In accordance with generally accepted accounting principles, certain costs directly associated with the issuance of new policies are deferred and amortized over the lives of the policies. These costs are defined as deferred policy acquisition costs and are shown in the asset section of the balance sheet of the Company. Capitalized acquisition costs 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 universal life insurance business and are generally attributed to the recognition of current and emerging experience in accordance with the principles of SFAS 97.
The 1995 decline of 13% in premium and policy charges was attributed somewhat to the decline in the Company's insurance in force and therefore an associated reduction in administrative and mortality fees. Surrender fees for 1995 decreased by approximately 5% from 1994.
The amortization of deferred acquisition costs increased in 1996, following a two year decline in 1995 and 1994. The amortization of deferred acquisition costs is a continuous refinement process which relates to current experience in connection with revenues, mortality gains and losses, credited interest rate spreads, expense charges and surrender charges. The change in the rate of amortization of both deferred acquisition costs and unearned premium liabilities is due to "unlocking" for current and future experience based on the results of the changing experience encountered as required under FAS 97.
Reinsurance premiums ceded for 1996, 1995 and 1994 were $1,767,418, $2,112,884 and $2,508,749 respectively. Policy benefits were reduced due to reinsurance recoveries of $709,643, $405,345 and $679,622 for 1996, 1995 and 1994, respectively. Reinsurance commissions amounted to $308,179 for 1996 and $397,253 and $679,522 for 1995 and 1994 respectively. In addition, under the terms of the Company's treaty with Mega Life (formerly United Group Insurance Company) expenses of $956,143 were transferred for 1996 and $911,452 and $1,163,843 for 1995 and 1994 respectively. In 1995, the company amortized the remaining $200,000 of deferred gain, under the aforementioned treaty, against deferred acquisition costs for 1995.
We conducted our audits in accordance with generally accepted auditing standards. 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 a reasonable basis for our opinion.
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 minimizes this risk by adhering to a conservative investment strategy, by maintaining sound reinsurance and by providing for any amounts deemed uncollectible.
(d) 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. At December 31, 1996 and 1995, the Company did not have any investments categorized as trading securities.
The liability for future policy benefits 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.
Universal life policies - premiums received from policy-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.
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.
k. Reinsurance assets and liabilities are reported on a gross basis rather than shown on a net basis as permitted by statutory accounting practices.
A reconciliation of net income (loss) for the years ended December 31, 1996, 1995 and 1994 and shareholders' equity as of December 31, 1996 and 1995 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. A dividend may be declared and paid without prior Florida
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, 1996.
Equity securities consist of $0 and $1,715,385 of common stock at December 31, 1996 and 1995 respectively.
The amortized cost and estimated market values of investments in debt securities are as follows:
The amortized cost and estimated fair value of fixed maturities at December 31, 1996, 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.
At December 31, 1996 and 1995, 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 $514,483 and $4,403,061 at December 31, 1996 and 1995, respectively, which are guaranteed by the U.S. government. Subsequent to December 31, 1996, all of these loans were sold at their unpaid principal balance.
Certain of these assets, totaling approximately $650,000 for each of the years ended December 31, 1996 and 1995, are restricted for the future benefit of policyholders in a particular state.
Life insurance in-force aggregated approximately $1.2 billion and $1.3 billion at December 31, 1996, and 1995, respectively.
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. As of December 31, 1996, 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 only in the event that the reinsuring company might be unable to meet its obligations under the reinsurance agreement in force, as the Company remains primarily liable for such obligations. Under these contracts, the Company has ceded premium of $448,327, $525,662 and $585,957 included in reinsurance ceded, and received recoveries of $608,355, $204,171 and $514,868 included in annuity, death and other benefits for the years ended December 31, 1996, 1995 and 1994, respectively.
On December 31, 1992, the Company entered into a reinsurance agreement ceding an 18% share of all universal life policies in force at December 31, 1992 as a measure to manage the future needs of the Company. The reinsurance agreement is a co-insurance treaty entitling the assuming company to 18% of all future premiums, while making them responsible for 18% of all future claims and policyholder loans relating to the ceded policies. In addition, the Company receives certain commission and expense reimbursements.
As of December 31, 1992, the Company ceded premiums of $5,240,058, equal to the 18% of net statutory reserves ceded on the effective date of the contract. In return, the Company received a commission and expense allowance of $2,497,370. The economic gain on the reinsurance transaction amounted to approximately $1,600,000, however, management deferred approximately $1,000,000 of the gain against deferred acquisition costs as a provision for the recoverability of such costs. Based upon management's and actuarial evaluation of such costs, approximately $0, $200,000 and $500,000 of the amount deferred was amortized against deferred acquisition costs during 1996, 1995 and 1994, respectively.
The note payable of $0, and $1,400,553 at December 31, 1996 and 1995 respectively, secured by student loans equaling 115% of the unpaid principal balance, relates to advances under a $5,000,000 line of credit ($5,000,000 available to be drawn at December 31, 1996). The note bears interest at a variable rate and matures on September 18, 1997.
Note payable to related party consists of amounts due on demand to Consolidare Enterprises, Inc., the Company's majority shareholder. The note 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, 1996, the note bears interest at 9.0% percent (payable monthly); principal repayment is contingent upon the Company maintain-ing statutory surplus in excess of $1,750,000 and approval in advance by the Florida Department of Insurance. Interest expense relating to the balance of note payable to related party during 1996, 1995 and 1994 aggregated $90,000, $90,000, and $90,000 respectively.
Total income taxes for the years ended December 31, 1996, 1995, and 1994 were allocated as follows:
Income tax expense for the years ended December 31, 1996, 1995 and 1994 differs from "expected" tax (computed by applying the U.S. federal income tax rate of 35% in 1996, 35% in 1995 and 1994 and to pretax income) as a result of the following:
At December 31, 1996, the balance of the Policyholders' Surplus account aggregated approximately $236,000. The Company has not recorded deferred income taxes totaling approximately
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 1996, 1995 and 1994, AMT exceeded regular tax by $64,900, $62,600, and $14,000, respectively. At December 31, 1996, the AMT tax credit available to reduce future regular tax totaled $398,500.
The tax effect of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities at December 31, 1996 and 1995 are presented below:
deferred and related amortization. Insuradyne incurred insurance-related expenses aggregating $31,703, $35,271, and $192,332 in 1996, 1995 and 1994, respectively.
The Company had an incentive bonus plan for agents that was adopted in 1983 and effective through December 31, 1990. Bonuses granted under the plan were vesting over a five year period commencing on the fifth anniversary date of the award. Once vested, the agent had the option to receive the bonus in cash or shares of common stock. The number of shares of common stock was determined on the date of the award as the number of whole shares equal to the award based on the applicable stock price on that date.
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.
Schedule I SOUTHERN SECURITY LIFE INSURANCE COMPANY Summary of Investments Other Than Investments in Related Parties December 31, 1996