Final expense products are traditional endowment type insurance policies written for the senior market. Because the products are written to a senior market they are designed to accommodate adverse health conditions. Because of the size of the policies, the products are usually issued with only limited underwriting. The coverage size of the policy is roughly equivalent to the insured's anticipated funeral costs.
Benefits and claims increased by $655,000, or 14.7%, to $5,109,000 for fiscal year 2000, from $4,454,000 for the comparable period in 1999. The increase was primarily due to an increase in traditional life reserves as a result of additional policies in force of traditional life products.
Operating expenses increased by $269,000, or 8.3% to $3,530,000 for fiscal year 2000 from $3,261,000 for the same period in 1999. The increase was primarily due to increased marketing and home office building expenses.
Net insurance revenues decreased by $326,000, or 4.5%, to $6,902,000 for fiscal year 1999, from $7,228,000 for fiscal year 1998. 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.
Other revenue totaled $715,000 for fiscal year 1999, as compared to no other revenue for the same period in 1998. This amount was the result of a settlement from insurance claims filed for the recovery of the costs to litigate a case against a former officer of the Company.
Operating expenses decreased by $874,000, or 21.1% to $3,261,000 for fiscal year 1999 from $4,135,000 for the same period in 1998. This reduction was primarily due to the lump sum payment to the Company's former President in December 1998 in connection with the acquisition of Company's parent company.
The Company attempts to match the duration of invested assets with its policyholder liabilities. The Company may sell investments other than those held- to-maturity in the portfolio to help in this timing; however, to date, that has not been necessary. The Company purchases short-term investments on a temporary basis to meet the expectations of short-term requirements of the Company's products. The Company's investment philosophy is intended to provide a rate of return which will persist during the expected duration of policyholder liabilities regardless of future interest rate movements.
If market conditions were to cause interest rates to change, the market value of the fixed income portfolio (approximately $30.939 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):
(in millions of dollars) -200bps -100bps +100bps +200bps - ----------------------- -------- ------- -------- ------- Change in Market Value $2.023 $.974 $(.905) $(1.748)
The Company has classified certain of its fixed income securities as available for sale, with the remainder classified as held to maturity. However, in accordance with Company policy, any such securities purchased in the future will be classified as held to maturity. Business conditions, however, may develop in the future which may indicate a need for a higher level of liquidity in the investment portfolio. In that event the Company believes it could sell short- term investment grade securities before liquidating higher-yielding longer term securities.
Lapse rates measure the amount of insurance terminated during a particular period. The Company's lapse rate for life insurance in 2000 was 16.1% as compared to a rate of 9.1% for 1999.
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, 2000.
Independent Auditors' Report............. . . . . . . . . . . . . . . . 16
Balance Sheet-December 31, 2000 and 1999. . . . . . . . . . . . . . . . 17
Statement of Shareholders' Equity-years ended December 31, 2000, 1999 and 1998... . . . . . . . . . . . . . . . 20
Statement of Cash Flows - years ended December 31, 2000, 1999 and 1998......... . . . . . . . . . . . . . . . 21
Cash and cash equivalents 2,513,668 4,080,484 Accrued investment income 610,474 582,908 Deferred policy acquisition costs (note 4) 13,211,413 12,874,219 Policyholders' account balances on deposit with reinsurer (note 7) 7,434,750 7,806,866 Reinsurance receivable (note 7) 324,793 373,459 Receivables: Agent balances 1,208,378 1,215,756 Other 279,567 193,506 Refundable income taxes -- 34,951 Property and equipment, net, at cost (note 5) 2,542,384 2,435,565 Investment in affiliate at cost 1,566,173 751,052 ----------- ----------- $77,125,931 $77,208,941 =========== ===========
Liabilities and Shareholders' Equity 2000 1999 - ------------------------------------- Liabilities: Policy liabilities and accruals (notes 6 and 7): $ 2,965,940 $ 1,648,976 Future policy benefits: Policyholders' account balances 48,722,138 50,377,101 Unearned revenue 4,948,989 5,323,954 Other policy claims and benefits payable 580,196 540,407 Other policyholders' funds, dividend and endowment accumulations 72,890 69,789 Funds held related to reinsurance treaties (note 7) 1,417,216 1,475,512 Note payable to related party (note 9) 1,000,000 1,000,000 Due to affiliated insurance agency (note 11) 151,689 195,785 General expenses accrued 157,944 137,884 Unearned investment income 323,830 324,750 Other liabilities 28,488 63,753 Income taxes (note 10) 558,076 413,710 ----------- ----------- 60,927,396 61,571,621 ----------- -----------
Shareholders' equity (notes 2,3 and 12): Common stock, $1 par, authorized 3,000,000 shares; issued and out- standing, 1,907,989 shares 1,907,989 1,907,989 Capital in excess of par 4,011,519 4,011,519 Accumulated other comprehensive income (loss) (75,628) (476,583) Retained earnings 10,354,655 10,194,395 ----------- ----------- 16,198,535 15,637,320 Commitments and contingencies (notes 7 and 15) -- -- ----------- ----------- $77,125,931 $77,208,941 =========== ===========
2000 1999 1998 ------ ------ ------ Cash flows provided by (used in) operating activities: Net income (loss) $ 160,260 $ 631,958 $ (383,733) Adjustments to reconcile net cash provided by (used in) operating activities: Depreciation and amortization 260,956 286,514 301,970 Net realized (gains) on investments -- -- (525,182) Loss on disposal of property, plant & equipment 1,886 15,180 2,956 Deferred income taxes (9,426) 11,009 175,274 Amortization of deferred policy acquisition costs 1,797,320 3,029,223 3,484,689 Acquisition costs deferred (2,206,125) (2,084,438) (1,911,282) Change in assets and liabilities affecting cash provided by operations: Accrued investment income (27,566) (18,790) 73,342 Accounts receivable (78,683) (63,291) (344,122) Reinsurance receivable 48,666 (67,201) 53,430 Other policy claims and future benefits payable 1,356,753 (78,706) 431,409 Policyholders' account balances 2,080,769 2,585,204 2,356,804 Funds held under reinsurance (58,296) 56,155 79,430 Unearned premiums (331,998) (840,474) (1,160,706) Dividend and endowment accumulations 3,101 5,051 5,052 Payable to affiliated insurance agent (44,096) 172,914 (45,775) Income taxes payable (46,738) 139,159 -- Other liabilities (16,125) (651,872) (133,376) ----------- ----------- ----------- Net cash provided by operating activities $ 2,890,658 $ 3,127,595 $ 2,460,180 ----------- ----------- ----------- Cash flows from (used in) investing activities: Purchase of investments: Purchase of investments held-to-maturity $ (2,606,749) $ (477,150) $ -- Purchase of investments available-for-sale -- -- (6,180,178) Purchase of equity securities (916,815) (766,662) (610,370) Proceeds from maturity of held-to maturity securities 1,210,272 1,446,315 5,536,006 Proceeds from maturity of available-for-sale securities 1,225,522 2,739,662 299,281 Proceeds from sale of available- for-sale securities (equity and fixed maturity) -- -- 10,675,217 Purchase of mortgage loan (825,000) (1,500,000) -- Repayment of mortgage loans 24,525 2,312 -- Net change in short-term investments 780,280 2,839,890 (11,334,983) Net change in policy and student loans 238,236 3,466 (517,057) Acquisition of property and equipment (224,129) (635) (71,356) ----------- ----------- ----------- Net cash provided by (used in) investing activities $(1,093,858) $ 4,287,198 $(2,203,440) =========== =========== ===========
Cash and cash equivalents at beginning of year 4,080,484 682,389 2,448,994 ----------- ------------ ---------- Cash and cash equivalents at end of year $ 2,513,668 $ 4,080,484 $ 682,389 =========== ============ =========== Supplemental schedule of cash flow information: Interest paid during the year $ 105,000 $ 90,000 $ 90,000 =========== ============ =========== Income taxes paid during the year $ 94,365 $ -- $ 45,500 =========== =========== =========== Change in market value adjustments- investments available-for-sale: Fixed maturities $ 786,282 $(1,645,893) $ 204,802 Equity securities (121,202) 112,598 (111)
SOUTHERN SECURITY LIFE INSURANCE COMPANY Notes to Financial Statements December 31, 2000, 1999, 1998
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 (11%), Florida (41%), Georgia (11%), and Texas (11%). None of the remaining ten states in which the Company is licensed to conduct business account for over 10% 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 Financial Corporation ("SNFC"). Accordingly, from December 17, 1998, the Company is a 71.5% owned, indirect subsidiary of SNFC.
Policy loans and student loans are carried at the unpaid principal balance, less any amounts deemed to be uncollectible. The Company's policy is that policy loans are not made for amounts in excess of the cash surrender value of the related policy. Accordingly, policy loans are fully collateralized by the related liability for future policy benefits for traditional insurance policies and by the policyholders' account balance for interest sensitive policies.
The Company holds investments in its parent company's common stock. This reciprocal stockholding is accounted for based on the treasury stock approach. The value of the investment is recorded at cost and will be classified as treasury stock upon consolidation with its parent company.
The Company reviews its long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of the assets may not be recoverable through undiscounted future cash flows. If it is determined that an impairment loss has occurred based on expected cash flows, such loss is recognized in the statement of operations.
SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities, was issued in June 1998 and amended by SFAS No. 138, issued in June 2000. The requirements of SFAS No. 133, as amended, will be effective for the Company in the first quarter of the fiscal year beginning January 1, 2001. The standard establishes accounting and reporting standards for derivative
1. Nature of business and summary of significant accounting policies, continued: ---------------------------------------------------------------------------- (p) Pending accounting change (continued)
instruments embedded in other contracts and for hedging activities. Under the standard, certain contracts that were not formerly considered derivatives may now meet the definition of a derivative. The Company has determined SFAS 133 to have no impact on the Company's financial position and results of operations because the Company has no derivative activity.
SFAS No. 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities, was issued in September 2000. SFAS No. 140 is a replacement of SFAS No. 125, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities. Most of the provisions of SFAS No. 125 were carried forward to SFAS No. 140 without reconsideration by the Financial Accounting Standards Board (FASB), and some were changed only in minor ways. In issuing SFAS No. 140, the FASB included issues and decisions that had been addressed and determined since the original publication of SFAS No. 125. SFAS No. 140 is effective for transfers after March 31, 2001. Management does not expect the adoption of SFAS No. 140 to have a significant impact on the financial position or results of operations of the Company.
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 2000 without prior approval is approximately $92,000. Accordingly, GAAP excess earnings over a statutory basis are not available for dividends.
2. Basis of financial statements, continued ---------------------------------------- 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, 2000.
The amortized cost and estimated fair value of fixed maturities at December 31, 2000, 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.
Due in 2001 $ 2,771,882 $ 2,772,970 Due in 2002 through 2005 14,075,954 14,014,590 Due in 2006 through 2010 6,408,951 6,406,860 Due after 2010 97,735 108,156 ----------- ----------- 23,354,522 23,302,576 Mortgage-backed securities 64,836 64,907 ----------- ----------- $23,419,358 $23,367,483 =========== ===========
Certain of the fixed maturity securities classified as available-for-sale and held-to-maturity were called during the year ended December 31, 2000, 1999, 1998 resulting in the following realized gains and losses:
2000 1999 1998 ------ ------ ------ Held-to-maturity: Gross realized gains $ -- $ -- $ -- Available-for-sale: Gross realized gains -- -- 1,740 -------- ------- ------ $ -- $ -- $1,740 ======== ======== =======
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, 2000 and 1999, other than investments issued or guaranteed by the United States government are as follows:
2000 Carrying Amount Federal Express $2,072,820 Dean Witter Discover 4,105,788 Philip Morris Inc. 5,469,305
At December 31, 2000 and 1999, 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 $61,576 and $149,198 at December 31, 2000 and 1999, respectively, which are guaranteed by the U.S. government. Subsequent to December 31, 2000, all of these loans were sold at their unpaid principal balance.
2000 1999 1998 Interest: Fixed maturities $2,014,883 $2,123,671 $2,633,888 Policy and student loans 505,319 579,774 489,991 Short-term investments 937,077 859,699 474,949 Mortgage loans 190,068 25,759 -- Rental income 278,302 319,758 --
Dividends on equity securities common stock, including mutual fund 33,412 15,610 719 ---------- ----------- ----------- 3,959,061 3,924,271 3,599,547 Less investment expenses 23,454 14,898 12,400 ---------- ---------- ---------- $3,935,607 $3,909,373 $3,587,147 ========== ========== ==========
Florida $1,708,735 $1,708,530 $1,718,097 Alabama 100,199 100,702 101,170 South Carolina 300,596 302,106 303,511 Georgia 250,496 251,755 252,926 Indiana 200,000 199,855 199,578 ---------- ---------- ---------- $2,560,025 $2,562,948 $2,575,282 ========== ========== ==========
5. Property and equipment ---------------------- Property and equipment consists of the following:
Depreciation expense for the years ended December 31, 2000, 1999, 1998 totaled $115,425, $135,145, and $153,348, respectively.
6. Future policy benefits ---------------------- At December 31, 2000 and 1999, future policy benefits, exclusive of universal life and flexible term annuities consist of the following:
Life insurance in-force aggregated approximately $1.2 billion at December 31, 2000, and 1999. Mortality and withdrawal assumptions are based upon the Company's experience and actuarial judgment with an allowance for possible unfavorable deviations from the expected experience.
For the years ended December 31, 2000, 1999, 1998, the Company ceded premiums to MEGA of $419,353, $424,592 and $448,355, included in reinsurance ceded, and received recoveries of $478,485, $576,194 and $469,307, included in annuity, death and other benefits, respectively. The funds held related to reinsurance treaties of $1,417,216 and $1,475,512 represent the 18% share of policy loans ceded to the reinsurer at December 31, 2000 and 1999, respectively.
8. Notes payable ------------- As of December 31, 2000, 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.
10. Income taxes ------------ The Company's income tax liability at December 31 is summarized as follows:
2000 1999 1998 ------ ------ ------ Current: Federal $ 40,812 $123,268 $ 9,329 State 6,719 15,891 1,207 -------- -------- --------- 47,531 139,159 10,536 -------- --------- --------- Deferred: Federal (7,073) 9,693 (215,838) State (2,353) 1,316 (36,605) -------- -------- --------- (9,426) 11,009 (252,443) -------- -------- --------- $ 38,105 $150,168 $(241,907) ======== ======== =========
Income tax expense (benefit) for the years ended December 31, 2000, 1999, 1998 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, 2000 and 1999 are presented below:
2000 1999 ------- ------- Deferred tax assets: Unearned revenue, due to deferral of "front-end" fee $ 1,939,023 $ 1,950,587 Policy liabilities and accruals, principally due to adjustments to reserves for tax purposes 2,003,251 1,804,230 Deferred policy acquisition costs related to unrealized appreciation (depreciation) 137,601 (126,830)
The net change in the total valuation allowance for the years ended December 31, 2000 and 1998 was an increase of $27,338 and $11,100, respectively. The net change in the total valuation allowance for the year ended December 31, 1999 was a decrease of $17,590.
10. Income taxes, continued ----------------------- 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, 2000.
The Company received for the years ended December 31, 2000 and 1999, $123,393 and $230,639 respectively, in interest income from Security National for short-term loans of which none were outstanding as of December 31, 2000 and 1999.
12. Earnings per share ------------------ The following table sets forth the computation of basic and diluted earnings per share:
2000 1999 1998 ------- ------- ------- Numerator for basic and diluted Earnings per share: Net income (loss) $ 160,260 $ 631,958 $(383,733) Denominator: Denominator for basic earnings per share weighted average shares 1,907,989 1,907,989 1,907,989
13. Agents' incentive stock bonus plan ---------------------------------- 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 qualify under the plan have the option to purchase shares of common stock. The number of shares of common stock is 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 has qualified for the bonus. For each share of common stock purchased by the agent, the Company will concurrently award an equivalent number of shares to the agent. Awards were granted in 1999 under this plan. The Company incurred expenses of approximately $5,010 relating to the Company's matching number of shares. There were no awards granted in 2000. 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 amount reported in the balance sheet for these instruments approximate their fair value.