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, 1996.
In recent years the Company has primarily issued one type of insurance product, universal life. Universal life provides insurance coverage with flexible premiums, within limits, which allow policyholders to accumulate cash values. These accumulated cash values are credited with tax-deferred interest, as adjusted by the Company on a periodic basis. Deducted from these cash accumulations are administrative charges and mortality costs. Should a policy surrender in its early years, the Company assesses a surrender fee against these same cash accumulations, based on issue age of the insured, smoker verses non-smoker status, sex of the insured and the duration of the policy at the time of surrender.
The following table sets forth certain percentages reflecting financial data and results of operations (a) for 1996, 1995 and 1994 premium and investment revenues and (b) for period to period increases and (decreases).
New business written was 122, 124 and 189 million dollars in face value for 1996, 1995 and 1994, respectively. While the face amount issued declined again in 1996, new business production actually increased. The company entered a new market known as the final expense market. Generally, 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. In 1995 the Company issued 1,696 new policies. In 1996, 2,702 policies were issued for an increase of 59%. The Company is encouraged by these results and anticipates a continuation of this trend throughout 1997.
Premium and policy charges for 1996 was recorded at $7.7 million, 1995 was recorded at $7.9 million and 1994 at $9.1 million. While policy production was up for 1996, premium and policy cahrges went down.
The 1996 premium and policy charges for 1996 was recorded at 7.7%. Several factors have combined to create this decline. 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 be beneficial and the new product currently being marketed has lower premiums than those of the universal life product. Surrender fee income declined 13.7% from that of 1995. Surrender fee income is dependent upon the duration and value of the policies lapsing. Should the policies be in their early years, the fee is high, however, limited to the value in the policy which is smaller in the early years. The older policies have lower surrender fees and greater account values from which to collect those fees.
Increased investment in debt securities coupled with reduced expenses for student loan processing are responsible for the 10% increase in 1996 and 9% increase in 1995 investment income. The Company continues to review its investment strategies to increase its earned interest rate. As a part of this process of review and refinement, the Company sold its entire stock portfolio just prior to year end 1996. This created a significant increase in realized gains for 1996. The resulting funds are to be invested in a more aggressive stock market fund which should create an increased yield for the Company. Additional changes in the Company's holdings are being planned for 1997.
Operating expenses for the Company were $3.3 million, $2.7 million and $3.2 million for 1996, 1995 and 1994, respectively. Several items are responsible for the increased operating costs of 1996. The lead program used to introduce and promote our new product was not without cost. The Company also attempted some new marketing procedures in 1996 which added to these costs. In addition, legal expenses were higher in 1996 than in 1995. The Company has reviewed its promotional expenses and now that the new product has established a market, has cut back on these expenses. The increased legal costs were related to the settlement of another lawsuit whereby the Company received settlement of approximately $400,000, which flowed through income and paid the associated attorneys fees. Operating expenses for 1994 also reflect increased legal expenses, however these expenses were associated with settlements paid rather than received.
Income, before income taxes, in 1996 was $1,588,505, inclusive of gain on equity securities of $873,299, compared to $1,274,903 in 1995 and $1,543,979 in 1994. The 1995 income declined 17% from prior year as a result of reduced premium income and level amortization expenses.
Effective January 1, 1994, the Company adopted Statement of Financial Accounting Standards No. 115 ("SFAS 115"), "Accounting
for Certain Investments in Debt and Equity Securities." SFAS 115 required that 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 1995 the Company renewed its $5,000,000 line of credit with SLMA in order to meet these seasonal borrowing requirements. The Company made no draws against this line of credit throughout the seasonal period for 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 1997. 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 1996. In 1995, a similar program was in effect with University Support Services.
Except as otherwise provided herein, management believes that cash flow levels in future periods will be such that the Company will be able to continue its prior growth patterns in writing life insurance policies, fund Federally insured student loans and meet normal operating expenses.
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 their RBC results in anticipation of future adoption. At December 31, 1996, the Company had statutory surplus well in excess of any RBC action level requirements.
The Company has now fully leased all rentable space on the first floor of its office building. The Company has no material commitments for capital expenditures throughout the balance of the year 1997.
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, 1996 and 1995, and the results of its operations and its cash flows for each of the years in the three year period ended December 31, 1996, 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, 1996, 1995 and 1994
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 or may cause disintermediation. 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
(a) 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.
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 are classified as trading securities. Trading securities are carried at fair 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 fair value,
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
Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.
Earnings per share are computed based on weighted average outstanding shares for each year.
Certain amounts presented in the 1995 and 1994 financial statements have been restated to conform to the 1996 presentation.
d. Investments in securities are reported as described in Note 1,(c), rather than in accordance with valuations established by the National Association of Insurance Commissioners ("NAIC"). Pursuant to NAIC valuations, bonds eligible for amortization are reported at amortized value; other securities are carried at values prescribed by or deemed acceptable by NAIC including common stocks, other than stocks of affiliates, at market value.
e. Deferred income taxes, if applicable, are recognized for future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases.
j. Certain proceeds from a note payable (note 9) that are treated as shareholder's equity for statutory purposes are treated as a liability under generally accepted accounting principles.
Unrealized (depreciation) appreciation in investments in equity securities for the years ended December 31, 1996, 1995, and 1994 is $0, $406,611 and ($108,809), respectively.
Unrealized (depreciation) appreciation of fixed maturities for years ending December 31, 1996, 1995 and 1994 is ($720,253), $2,779,872 and $(2,534,413) respectively.
Certain of the fixed maturity securities classified as available for sale and held to maturity were called during the year ended December 31, 1996, 1995 and 1994 resulting in the following realized gains and losses:
Net investment income for the years ended December 31, 1996, 1995, and 1994 consists of the following:
Deferred policy acquisition costs at December 31, 1996, 1995 and 1994 consist of the following:
Depreciation expense for the years ended December 31, 1996, 1995 and 1994 totaled $151,950, $150,213, and $148,355, respectively.
At December 31, 1996 and 1995, future policy benefits, exclusive of universal life and flexible term annuities consist of the following:
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 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 based upon the Company's investment yield plus 1 percent.
For the years ended December 31, 1996, 1995 and 1994, the Company ceded premiums of $582,346, $675,770 and $758,956, included in reinsurance ceded, and received recoveries of $367,295, $459,090 and $386,509, included in annuity, death
death and other benefits, respectively. The funds held in reinsurance treaties with reinsurer of $1,193,366 and $977,416 represent the 18% share of policy loans ceded to the reinsurer at December 31, 1996 and 1995, respectively.
Interest expense relating to these notes payable during the three years ended December 31, 1996, 1995 and 1994 totaled $12,094, $26,240, and $60,864, respectively and is included in net investment income.
Income taxes for the years ended December 31, 1996, 1995 and 1994 is summarized as follows:
$80,000 relating to this amount as it has no plan to distribute the amounts in Policyholders' Surplus in the foreseeable future.
The net change in the total valuation allowance for the years ended December 31, 1996, 1995, and 1994 was an increase of $64,900, $62,000 and $14,000, 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, 1996.
The Company's general agent, Insuradyne Corporation, is a wholly-owned subsidiary of Consolidare Enterprises, Inc., which owns approximately fifty-seven percent (57%) of the Company's outstanding stock. The balances due (to) from 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 $344,904, $422,121 and $582,059, in 1996, 1995, and 1994, respectively. These amounts are included as components of acquisition costs
The following table presents the carrying amounts and estimated fair values of financial instruments held at December 31, 1996 and 1995. The fair value of a financial instrument is the amount at which the instrument could be exchanged in a current transaction between willing parties.