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, 1999.
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.
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.
Total revenues decreased by $356,000, or 3.0%, to $11,340,000 for fiscal year 1998, from $11,696,000 for fiscal year 1997. Contributing to this decrease in total revenue was a $416,000 decrease in net insurance revenue.
Net investment income increased by $42,000, or 1.2%, to $3,587,000 for fiscal year 1998, from $3,545,000 for fiscal year 1997. This increase was primarily the result of increased yields of the Company's investments.
Operating expenses increased by $663,000, or 19.1%, to $4,135,000 for fiscal year 1998, from $3,472,000 for the same period in 1997. This increase was primarily due to the lump sum payment to the Company's former President in December 1998 in connection with the acquisition of the Company's parent company.
The Company's insurance operations have historically provided adequate positive cash flow enabling the Company to continue to meet operational needs as well as increase its investment-grade securities to provide ample protection for policyholders.
Lapse rates measure the amount of insurance terminated during a particular period. The Company's lapse rate for life insurance in 1999 was 9.1% as compared to a rate of 17.4% for 1998.
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.
hedged assets, liabilities and firm commitments or, for forecasted transactions, deferred and recorded as a component of equity until the hedged transactions occur and are recognized in earnings. The ineffective portion of a hedging derivative's change in fair value will be immediately recognized in earnings. The impact of SFAS 133 on the Company's financial statements will depend on a variety of factors, including future interpretive guidance from the FASB, the future level of forecasted and actual foreign currency transactions, the extent of the Company's hedging activities, the types of hedging instruments used and the effectiveness of such instruments. However, the Company does not believe the effect of adopting SFAS 133 will be material to its financial position.
In our opinion, the 1999 financial statements referred to above present fairly, in all material respects, the financial position of Southern Security Life Insurance Company as of December 31, 1999, 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.
Liabilities and Shareholders' Equity 1999 1998 - ------------------------------------ ---- ---- Liabilities: Policy liabilities and accruals (notes 6 and 7): $ 1,648,976 $ 1,727,300 Future policy benefits: Policyholders' account balances 50,377,101 52,520,300 Unearned revenue 5,323,954 6,023,399 Other policy claims and benefits payable 540,407 540,789 Other policyholders' funds, dividend and endowment accumulations 69,789 64,738 Funds held related to reinsurance treaties (note 7) 1,475,512 1,419,357 Note payable to related party (note 9) 1,000,000 1,000,000 Due to affiliated insurance agency (note 11) 195,785 22,871 General expenses accrued 137,884 747,148 Unearned investment income 324,750 340,622 Other liabilities 63,753 90,489 Income taxes (note 10) 413,710 796,074 ------------ ------------
15,637,320 15,912,106 Commitments and contingencies (notes 7 and 14) -- -- ------------ ------------
Benefits and claims 4,453,564 4,346,820 4,431,474 Amortization of deferred policy acquisition costs (note 4) 3,029,223 3,484,689 3,542,617 Operating expenses (notes 9 and 11) 3,261,134 4,134,686 3,472,255 ------------ ------------ ------------
Income tax expense (benefit) (note 10) 150,168 (241,907) 54,200 ------------ ------------ ------------
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.
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.
(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.
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 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.
(g) Depreciation ------------ Depreciation is being provided on the straight-line method over the estimated useful lives of the assets.
(h) Investment in affiliate ----------------------- The Company holds investments in its parent company's common stock. This reciprocal stockholding is accounted for based on the treasury stock approach. The value of the investment is recorded at cost and will be classified as treasury stock upon consolidation with its parent company.
1. Nature of business and summary of significant accounting policies, continued: ----------------------------------------------------------------------------
(o) Pending accounting change ------------------------- In June 1998, the Financial Accounting Standards Board (the "FASB") issued Statement No. 133, Accounting for Derivative Instruments and Hedging Activities ("SFAS 133"), which the Company is required to adopt January 1, 2000. SFAS 133 will require the Company to include all derivatives in the statement of financial position at fair value. Changes in derivative fair values will either be recognized in earnings as offsets to the changes in fair value of related hedged assets, liabilities and firm commitments or, for forecasted transactions, deferred and recorded as a component of equity until the hedged transactions occur and are recognized in earnings. The ineffective portion of a hedging derivative's change in fair value will be immediately recognized in earnings. The impact of SFAS 133 on the Company's financial statements will depend on a variety of factors, including future interpretive guidance from the FASB, the future level
f. The statutory liabilities for the asset valuation reserve and interest maintenance reserve have not been provided in the financial statements.
h. Costs attributable to the public offering of the common shares have been reclassified from accumulated surplus to capital in excess of par. i. Realized gains or losses on the sale or maturity of investments are included in the statement of income and not recorded net of taxes and amounts transferred to the interest maintenance reserve as required by statutory accounting practices.
A reconciliation of net income (loss) for the years ended December 31, 1999, 1998 and 1997 and shareholders' equity as of December 31, 1999 and 1998 between the amounts reported on a statutory basis and the related amounts presented on the basis of generally accepted accounting principles is as follows:
The 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, 1999.
The amortized cost and estimated fair value of fixed maturities at December 31, 1999 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.
Due in 2000 $1,000,563 $1,002,705 Due in 2001 through 2004 1,507,233 1,522,755 Due in 2005 through 2009 477,201 468,525 Due after 2009 -- -- ---------- ----------
Due in 2000 $ 1,199,855 $ 1,203,062 Due in 2001 through 2004 12,874,501 12,582,877 Due in 2005 through 2009 9,315,012 8,823,546 Due after 2009 1,309,558 1,251,513 ----------- -----------
24,698,926 23,860,998 Mortgage-backed securities 90,341 90,113 ----------- ----------- $24,789,267 $23,951,111 =========== ===========
1999 1998 1997 ---------- ---------- ------- Proceeds from sale of equity securities $ -- $ 1,405,248 $ 2,873,980 ------------ ------------ ------------
Gross realized gains -- $ 319,934 278,904 Gross realized (losses) -- -- (150,045) Equity securities: Gross realized gains -- 205,247 357,731 Gross realized (losses) -- -- -- ------------ ------------ ------------ $ -- $ 525,181 $ 486,590 ============ ============ ============
Certain of the fixed maturity securities classified as available-for-sale and held-to-maturity were called during the year ended December 31, 1999, 1998 and 1997 resulting in the following realized gains and losses:
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, 1999 and 1998, other than investments issued or guaranteed by the United States government are as follows:
1999 Carrying Amount ---- --------------- Federal Express $2,100,000 Dean Witter Discover $3,964,767 Philip Morris, Inc. $5,260,000
------ Dean Witter Discover $4,160,217 Federal Express $2,180,000 Philip Morris Inc. $5,815,000
At December 31, 1999 and 1998, the Company did not hold any unrated or less- than-investment grade corporate debt securities. The Company also invests in subsidized and unsubsidized student loans totaling $149,198 and $207,006 at December 31, 1999 and 1998, respectively, which are guaranteed by the U.S. government. Subsequent to December 31, 1999, all of these loans were sold at their unpaid principal balance.
Dividends on equity securities common stock, including mutual fund 15,610 719 16,189 ---------- ---------- ---------- 3,924,271 3,599,547 3,568,158 Less investment
expenses 14,898 12,400 22,847 ---------- ---------- ---------- $3,909,373 $3,587,147 $3,545,311 ========== ========== ==========
1999 1998 1997 ---------- ---------- ---------- Florida $1,708,530 $1,718,097 $1,727,034 Alabama 100,702 101,170 100,000 South Carolina 302,106 303,511 304,816 Georgia 251,755 252,926 254,013 Indiana 199,855 199,578 199,317 ---------- ---------- ----------
Certain of these assets, totaling approximately $850,000 for each of the years ended December 31, 1999 and 1998, are restricted for the future benefit of policyholders in a particular state.
1999 1998 1997 ---- ---- ---- Deferred policy acquisition costs at beginning of year $ 13,583,956 $ 15,451,689 $ 16,979,612 Policy acquisition costs deferred:
Commissions 1,223,187 1,053,953 1,204,604 Underwriting & issue costs 440,200 429,600 450,800 Other 421,051 427,729 414,374 Change in unrealized appreciation
(depreciation) 235,048 (294,326) (55,084) ------------ ------------ ------------ 2,319,486 1,616,956 2,014,694 Amortization of deferred policy
December 31, December 31, 1999 1998 ------------ ----------- Land $ 982,027 $ 982,027 Building and improvements 2,205,795 2,198,468 Furniture and equipment 993,198 1,068,995 ---------- ---------- 4,181,020 4,249,490 Less accumulated depreciation 1,745,455 1,664,235 ---------- ---------- $2,435,565 $2,585,255 ========== ==========
Depreciation expense for the years ended December 31, 1999, 1998 and 1997 totaled $135,145, $153,348, and $145,912, respectively.
6. Future policy benefits ---------------------- At December 31, 1999 and 1998, future policy benefits, exclusive of universal life and flexible term annuities consist of the following:
Life insurance in-force aggregated approximately $1.2 billion at December 31, 1999, and 1998. 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.
7. Reinsurance ----------- The Company routinely cedes and, to a limited extent, assumes reinsurance to limit its exposure to loss on any single insured. Ceded insurance is treated as a risk and liability of the assuming companies.
For the years ended December 31, 1999, 1998 and 1997, the Company ceded premiums to MEGA of $424,592, $448,355 and $481,585, included in reinsurance ceded, and received recoveries of $576,194, $469,307 and $503,159, included in annuity, death and other benefits, respectively. The funds held related to reinsurance treaties of $1,475,512 and $1,419,357 represent the 18% share of policy loans ceded to the reinsurer at December 31, 1999 and 1998, respectively.
A note payable to a related party consists of amounts due on demand to Security National Financial Corporation. The note's proceeds were obtained in December 1988 and the note qualifies as shareholders' equity for statutory accounting purposes in accordance with Section 628.401 of the Florida Statutes. At December 31, 1999, 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 1999, 1998 and 1997 aggregated $90,000, $90,000, and $90,000 respectively.
Tax expense (benefit) in operations $ 150,168 $(241,907) $ 54,200 Tax on unrealized appreciation (depreciation) of
1999 1998 1997 ---- ---- ---- Current: Federal $ 123,268 $ 9,329 $(142,870) State 15,891 1,207 (1,030) --------- --------- --------- 139,159 10,536 (143,900) --------- --------- --------- Deferred: Federal 9,693 (215,838) 169,100 State 1,316 (36,605) 29,000 --------- --------- --------- 11,009 (252,443) 198,100 --------- --------- --------- $ 150,168 $(241,907) $ 54,200 ========= ========= =========
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, or; d. the tax deferred status of the Policyholder's Surplus Account is modified by future tax legislation.
1999 1998 ----------- ----------- Deferred tax assets: Unearned revenue, due to deferral of "front-end" fee $ 1,950,587 $ 2,266,605 Policy liabilities and accruals, principally due to adjustments to reserves for tax purposes 1,804,230 2,090,315 Deferred policy acquisition costs related to unrealized appreciation (depreciation) (126,830) 59,420
Total gross deferred tax assets 3,863,177 4,669,120 Less valuation allowance (235,190) (252,780) ----------- -----------
Deferred tax liabilities: Deferred policy acquisition costs (3,908,348) (4,263,587) Other (252,011) (629,892) Unrealized (appreciation) depreciation of securities 257,822 (318,935) ----------- -----------
The Company received for the year ended December 31, 1999, $219,684 as rental income from Security National for a lease of office space in the Company's building under the terms of the Administrative Services Agreement.
The Company received for the year ended December 31, 1999, $230,639 in interest income from Security National for short-term loans of which none were outstanding as of December 31, 1999.
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. 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.
1999 1998 ---------------------- -------------- Carrying Estimated Carrying Estimated amount fair value amount fair value -------- ---------- -------- ---------- Financial assets: Fixed maturities held-to-maturity (see note 3) $ 3,978,871 $ 3,985,336 $ 4,956,910 $ 5,064,541 Fixed maturities available-for- sale (see note 3) 23,951,111 23,951,111 28,479,161 28,479,161 Equity securities
Financial liabilities: Policy liabilities- policyholders' account balances $50,377,101 $46,586,173 $52,520,300 $46,755,788
15. Legal proceedings ----------------- Lawsuits against the Company have arisen in the normal 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.