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 decrease in net insurance revenues and a $715,000 increase in other revenue.
The amortization of deferred policy acquisition costs decreased by $1,232,000 or 40.7%, to $1,797,000, for fiscal year 2000, from $3,029,000 for the comparable period in 1999. The decrease in amortization expense was primarily due to adjusting the amortization rate to the Company's current assumptions.
Total revenues increased by $186,000, or 1.6%, to $11,526,000 for fiscal year 1999 from $11,340,000 for fiscal year 1998. Contributing to this increase in total revenues was a $322,000 increase in net investment income and a $715,000 increase in other revenue.
Realized gains on investments decreased from $525,000 in fiscal year 1998 to no gains in fiscal year 1999. The gains in 1998 were the result of the Company trading its available-for-sale securities. The Company did not engage in the trading of any of its available-for-sale securities in 1999.
The amortization of deferred policy acquisition costs decreased by $456,000, or 13.1%, to $3,029,000, for fiscal year 1999, from $3,485,000 for the comparable period in 1998. The decrease in amortization expenses was primarily due to the reduction in net insurance revenues.
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 $28,742,000 as of December 31, 2000 as compared to $27,930,000 as of December 31, 1999. This represents 60.6% and 59.8% of the total investments as of December 31, 2000 and December 31, 1999, 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, 2000, and at December 31, 1999, the Company did not have investments in bonds in rating categories three through nine, which are considered non-investment grade.
The Company has no other financial instruments which would be materially susceptible to market risk.
The Company is subject to risk based capital guidelines established by statutory regulators requiring minimum capital levels based on the perceived risk of assets, liabilities, disintermediation, and business risk. At December 31, 2000 and December 31, 1999, the Company exceeded the regulatory criteria.
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 2000 and 1999.
The Company has leased approximately 38% of the available space in its principal office building and does not anticipate significant capital expenditures to the rental space.
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.
Statement of Operations - years ended December 31, 2000, 1999 and 1998......... . . . . . . . . . . . . . . . 19
We have audited the accompanying balance sheet of Southern Security Life Insurance Company as of December 31, 2000 and 1999 and the related statements of operations, shareholders' equity, and cash flows for the years 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 audits.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Southern Security Life Insurance Company at December 31, 2000 and 1999, and the results of its operations and its cash flows for the two years then 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.
2000 1999 1998 Revenues: Net insurance revenues $ 6,698,869 $ 6,901,546 $ 7,228,227 Net investment income (notes 3 and 11) 3,935,607 3,909,373 3,587,147 Realized gain on investments (note 3) -- -- 525,181 Other revenue, net -- 715,128 -- ----------- ------------ ----------- 10,634,476 11,526,047 11,340,555 ----------- ------------ ----------- Benefits, claims and expenses:
Benefits and claims 5,109,411 4,453,564 4,346,820 Amortization of deferred policy acquisition costs (note 4) 1,797,320 3,029,223 3,484,689 Operating expenses (notes 9 and 11) 3,529,381 3,261,134 4,134,686 ----------- ----------- ----------- 10,436,112 10,743,921 11,966,195 ----------- ----------- ----------- Income(Loss) before income taxes 198,365 782,126 (625,640)
Income tax expense (benefit) (note 10) 38,105 150,168 (241,907) ----------- ----------- ----------- Net income(loss) $ 160,260 $ 631,958 $ (383,733) =========== =========== =========== Basic and diluted net income (loss) per share of common stock (note 12) $0.08 $.33 $(.20) ===== ==== =====
2000 1999 1998 ------- ------ Cash flows from financing activities: Receipts from universal life and certain annuity policies credited to policyholder account balances 5,765,790 6,662,558 7,524,375 Return of policyholder account balances on universal life and certain annuity policies (9,129,406) (10,679,256) (9,547,720)
Change in deferred acquisition costs (71,611) 235,048 (294,326) Change in premium deposit funds 42,967 (141,029) 79,440 Deferred income tax asset (liability) (235,481) 532,532 174,016 ----------- ----------- ---------- Accumulated comprehensive income Net change in unrealized appreciation (depreciation) $ 400,955 $ (906,744) $ 163,821 =========== =========== ===========
1. Nature of business and summary of significant accounting policies: ----------------------------------------------------------------- (a) Nature of 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 71.5% of the Company's voting securities at December 31, 2000.
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.
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.
1. Nature of business and summary of significant accounting policies, continued ---------------------------------------------------------------------------- (c) Use of estimates
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.
Certain amounts presented in the 1999 and 1998 financial statements have been reclassified to conform to the 2000 presentation.
2. Basis of financial statements ----------------------------- The more significant generally accepted accounting principles applied in the preparation of financial statements that differ from life insurance statutory accounting practices prescribed or permitted by regulatory authorities are as follows:
2. Basis of financial statements, continued ---------------------------------------- j. Certain proceeds from a note payable (note 9) that are treated as shareholders' equity for statutory purposes are treated as a liability under generally accepted accounting principles.
The National Association of Insurance Commissioners has adopted the Codification of Statutory Accounting Principles ("Codification"). Codification changes current statutory accountintg rules in several areas and is effective January 1, 2001. Although the Company has not estimated the potential effect, it does not believe Codificaiton will have a material effect on the financial position, results of operation, or liquidity of the Company.
Equity securities consist of $358,932 and $378,440 of common stock at fair value at December 31, 2000 and 1999 respectively.
Unrealized (depreciation) appreciation in investments in equity securities for the years ended December 31, 2000, 1999, and 1998 is $(121,203), $112,598 and $(111), respectively.
Gross Gross Estimated Amortized Unrealized Unrealized Fair Cost Gains Losses Value --------- ---------- ---------- --------- December 31, 2000: Held-to-maturity: U.S. Treasury securities and obligations of U.S. government corporations and agencies (guaranteed) $ 2,001,985 $ 13,327 $ -- $ 2,015,312
Mortgage-backed securities 784,358 9,958 -- 794,316 ----------- -------- --------- ----------- 5,374,204 87,704 188,876 5,273,032 ----------- -------- --------- ----------- Available-for-sale: U.S. Treasury securities and obligations of U.S. government corporations and agencies (guaranteed) 3,367,086 45,003 648 3,411,441
3. Investments, continued ---------------------- (a) Equity securities and fixed maturities, continued
Gross Gross Estimated Amortized Unrealized Unrealized Fair Cost Gains Losses Value ---------- ---------- ---------- ---------- December 31, 1999: Held-to-maturity: U.S. Treasury securities and obligations of U.S. government corporations and agencies (guaranteed) $ 1,007,021 $ 15,789 $ -- $ 1,022,810
Mortgage-backed securities 993,874 11,355 13,878 991,351 ----------- --------- -------- ----------- 3,978,871 29,295 22,830 3,985,336 ----------- --------- -------- ----------- Available-for-sale: U.S. Treasury securities and obligations of U.S. government corporations and agencies (guaranteed) 4,596,187 4,599 21,561 4,579,225
Mortgage-backed securities 90,341 -- 228 90,113 ----------- -------- --------- ----------- 24,789,267 4,599 842,755 23,951,111 ----------- -------- --------- ----------- $28,768,138 $ 33,894 $ 865,585 $27,936,447 =========== ======== ========= ===========
Unrealized appreciation (depreciation) of fixed maturities for years ending December 31, 2000, 1999, 1998 is $678,644, $(1,747,058) and $183,142 respectively.
2000 1999 1998 --------- ------- -------- Proceeds from sale of equity securities $ -- $ -- $ 1,405,248 ---------- ---------- ------------ Proceeds from sale of fixed maturities available-for-sale $1,200,000 $2,739,662 $9,569,250 ---------- ---------- ---------- Realized gains (losses) Fixed maturities: Gross realized gains -- -- $ 319,934 Gross realized (losses) -- -- -- Equity securities: Gross realized gains -- -- 205,247 Gross realized (losses) -- -- -- ----------- --------- ------------ $ -- $ -- $ 525,181 =========== ========== =============
Federal Express $2,100,000 Dean Witter Discover 3,964,767 Philip Morris, Inc. 5,260,000
Net investment income for the years ended December 31, 2000, 1999, and 1998 consists of the following:
4. Deferred policy acquisition costs --------------------------------- Deferred policy acquisition costs at December 31, 2000, 1999, 1998 consist of the following:
2000 1999 1998 ------ ------ ------ Deferred policy acquisition costs at beginning of year $12,874,219 $13,583,956 $15,451,689 Policy acquisition costs deferred: Commissions 1,384,782 1,223,187 1,053,953 Underwriting & issue costs 398,622 440,200 429,600 Other 422,721 421,051 427,729 Change in unrealized appreciation (depreciation) (71,611) 235,048 (294,326) ----------- ----------- ----------- 2,134,514 2,319,486 1,616,956 Amortization of deferred policy acquisition costs (1,797,320) (3,029,223) (3,484,689) ----------- ----------- ----------- Deferred policy acquisition costs at end of year $13,211,413 $12,874,219 $13,583,956 =========== =========== ===========
December 31, December 31, 2000 1999 Land $ 982,027 $ 982,027 Building and improvements 2,348,973 2,205,795 Furniture and equipment 945,345 993,198 ------------ ----------- 4,276,345 4,181,020 Less accumulated depreciation (1,733,961) (1,745,455) ------------ ----------- $ 2,542,384 $ 2,435,565 ============ ===========
December 31, December 31, 2000 1999 ------------- ------------ Life insurance $2,677,841 $1,334,887 Annuities 235,032 304,414 Accident & health insurance 53,067 9,675 ---------- ---------- Total life & health future policy benefits $2,965,940 $1,648,976 ========== ==========
As of December 31, 2000, 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
7. Reinsurance, continued ---------------------- 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 $275,288, $424,255, and $415,080 included in reinsurance premiums ceded, and received recoveries of $131,886, $162,871 and $88,457 included in annuity, death and other benefits for the years ended December 31, 2000, 1999, 1998, respectively.
9. Note payable to related party ----------------------------- A note payable to a related party consists of amounts due on demand to Security National Life Insurance Company. 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, 2000, the note bears interest at 11.0% 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 2000, 1999, 1998 aggregated $105,000, $90,000, and $90,000 respectively.
2000 1999 --------- -------- Current $ 57,471 $139,160 Deferred 500,605 274,550 Total $558,076 $413,710
10. Income taxes, continued ----------------------- Total income taxes including taxes on the change in the value of investments for the years ended December 31, 2000, 1999, and 1998 were as follows:
2000 1999 1998 ------ ------ ------ Tax expense (benefit) in operations $ 38,105 $ 150,168 $(241,907) Tax on unrealized appreciation (depreciation) of investments 235,481 (532,532) (174,016) -------- --------- --------- $273,586 $(382,364) $(415 923)
2000 1999 1998 Computed "expected" tax expense (benefit) $ 67,444 $ 265,923 $(212,718) Increase (reduction) in income taxes resulting from: Small life insurance company deduction (3,485) (139,195) (12,390) Changes in the valuation allowance for deferred tax assets, allocated to income tax expense (27,338) 17,590 (17,950) State taxes, net of federal income tax benefit 1,484 5,850 1,207 Other, net -- -- (56) -------- --------- --------- $ 38,105 $ 150,168 $(241,907) ======== ========= =========
10. Income taxes, continued ----------------------- a. The Policyholders' Surplus exceeds a prescribed maximum, or; 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.
Alternative minimum tax credit carry forwards 262,528 235,190 ------------ ----------- Total gross deferred tax assets 4,342,403 3,863,177 Less valuation allowance (262,528) (235,190) ------------ ----------- Net deferred tax assets 4,079,875 3,627,987 ------------ ----------- Deferred tax liabilities: Deferred policy acquisition costs (4,565,655) (3,908,348) Other (22,576) (252,011) Unrealized (appreciation) depreciation of securities 7,751 257,822 ------------ ----------- Total gross deferred tax liabilities (4,580,480) (3,902,537) ------------ ----------- Net deferred tax (liability) $ (500,605) $ (274,550) =========== ===========
11. Related party transactions -------------------------- 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 $180,941, $175,409 and $252,955, in 2000, 1999, and 1998, respectively. These amounts are included as components of acquisition costs deferred and related amortization. Insuradyne incurred insurance-related expenses aggregating $1,147, $495, and $33,374 in 2000, 1999, 1998, respectively.
On December 28, 1998 the Company entered into a Loan Funding and Fee Agreement and Agency Agreement (the "Agreement") with Security National Mortgage Company ("SNMC"), a subsidiary of Security National. Under the terms of the Agreement, SNMC assigns their interest in residential mortgage loans that have been pre-sold to third party investors to the Company. The Company purchases these loans and holds them as short-term investments until it receives the proceeds from the third party investors. The Company receives interest income from SNMC based upon how long the loans were outstanding. At December 31, 2000 and 1999 the Company had outstanding loan purchases of $7,814,813 and $8,595,093, respectively. Included in investment income is $732,691 and $457,861 for the years ended December 31, 2000 and 1999, respectively.
The Company received for the years ended December 31, 2000 and 1999, $182,248 and $219,684 respectively, 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.
Dilutive potential common shares -- -- -- Denominator for diluted earnings per share weighted average shares and assumed conversions 1,907,989 1,907,989 1,907,989 Basic earnings per share $0.08 $.33 $(0.20) Diluted earnings per share $0.08 $.33 $(0.20)
14. Disclosures about fair value of financial instruments ----------------------------------------------------- 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:
The following table presents the carrying amounts and estimated fair values of financial instruments held at December 31, 2000 and 1999. The fair value of a financial instrument is the amount at which the instrument could be exchanged in a current transaction between willing parties.