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.
Premium and policy charges for 1997 were $7.5 million. 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 in 1997 was consistent with the amount of 1996. 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 6.94% net yield in 1997 and 6.54% net yield in 1996. 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 were invested in a more aggressive stock market fund which created an increased yield for the Company in 1997. Additional changes in the Company's holdings are being planned for 1998.
Income, before income taxes, in 1997 was $249,410, inclusive of gain on equity securities of $506,795, compared to $1,588,505, in 1996 and $1,274,903 in 1995. The 1997 income declined approximately $1,339,000 from the prior year as a result of reduced total revenue of $407,000 with realized gain on investments representing $363,000 of this amount. Total expenses increased $932,000 with death claims representing $449,000 of this amount and the balance of $493,000 attributed to acquisition costs and operating expense of $324,000 and other policy benefits of $169,000.
The Company has no material commitments for capital expenditures throughout the balance of the year 1998 as all rentable space on the first floor of its office building is fully leased.
We have audited the accompanying financial statements of Southern Security Life Insurance Company as listed in the accompanying index under Item 14(a). In connection with our audit 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)2. 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.
SOUTHERN SECURITY LIFE INSURANCE COMPANY Notes to Financial Statements December 31, 1997, 1996 and 1995
The primary business purpose of Southern Security Life Insurance Company (the "Company") is the issuance of long duration universal life insurance contracts. Prior to 1986, the Company's business included traditional whole life and annuity contracts. The majority of the Company's business is conducted in the states of Florida (43%), Georgia (13%) and Texas (14%). None of the remaining eleven states in which the Company is licensed to conduct business account for over 10% of the Company's total business.
Certain executive officers and directors of the Company are shareholders of approximately 60% of the issued and outstanding common shares of Consolidare Enterprises, Inc. Consolidare Enterprises, Inc. owns approximately 57% of the Company's voting securities at December 31, 1997.
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 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, 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, 1997 and 1996, the Company did not have any investments categorized as trading securities.
Depreciation is being provided on the straight-line method over the estimated useful lives of the assets.
Certain amounts presented in the 1996 and 1995 financial statements have been restated to conform to the 1997 presentation.
The more significant generally accepted accounting principles applied in the preparation of financial statements that differ from life insurance statutory accounting practices prescribed or permitted by regulatory authorities (which are primarily designed to demonstrate solvency) are as follows:
c. The liability for policyholder funds associated with universal life and certain annuity contracts are based on the provisions of Statement of Financial Accounting Standards Statement No. 97, rather than on the statutory rates for mortality and interest. d. Investments in securities are reported as described in Note
d. 1 (d), 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.
h. Expenses attributable to the public offering of the common shares have been reclassified from retained earnings to capital in excess of par.
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
Unrealized appreciation (depreciation) of fixed maturities for years ending December 31, 1997, 1996 and 1995 is $388,847, ($720,253) and $2,779,872 respectively.
Proceeds from sale of equity securities and fixed maturities available for sale and related realized gains and losses are summarized as follows:
Certain of the fixed maturity securities classified as available for sale and held to maturity were called during the year ended December 31, 1997, 1996 and 1995 resulting in the following realized gains and losses:
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, 1997, other than investments issued or guaranteed by the United States government are as follows:
At December 31, 1997 and 1996, 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 $244,361 and $514,483 at December 31, 1997 and 1996, respectively, which are guaranteed by the U.S. government. Subsequent to December 31, 1997, all of these loans were sold at their unpaid principal balance.
Certain of these assets, totaling approximately $850,000 and $650,000 for each of the years ended December 31, 1997 and 1996, are restricted for the future benefit of policyholders in a particular state.
Deferred policy acquisition costs at December 31, 1997, 1996 and 1995 consist of the following:
At December 31, 1997 and 1996, future policy benefits, exclusive of universal life and flexible term annuities
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 less 1 percent.
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, 1997, 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 $432,486, $448,327, and $525,662 included in reinsurance ceded, and received recoveries of $131,449, $608,355 and $204,171 included in annuity, death and other benefits for the years ended December 31, 1997, 1996 and 1995, respectively.
As of December 31, 1997, 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 note
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, 1997, the note bears interest at 9.0% percent (payable monthly); principal repayment is contingent upon the Company maintaining statutory surplus in excess of $1,900,000 and approval in advance by the Florida Department of Insurance. Interest expense relating to the balance of note payable to related party during 1997, 1996 and 1995 aggregated $90,000, $90,000, and $90,000 respectively.
Income tax expense for the years ended December 31, 1997, 1996 and 1995 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, 1997 and 1996 are presented below:
The net change in the total valuation allowance for the years ended December 31, 1997, 1996, and 1995 was an increase of $11,100, $64,900 and $62,000, 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, 1997.
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 $323,303, $344,904 and $422,121, in 1997, 1996, and 1995, respectively. These amounts are included as components of acquisition costs deferred and related amortization. Insuradyne incurred insurance-related expenses aggregating $25,604, $31,703, and $35,271 in 1997, 1996 and 1995, respectively.
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 as of 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.
The first awards were granted in 1997 under this plan. The Company incurred expenses of approximately $13,000 relating to the Company's matching number of shares. 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.
estimated fair values of financial instruments held at December 31, 1997 and 1996. The fair value of a financial instrument is the amount at which the instrument could be exchanged in a current transaction between willing parties.
The Company is aware of potential problems all computer systems face with respect to the year 2000, and has investigated various solutions. Present plans call for the conversion to be completed by the end of 1998. It is estimated to cost approximately $200,000, which would not have a material impact on the Company.
Schedule I SOUTHERN SECURITY LIFE INSURANCE COMPANY Summary of Investments Other Than Investments in Related Parties December 31, 1997