001 and 2000. The fair value of a financial instrument is the amount at which the instrument could be exchanged in a current transaction between willing parties.
2001 2000 ---------------------- ----------------------- Carrying Estimated Carrying Estimated amount fair value amount fair value -------- ---------- -------- ---------- Financial assets: Fixed maturities held-to-maturity (see note 3) $ 3,156,650 $ 3,250,894 $ 5,374,204 $ 5,273,032 Fixed maturities available-for- sale (see note 3) 21,364,731 21,364,731 23,367,483 23,367,483 Equity securities available-for-sale 372,183 372,183 358,932 358,932 Mortgage loans 2,268,292 2,268,292 2,298,163 2,298,163 Policy and student loans 8,181,223 8,181,223 8,220,736 8,220,736 Short-term investments 13,860,534 13,860,534 7,814,813 7,814,813 Cash and cash equivalents 1,969,055 1,969,055 2,513,668 2,513,668
Financial liabilities: Policy liabilities- policyholders' account balances $47,601,259 $44,808,386 $48,722,138 $45,680,048
Schedule I SOUTHERN SECURITY LIFE INSURANCE COMPANY Summary of Investments Other Than Investments in Related Parties December 31, 2001