In connection with its higher education sales, the Company established a lead generation program that has been coupled with a recruiting program for new sales agents to help generate new business.
An additional source of income to the Company is investment income. The Company invests those funds deposited by policyholders in debt and equity securities, mortgage loans, and warehouse mortgage loans in accordance with the requirements and laws governing life insurance companies, 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 an important part in determining the interest rates credited to policyholders.
The costs related to acquiring new business, including certain costs of issuing policies and other variable selling expenses (principally commissions), defined as deferred policy acquisition costs, are capitalized and amortized into expense. For traditional life products, these costs are amortized over the premium-paying period of the related policies, in proportion to the ratio of annual premium revenues to total anticipated premium revenues. Such anticipated premium revenues are estimated using the same assumption used for computing liabilities for future policy benefits and are generally "locked in" at the date the policies are issued. For interest sensitive products, these costs are amortized generally in proportion to expected gross profits from surrender charges and investment, mortality and expense margins. This amortization is adjusted when the Company revises the estimate of current or future gross profits or margins. For example, deferred policy acquisition costs are amortized earlier than originally estimated when policy terminations are higher than originally estimated or when investments backing the related policyholder liabilities are sold at a gain prior to their anticipated maturity.
These estimates, which are revised periodically, are based on historical results and our best estimate of future expenses.
Total revenues increased by $430,000, or 3.9%, to $11,340,000 for fiscal year 2003 from $10,910,000 for fiscal year 2002. Increases occurred in both net insurance revenues and net investment income.
Net insurance revenues increased by $260,000, or 3.7%, to $7,335,000, for fiscal year 2003 from $7,075,000 for fiscal year 2002. This increase was primarily the result of an increase in traditional life sales.
Net investment income decreased by $32,000, or .8%, to $3,835,000 for fiscal year 2002 from $3,867,000 for fiscal year 2001. Investment yield decreased to 7.41% in fiscal year 2002 from 7.65% in fiscal year 2001.
(in millions of dollars) -200bps -100bps +100bps +200bps - ------------------------ ------- ------- ------- -------
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 2003 and 2002.
The Company has leased approximately 100% of the available rental space in its principal office building and does not anticipate significant capital expenditures to the rental space.
The Private Securities Litigation Reform Act of 1995 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.
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 mortality and morbidity.
The Company has not entered into any off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on its financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures, or capital resources that are material to investors.
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based Compensation - Transition and Disclosure and Amendment to FASB No. 123", which provides three optional transition methods for entities that decide to voluntarily adopt the fair value recognition principles of SFAS No. 123, "Accounting for Stock Issued to Employees", and modifies the disclosure requirements of that Statement. Under the prospective method, stock-based compensation expense is recognized for awards granted after the beginning of the fiscal year in which the change is made. The modified prospective method recognizes stock-based compensation expense related to new and unvested awards in the year of change equal to that which would have been recognized had SFAS No. 123 been adopted as of its effective date, for fiscal years beginning after December 15, 1994. The retrospective restatement method recognizes stock compensation costs for the year of change and restates financial statements for all prior periods presented as though the fair value recognition provisions of SFAS No. 123 had been adopted as of its effective date. Since the Company does not intend to voluntarily adopt the fair value provisions of FASB 123, adoption of SFAS 148 did not have a material effect on the financial condition or results of operations of the Company. However, pro forma disclosures required by SFAS 148 are included in the Company's interim financial statements, as required.
instruments affected include mandatory redeemable stock, certain financial instruments that require or may require the issuer to buy back some of its shares in exchange for cash or other assets and certain obligations that can be settled with shares of stock. This Statement is effective for all such financial instruments entered into or modified after May 31, 2003, and otherwise is effective at the beginning of the first interim period beginning after June 15, 2003. The adoption of SFAS No. 150 did not have a material effect on the Company's financial position or results of operations.
Statement of Operations - years ended December 31, 2003, 2002 and 2001....................................22
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, 2003 and 2002, and the results of its operations and its cash flows for the three years in the period ended December 31, 2003, in conformity with accounting principles generally accepted in the United States of America. 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.
Cash and cash equivalents (note 3) 7,075,394 3,067,284 Accrued investment income 462,846 473,789 Deferred policy acquisition costs (note 4) 13,624,107 13,391,535 Policyholders' account balances on deposit with reinsurer (note 7) 6,795,983 6,955,691 Reinsurance receivable (note 7) 442,574 279,090 Receivables: Agent balances, net 461,133 776,244 Other 320,325 614,150 Property and equipment, net, at cost (note 5) 2,313,119 2,430,404 ----------- ----------- Total Assets $77,664,439 $77,264,997 =========== ===========
Shareholders' equity (notes 2,3 and 12): Common stock, $1 par, authorized 3,000,000 shares; issued and out- standing, 2,103,600 shares in 2003 and 2,003,388 in 2002 2,103,600 2,003,388 Capital in excess of par 4,614,925 4,267,189 Accumulated other comprehensive income 835,784 871,197 Retained earnings 9,460,177 10,003,996 ----------- -----------
Benefits, claims and expenses: Benefits and claims 5,599,434 5,343,573 4,482,588 Amortization of deferred policy acquisition costs (note 4) 2,039,459 1,969,966 2,197,399 Operating expenses 3,871,302 3,678,920 3,835,165 ------------ ------------ ------------
Net income (loss) $ (95,871) $ (70,566) $ 70,976 ============ ============ ============
Basic and diluted net income (loss) per share of common stock (note 12) $(.05) $(.04) $.04 ===== ===== =====
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 Alabama (10%), Florida (43%), and Georgia (12%). None of the remaining eleven states in which the Company is licensed to conduct business account for over 10% individually of the Company's total business.
Effective December 17, 1998, 100% of the common stock of SSLIC Holding Company, Inc. was acquired by Security National Life Insurance Company ("SNLIC"). Accordingly, from December 17, 1998, the Company is a 77.0% owned, indirect subsidiary of SNLIC.
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 Life Insurance Company at December 17, 1998.
In preparing the financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities. Actual results could differ significantly from those estimates.
The Company maintains its cash in bank deposit accounts, which at times may exceed federally insured limits. The Company has not experienced any losses in such accounts and believes it is not exposed to any significant credit risk on cash and cash equivalents.
In April 2002, FASB issued SFAS No. 145, "Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections". Under historical guidance, all gains and losses resulting from the extinguishment of debt were required to be aggregated and, if material, classified as an extraordinary item, net of related income tax effect. SFAS No. 145 rescinds that guidance and requires that gains and losses from extinguishments of debt be classified as extraordinary items only if they are both unusual and infrequent in occurrence. SFAS No. 145 also amends SFAS No. 13, "Accounting for Leases" for the required accounting treatment of certain lease modifications that have economic effects similar to sale-leaseback transactions. SFAS No. 145 requires that those lease modifications be accounted for in the same manner as sale-leaseback transactions. The provisions of SFAS No. 145 related to SFAS No. 13 are effective for transactions occurring after May 15, 2002. Adoption of the provisions of SFAS No. 145 related to SFAS No. 13 did not have a material impact on the Company's financial condition or results of operations.
intend to voluntarily adopt the fair value provisions of FASB 123, adoption of SFAS 148 did not have a material effect on the financial condition or results of operations of the Company. However, pro forma disclosures required by SFAS 148 are included in the Company's interim financial statements, as required.
a. Costs of acquiring new business are deferred and amortized, rather than being charged to operations as incurred.
c. The liability for policyholder funds associated with universal life and certain annuity contracts is based on the provisions of Statement of Financial Accounting Standards No. 97, rather than on the statutory rates for mortality and interest.
Under applicable laws and regulations, the Company is required to maintain minimum surplus as to policyholders, determined in accordance with regulatory accounting practices, in the aggregate amount of approximately $1,799,000.
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, 2003.
Equity securities consist of $424,165 and $309,218 of common stock at fair value at December 31, 2003 and 2002 respectively.
Unrealized (depreciation) appreciation in investments in equity securities for the years ended December 31, 2003, 2002, and 2001 is $114,947, $(62,965) and $24,632, respectively.
At December 31, 2003, investments in debt securities at fair value and cash totaling $21,983,142 were restricted under the terms of a reinsurance agreement with Security National Life Insurance Company. See note 7.
Due in 2004 $ 2,668,412 $ 2,734,176 Due in 2005 through 2008 9,242,775 10,044,656 Due in 2009 through 2013 1,148,267 1,320,516 Due after 2013 97,883 113,969
2003 2002 2001 ---------- ---------- ---------- Proceeds from sale of equity securities $ -- $ 782,048 $ 794,356 =========== =========== ========== Proceeds from sale of fixed maturities available-for-sale $ 3,860,000 $ 3,300,000 $ 2,814,816 =========== =========== =========== Realized gains (losses) Fixed maturities: Gross realized gains $ -- $ -- $ -- Gross realized (losses) -- -- -- Equity securities: Gross realized gains -- -- -- Gross realized (losses) -- (1,038) -- ----------- ----------- ----------- $ -- $ (1,038) $ -- =========== =========== ===========
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, 2003 and 2002, other than investments issued or guaranteed by the United States government are as follows:
Net investment income for the years ended December 31, 2003, 2002, and 2001 consists of the following:
Deferred policy acquisition costs at December 31, 2003, 2002 and 2001 consist of the following:
2003 2002 2001 ---- ---- ---- Deferred policy acquisition costs at beginning of year $ 13,391,535 $ 12,974,390 $ 13,211,413 ------------ ------------ ------------ Policy acquisition costs deferred: Commissions 1,339,106 1,544,860 1,249,453 Underwriting & issue costs 422,744 242,162 269,070 Other 173,724 342,403 380,448 Change in unrealized appreciation (depreciation) 336,457 257,686 61,405 ------------ ------------ ------------ 2,272,031 2,387,111 1,960,376 Amortization of deferred policy acquisition costs (2,039,459) (1,969,966) (2,197,399) ------------ ------------ ------------ Deferred policy acquisition Costs at end of year $ 13,624,107 $ 13,391,535 $ 12,974,390 ============ ============ ============
December 31, December 31, 2003 2002 ------------- ----------- Land $ 982,027 $ 982,027 Building and improvements 2,445,931 2,441,849 Furniture and equipment 954,954 968,761 ----------- ----------- 4,382,912 4,392,637 Less accumulated depreciation (2,069,793) (1,962,233) ----------- ----------- $ 2,313,119 $ 2,430,404 =========== ===========
December 31, December 31, 2003 2002 ------------- ----------- Life insurance $4,006,528 $3,291,275 Annuities 68,357 64,738 Accident & health insurance 204,396 161,468 ---------- ---------- Total life & health future policy benefits $4,279,281 $3,517,481 ========== ==========
As of December 31, 2003, 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 was 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 and SNLIC agreements discussed below, the Company has ceded premium of $344,736, $303,536, and $278,828 included in reinsurance premiums ceded, and received recoveries of $663,595, $286,817 and $624,314, included in annuity, death and other benefits for the years ended December 31, 2003, 2002, 2001, respectively.
For the years ended December 31, 2003, 2002, 2001, the Company ceded premiums to MEGA of $311,623, $344,981 and $365,247, included in reinsurance ceded, and received recoveries of $530,063, $496,751 and $494,683, included in annuity, death and other benefits, respectively. The funds held related to reinsurance treaties of $1,294,589, and $1,334,963 represent the 18% share of policy loans ceded to the reinsurer at December 31, 2003 and 2002, respectively.
Tax expense (benefit) in operations $ (74,488) $ (12,254) $ 16,865 Tax on unrealized appreciation (depreciation) of investments (20,798) 183,865 372,208 --------- --------- --------- $ (95,286) $ 171,611 $ 389,073 ========= ========= =========
Current: Federal $ 8,923 $ 4,246 $ (5,758) State 9,662 -- -- -------- -------- --------
18,585 4,246 (5,758) -------- -------- -------- Deferred: Federal (79,680) (14,678) 20,691 State (13,393) (1,822) 1,932 -------- -------- --------
Income tax expense (benefit) for the years ended December 31, 2003, 2002, 2001 differs from "expected" tax (computed by applying the U.S. federal income tax rate to pretax income) as a result of the following:
The tax effect of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities at December 31, 2003 and 2002 are presented below:
Deferred tax liabilities: Deferred policy acquisition costs (4,756,712) (4,544,629) Other 412,351 465,440 Unrealized (appreciation) depreciation of securities (437,608) (509,347) ----------- -----------
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 $97,124, $109,268 and $122,787, in 2003, 2002, and 2001, respectively. These amounts are included as components of acquisition costs deferred and related amortization. Insuradyne incurred insurance-related expenses aggregating $83, $206, and $77 in 2003, 2002, 2001, respectively. The amount due to Insuradyne at December 31,2003 and 2002 was $57,065 and $83,941, 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 its 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 are outstanding. At December 31, 2003 and 2002 the Company had outstanding loan purchases of $17,497,249, and $16,283,759, respectively. Included in investment income is $1,478,281, $1,130,231 and $984,872 for the years ended December 31, 2003, 2002, and 2001, respectively.
The Company received for the years ended December 31, 2003, 2002, and 2001, $33,767, $75,622, and $77,394, respectively, in interest income from Security National for short-term loans of which $28,091 and $113,707 were outstanding as of December 31, 2003 and 2002, respectively.
2003 2002 2001 ---- ---- ---- Numerator for basic and diluted Earnings per share: Net income (loss) $ (95,871) (70,566) $ 70,976 Denominator: Denominator for basic earnings per share weighted average shares 2,078,548 1,979,291 1,907,989
2003 2002 2001 ---- ---- ---- Dilutive potential common shares -- -- -- Denominator for diluted earnings per share weighted average shares and assumed conversions 2,078,548 1,979,291 1,907,989 Basic earnings (loss) per share $(.05) $(.04) $.04 Diluted earnings (loss) per share $(.05) $(.04) $.04
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 qualified under the plan had the option to purchase 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 December 31 of the year the agent had qualified for the bonus. For each share of common stock purchased by the agent, the Company will concurrently award an equivalent number of shares (this is the Company's matching contribution). In 2003 the Company incurred $1,354 relating to the Company's matching number of shares. There were no awards granted in 2003, 2002, and 2001. 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.
Cash and cash equivalents, short-term investments and policy and student loans: The carrying amounts reported in the balance sheet for these instruments approximate their fair value.
NGU alleged that it had been damaged far in excess of the $75,000 minimum jurisdictional limits of the federal court. NGU also sought attorney's fees and costs as well as prejudgment and post judgment interest. A second amended complaint and a third amended complaint, which included a fraud claim, were filed. A motion was filed by the Company to dismiss the third amended complaint, including the fraud claim. The court denied the motion. The Company counterclaimed for what it claimed to be a debit balance owing to it pursuant to the relationship between the parties (the amount subject to reduction as premiums are received). The Company also sought to recover attorney's fees and costs, as well as punitive damages on three of its causes of action.
Certain discovery took place. The federal case was dismissed by stipulation. The matter was refiled in Texas state court, Tarrant County, Case No. 348 195490 02. The claims of the respective parties are essentially the same as those in federal court, which claims include fraudulent inducement relative to entering into a contract, fraud, breach of contract, breach of duty of good faith and fair dealing, attorney's fees and exemplary damages as well as seeking an accounting and contesting the interest charges. Certain depositions have been taken since the filing again in state court and further discovery is anticipated. The Company filed a motion for partial summary judgment with respect to certain items. The court has yet to rule on the motion. A trial is presently set for October 2004. The Company intends to vigorously defend the matter as well as prosecute its counterclaim.
Benefits Amortization claims of deferred losses & policy Other settlement acquisition operating expenses costs expenses ----------- ------------- --------