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.
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.
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.
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.
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.
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.
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.
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.
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):
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 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.
The following financial statements of Southern Security Life Insurance Company are included in Part II, Item 8:
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.
SOUTHERN SECURITY LIFE INSURANCE COMPANY Notes to Financial Statements December 31, 1998, 1997 and 1996
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.
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.
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.
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.
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-
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.
holders are reported as deposits. Cost of insurance, policy administration and surrender charges which are charged against the policyholder account balance during the period, are recognized as revenue as earned. Amounts assessed against the policyholder account balance that represent compensation to the Company for services to be provided in future periods are reported as unearned revenue and recognized in income using the same assumptions and factors used to amortize acquisition costs capitalized.
h. Costs attributable to the public offering of the common shares have been reclassified from accumulated surplus to capital in excess of par.
A reconciliation of net income (loss) for the years ended December 31, 1998, 1997 and 1996 and shareholders' equity as of December 31, 1998 and 1997 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 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 which may be paid by the Company during 1999 without prior approval is approximately $114,000. Accordingly, GAAP excess earnings over a statutory 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, 1998.
Unrealized (depreciation) appreciation in investments in equity securities for the years ended December 31, 1998, 1997, and 1996 is $(111), $39,973, and $0, respectively.
Fair values reflected in available-for-sale and held-to-maturity categories are based on NAIC values, versus values associated with normal market pricing services. The estimated difference for both categories was immaterial for all years presented.
Unrealized appreciation (depreciation) of fixed maturities for years ending December 31, 1998, 1997 and 1996 is $183,141, $388,847 and $($720,253) respectively.
Certain of the fixed maturity securities classified as available-for-sale and held-to-maturity were called during the year ended December 31, 1998, 1997 and 1996 resulting in the following realized gains and losses:
At December 31, 1998 and 1997, 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 $207,006 and $244,361 at December 31, 1998 and 1997, respectively, which are guaranteed by the U.S. government. Subsequent to December 31, 1998, all of these loans were sold at their unpaid principal balance.
Certain of these assets, totaling approximately $850,000 for each of the years ended December 31, 1998 and 1997, are restricted for the future benefit of policyholders in a particular state.
Deferred policy acquisition costs at December 31, 1998, 1997 and 1996 consist of the following:
At December 31, 1998 and 1997, future policy benefits, exclusive of universal life and flexible term annuities
of the assuming companies. As of December 31, 1998, 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 $415,080, $432,486, and $448,327 included in reinsurance premiums ceded, and received recoveries of $88,457, $131,449 and $608,355 included in annuity, death and other benefits for the years ended December 31, 1998, 1997 and 1996, respectively.
For the years ended December 31, 1998, 1997 and 1996, the Company ceded premiums to MEGA of $448,355, $481,585 and $582,346, included in reinsurance ceded, and received recoveries of $469,307, $503,159 and $367,295, included in annuity, death and other benefits, respectively. The funds held related to reinsurance treaties of $1,419,357 and $1,339,927 represent the 18% share of policy loans ceded to the reinsurer at December 31, 1998 and 1997, respectively.
As of December 31, 1998, the Company had an unused line of credit of $5,000,000 which is secured by student loans equaling 115% of the unpaid principal balance. The facility
The principal elements of deferred income taxes consist of the following:
The Company's general agent, Insuradyne Corporation, is a wholly-owned subsidiary of SSLIC Holding Company, Inc., which owns approximately fifty-seven percent (57%) of the Company's outstanding stock. The balances due to/from an affiliated insurance agency reflected in the accompanying balance sheets principally represent unearned commission advances paid to Insuradyne. The Company incurred commission expense to Insuradyne aggregating $252,955, $323,303 and $344,904, in 1998, 1997, and 1996, respectively. These amounts are included as components of acquisition costs deferred and related amortization. Insuradyne incurred insurance-related expenses aggregating $33,374, $25,604, and $31,703 in 1998, 1997 and 1996, respectively.
Statement of Financial Accounting Standards No. 107 Disclosures About Fair Value of Financial Instruments (SFAS 107) requires the Company to disclose estimated fair value information. The following methods and assumptions were used by the Company in estimating fair values of financial instruments as disclosed herein:
Policyholders' account balances: The fair values for policyholder account balances are based on their approximate surrender values.
The following table presents the carrying amounts and estimated fair values of financial instruments held at December 31, 1998 and 1997. The fair value of a financial instrument is the amount at which the instrument could be exchanged in a current transaction between willing parties.
Other comprehensive income, as reflected in the Statement of Shareholders' Equity, for the year ended December 31, 1998 was as follows:
Including the above other comprehensive income, total comprehensive loss for 1998 was $212,912.
To the best of the Company's knowledge, it has no potential or pending contingent liabilities that might be material to the Company's financial condition, results of operations or liquidity pursuant to product and environmental liabilities.