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 approximately one-half of the second floor of the building. Approximately 94% of the remaining rentable space was leased as of December 31, 2001.
The following table presents selected financial data (on a GAAP basis) concerning the Company and its financial results during the periods indicated.
The amortization of deferred policy acquisition costs increased by $400,000 or 22.3%, to $2,197,000, for fiscal year 2001, from $1,797,000 for the comparable period in 2000. The increase in amortization expense was in line with actuarial assumptions.
Net insurance revenues decreased by $203,000, or 2.9%, to $6,699,000 for fiscal year 2000, from $6,902,000 for fiscal year 1999. This decrease was primarily the result of a change in the sales mix of the Company's insurance products. Since March 1998, the sales of the Company's funeral plan products have been greater than the universal life products. The universal life products were for greater face amounts than the funeral plan products. Consequently, the insurance revenues from final expense products were less than those from universal life products.
Net investment income increased by $26,000, or .7%, to $3,936,000 for fiscal year 2000 from $3,909,000 for fiscal year 1999. Investment yield slightly increased for the fiscal year 2000 from 7.78% in 1999 to 7.8% in 2000.
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.
If market conditions were to cause interest rates to change, the market value of the fixed income portfolio (approximately $26.884 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):
Effective December 17, 1998, the Company entered into an Administrative Services Agreement with Security National Financial Corporation ("SNFC"). Under the terms of the agreement, SNFC has agreed to provide the Company with certain defined administrative and financial services, including accounting services, financial reports and statements, actuarial, policyholder services, underwriting, data processing, legal, building management, marketing advisory services and investment services. In consideration for the services to be provided by SNFC, the Company shall pay SNFC an administrative services fee of $250,000 per month, provided, however, that such fee shall be reduced to zero for so long as the capital and surplus of the Company is less than or equal to $6,000,000, unless the Company and SNFC otherwise agree in writing and such agreement is approved by the Florida Department of Insurance.
Student loans are a service the Company has historically made 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 1997 the Company renewed its $5,000,000 line of credit with SLMA until 2007 in order to meet these seasonal borrowing requirements. The Company made no draws against this line of credit through December 31, 2001.
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 2001 and 2000.
In June 2001, the Financial Accounting Standards Board issued Statements of Financial Accounting Standards No. 141, "Business Combinations" (SFAS No. 141) and No. 142, "Goodwill and Other Intangibles" (SFAS No. 142). SFAS No. 141 requires that the purchase method of accounting be used for all business combinations initiated after June 30, 2001. The statement also establishes specific criteria for recognition of intangible assets separately from goodwill and requires unallocated negative goodwill to be written off immediately as an extraordinary gain. SFAS No. 142 primarily addresses the accounting for goodwill and intangible assets subsequent to their acquisition. The statement requires that goodwill and indefinite lived intangible assets no longer be amortized and be tested for impairment at least annually. The amortization period of intangible assets with finite lives will no longer be limited to forty years.
Statement of Operations - years ended December 31, 2001, 2000 and 1999........................................19
We have audited the accompanying balance sheet of Southern Security Life Insurance Company as of December 31, 2001 and 2000 and the related statements of operations, shareholders' equity, and cash flows for the three years in the period ended December 31, 2001. In connection with our audits 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, 2001 and 2000, and the results of its operations and its cash flows for the three years in the period ended December 31, 2001, 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.
Liabilities and Shareholders' Equity 2001 2000 - ------------------------------------ ---- ---- Liabilities: Policy liabilities and accruals (notes 6 and 7): $ 2,901,599 $ 2,965,940 Future policy benefits: Policyholders' account balances 47,601,259 48,722,138 Unearned revenue 4,694,563 4,948,989 Other policy claims and benefits payable 1,147,403 580,196 Other policyholders' funds, dividend and endowment accumulations 64,045 72,890 Funds held related to reinsurance treaties (note 7) 1,379,640 1,417,216 Note payable to related party (note 9) 1,000,000 1,000,000 Due to affiliated insurance agency (note 11) 193,689 151,689 General expenses accrued 93,436 157,944 Unearned investment income 357,322 323,830 Other liabilities 247,665 28,488 Income taxes (note 10) 895,437 558,076 ------------ ------------
2001 2000 1999 ---- ---- ---- Revenues: Net insurance revenues $ 6,736,027 $ 6,698,869 $ 6,901,546 Net investment income (notes 3 and 11) 3,866,966 3,935,607 3,909,373
Income tax expense (note 10) 16,865 38,105 150,168 ----------- ----------- -----------
Net income $ 70,976 $ 160,260 $ 631,958 =========== =========== ===========
Basic and diluted net income per share of common stock (note 12) $ .04 $ .08 $ .33 =========== =========== ===========
The following is a description of the most significant risks facing life and health insurers and how the Company mitigates those risks:
The estimates susceptible to significant change are those 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.
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 to the production of new business, have been deferred to the extent recoverable from future profit margins. Deferred policy acquisition costs applicable to traditional life policies are being amortized over the premium-paying period of the related policies in a manner that will charge each year's operations in direct proportion to the estimated premium revenue over the life of the policies. Premium revenue estimates are made using the same interest, mortality and withdrawal assumptions as are used for computing liabilities for future policy benefits. Acquisition costs relating to universal life policies are being amortized in relation to the incidence of expected gross profits over the life of the policies. Gross profits for universal life contracts consist of revenue representing policy charges for the cost of insurance, 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.
Property and equipment are recorded at cost, less accumulated depreciation. Depreciation and amortization on capital leases and property and equipment are determined using the straight-line method over the estimated useful lives of the assets or terms of the lease. Expenditures for maintenance and repairs are expensed when incurred and betterments are capitalized. Gains and losses on sale of property and equipment are reflected in operations.
Certain amounts presented in the 2000 and 1999 financial statements have been reclassified to conform to the 2001 presentation.
In June 2001, the Financial Accounting Standards Board issued Statements of Financial Accounting Standards No. 141, "Business Combinations" (SFAS No. 141) and No. 142, "Goodwill and Other Intangibles SFAS No. 142). SFAS No. 141 requires that the purchase method of accounting be used for all business combinations initiated after June 30, 2001. The statement also establishes
specific criteria for recognition of intangible assets separately from goodwill and requires unallocated negative goodwill to be written off immediately as an extraordinary gain. SFAS No. 142 primarily addresses the accounting for goodwill and intangible assets subsequent to their acquisition. The statement requires that goodwill and indefinite lived intangible assets no longer be amortized and be tested for impairment at least annually. The amortization period of intangible assets with finite lives will no longer be limited to forty years.
In August 2001, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 144, "Accounting for the Impairment of Long-Lived Assets". This Statement addresses financial accounting and reporting for the impairment of long-lived assets and for long-lived assets to be disposed of. This Statement supersedes FASB Statement 121 and APB Opinion No. 30. However, this Statement retains certain fundamental provisions of Statement 121, namely; recognition and measurement of the impairment of long-lived assets to be held and used, and measurement of long- lived assets to be disposed of by sale. The Statement also retains the requirement of Opinion 30 to report discontinued operations separately from continuing operations. This Statement also Amends ARB No. 51 to eliminate the exception of consolidation for a temporarily controlled subsidiary. The provisions of this statement are effective for financial statements issued for fiscal years beginning after December 15, 2001.
The adoption of these statements is not expected to have a significant impact on the Company's financial statements.
The Company adopted Statement of Financial Accounting Standards No. 140, Accounting for Transfers and Servicing of Financing Assets and Extinguishments of Liabilities - a replacement of FASB Statement No. 125 (FAS 140) on April 1, 2001. This standard revises the standards for accounting for securitizations and other transfers of financial assets and collateral and requires certain disclosures, but carries over most of FAS 125's provisions without reconsideration. This Statement is effective for recognition and reclassification of collateral and for disclosures relative to securitization transactions and collateral for fiscal years ending after December 15, 2000. The adoption of FAS 140 did not have a material impact on the Company's financial position or results of operations.
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 $1,900,000.
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 2001 without prior approval is approximately $97,000. 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, 2001.
Unrealized (depreciation) appreciation in investments in equity securities for the years ended December 31, 2001, 2000, and 1999 is $24,632, $(121,203) and $112,598, respectively.
Proceeds from sale of fixed maturities available-for-sale $2,814,816 $1,225,522 $2,739,662 ---------- ---------- ----------
Realized gains (losses) Fixed maturities: Gross realized gains $ -- $ -- $ -- Gross realized (losses) -- -- -- Equity securities: Gross realized gains -- -- -- Gross realized (losses) -- -- -- ---------- ---------- ---------- $ -- $ -- $ -- ========== ========== ==========
Certain of the fixed maturity securities classified as available-for-sale and held-to-maturity were called during the year ended December 31, 2001, 2000, 1999 resulting in the following realized gains and losses:
2001 Carrying Amount ---- --------------- Federal Express $2,036,560 Dean Witter Discover 4,252,500 Philip Morris Inc. 5,813,260
Net investment income for the years ended December 31, 2001, 2000, and 1999 consists of the following:
Dividends on equity securities common stock, including mutual fund -- 33,412 15,610 ---------- ---------- ---------- 3,876,421 3,959,061 3,924,271 Less investment expenses 9,455 23,454 14,898 ---------- ---------- ---------- $3,866,966 $3,935,607 $3,909,373 ========== ========== ==========
Depreciation expense for the years ended December 31, 2001, 2000, 1999 totaled $129,330, $115,425, and $135,145, respectively.
Life insurance $2,600,757 $2,677,841 Annuities 193,744 235,032 Accident & health insurance 107,098 53,067 ---------- ---------- Total life & health future policy benefits $2,901,599 $2,965,940 ========== ==========
The mortality tables used in calculating benefit reserves for non universal life contracts are the 1965-1970 Basic Select and Ultimate for males and the 1980 U.S. Population mortality table modified for company expected experience.
For the years ended December 31, 2001, 2000, 1999, the Company ceded premiums to MEGA of $365,247, $419,353 and $424,592, included in reinsurance ceded, and received recoveries of $494,683, $478,485 and $576,194, included in annuity, death and other benefits, respectively. The funds held related to reinsurance treaties of $1,379,640 and $1,417,216 represent the 18% share of policy loans ceded to the reinsurer at December 31, 2001 and 2000, respectively.
As of December 31, 2001, 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 bears interest at a variable rate per annum payable monthly and expires on September 18, 2007.
Tax expense (benefit) in operations $ 16,865 $ 38,105 $ 150,168 Tax on unrealized appreciation (depreciation) of investments 372,208 235,481 (532,532) --------- --------- --------- $ 389,073 $ 273,586 $(382,364) ========= ========= =========
Income tax expense (benefit) for the years ended December 31, 2001, 2000, 1999 is summarized as follows:
(5,759) 47,531 139,159 --------- --------- --------- Deferred: Federal 20,691 (7,073) 9,693 State 1,933 (2,353) 1,316 --------- --------- ---------
Under tax laws in effect prior to 1984, a portion of a life insurance company's gain from operations was not currently taxed but was accumulated in a memorandum "Policyholders' Surplus Account." As a result of the Tax Reform Act of 1984, the balance of the Policyholders' Surplus Account has been frozen as of December 31, 1983 and no additional amounts will be accumulated in this account. However, distributions from the account will continue to be taxed, as under previous law, if any of the following conditions occur:
The tax effect of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities at December 31, 2001 and 2000 are presented below:
Deferred tax liabilities: Deferred policy acquisition costs (4,469,612) (4,565,655) Other 294,104 (22,576) Unrealized (appreciation) depreciation of securities (361,256) 7,751 ----------- -----------
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, 2001 and 2000 the Company had outstanding loan purchases of $13,860,534 and $7,814,813, respectively. Included in investment income is $984,872 and $732,691 for the years ended December 31, 2001 and 2000, respectively.
The Company received for the years ended December 31, 2001 and 2000, $77,394 and $123,393 respectively, in interest income from Security National for short-term loans of which $344,308 and $0 were outstanding as of December 31, 2001 and 2000, respectively.