An additional source of income to the Company is investment income. The Company invests those funds deposited by policyholders of universal life and annuity products in debt and equity securities 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.
Net insurance revenues decreased $416,000, or 5.4%, to $7,228,000 for fiscal year 1998, from $7,644,000 for fiscal year 1997. 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.
Realized gains on investments increased by $18,000 or 3.6% to $525,000 for fiscal year 1998, from $507,000 for fiscal year 1997. These gains are the result of trading the Company's available-for-sale securities.
Benefits and claims decreased by $85,000, or 1.9%, to $4,347,000 for fiscal year 1998, from $4,432,000 for the comparable period in 1997. The decrease was a result of lower policyholder benefits for universal life products.
The amortization of deferred policy acquisition costs decreased by $58,000, or 1.6%, to $3,485,000, for fiscal year 1998, from $3,543,000 for the comparable period in 1997. The decrease in amortization expenses was primarily due to the change in net insurance revenues.
The Company's investment policy is to invest predominantly in fixed maturity securities, mortgage loans, and warehouse mortgage loans on a short-term basis before selling the loans to investors in accordance with the requirements and laws governing life insurance companies. Bonds owned by the Company amounted to
$27,930,000 as of December 31, 1999 as compared to $33,436,000 as of December 31, 1998. This represents 59.8% and 62.4% of the total investments as of December 31, 1999 and December 31, 1998, respectively. Generally, all bonds owned by the Company are rated by the National Association of Insurance Commissioners. Under this rating system, there are nine categories used for rating bonds. At December 31, 1999, and at December 31, 1998, the Company did not have investments in bonds in rating categories three through nine, which are considered non-investment grade.
The Company is subject to risk based capital guidelines established by statutory regulators requiring minimum capital levels based on the perceived risk of assets, liabilities, disintermediation, and business risk. At December 31, 1999 and December 31, 1998, the Company exceeded the regulatory criteria.
The Company has fully leased all available rental space in its principal office building and does not anticipate further capital expenditures to the rental space.
In June 1998, the Financial Accounting Standards Board (the "FASB") issued Statement No. 133, Accounting for Derivative Instruments and Hedging Activities ("SFAS 133"), which the Company is required to adopt January 1, 2000. SFAS 133 will require the Company to include all derivatives in the statement of financial position at fair value. Changes in derivative fair values will either be recognized in earnings as offsets to the changes in fair value of related
Statements of Operations - years ended December 31, 1999, 1998 and 1997........................................19
Statements of Shareholders' Equity-years ended December 31, 1999, 1998 and 1997..................................20
Statements of Cash Flows - years ended December 31, 1999, 1998 and 1997........................................21
We have audited the accompanying balance sheet of Southern Security Life Insurance Company as of December 31, 1999 and the related statements of operations, shareholders' equity, and cash flow for the year then ended. 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). 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 audit.
Cash and cash equivalents 4,080,484 682,389 Accrued investment income 582,908 564,118 Deferred policy acquisition costs (note 4) 12,874,219 13,583,956 Policyholders' account balances on deposit with reinsurer (note 7) 7,806,866 8,518,571 Reinsurance receivable (note 7) 373,459 306,258 Receivables: Agent balances 1,215,756 994,493 Other 193,506 351,478 Refundable income taxes 34,951 34,951 Property and equipment, net, at cost (note 5) 2,435,565 2,585,255 Investment in affiliate at cost 751,052 -- ----------- -----------
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) (476,583) 430,161 Retained earnings 10,194,395 9,562,437 ------------ ------------
Net income(loss) $ 631,958 $ (383,733) $ 195,210 ============ ============ ============
Basic and diluted net income (loss) per share of common stock (note 12) $ .33 $ (.20) $ .10 ============ ============ ============
SOUTHERN SECURITY LIFE INSURANCE COMPANY Notes to Financial Statements December 31, 1999, 1998 and 1997
Prior to December 17, 1998, certain executive officers and directors of the Company were shareholders of approximately 60 percent of the shares of SSLIC Holding Company, Inc., (formerly Consolidare Enterprises, Inc.). SSLIC Holding Company, Inc. owns 61.3% of the Company's voting securities at December 31, 1999.
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 61.3% owned, indirect subsidiary of SNFC.
1. Nature of business and summary of significant accounting policies, continued ----------------------------------------------------------------------------
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 would be classified as trading securities. Trading securities would be carried at fair value, with unrealized holding gains and losses included in earnings; the Company has no securities classified as trading securities. 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 in accumulated other comprehensive income which is included in stockholders' equity after adjustment for deferred income taxes and deferred acquisition costs related to universal life products.
Mortgage loans on real estate are reported at the unpaid principal balances, adjusted for amortization of premium or accretion of discount, less allowance for possible losses.
(f) Deferred policy acquisition costs --------------------------------- 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.
(j) Policyholder account balance ---------------------------- Insurance reserves for universal life policies are determined following the retrospective deposit method and consist of policy values that accrue to the benefit of the policyholder, unreduced by surrender charges.
Universal life policies - premiums received from policyholders 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.
(n) Reclassification ---------------- Certain amounts presented in the 1998 and 1997 financial statements have been reclassified to conform to the 1999 presentation.
(o) Pending accounting change-continued ----------------------------------- of forecasted and actual foreign currency transactions, the extent of the Company's hedging activities, the types of hedging instruments used and the effectiveness of such instruments. However, the Company does not believe the effect of adopting SFAS 133 will be material to its financial position.
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.
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 $149,000. Accordingly, GAAP excess earnings over a statutory basis are not available for dividends.
Unrealized (depreciation) appreciation in investments in equity securities for the years ended December 31, 1999, 1998, and 1997 is $112,598, $(111), and $39,973, respectively.
Unrealized appreciation (depreciation) of fixed maturities for years ending December 31, 1999, 1998 and 1997 is $(1,747,058), $183,142 and $388,647 respectively.
Proceeds from sale of fixed maturities available-for-sale $ 2,739,662 $ 9,569,250 $ 26,175,765 ------------ ------------ ------------
Net investment income for the years ended December 31, 1999, 1998, and 1997 consists of the following:
1999 1998 1997 ---------- ---------- ---------- Interest: Fixed maturities $2,123,671 $2,633,888 $2,918,006 Policy and student loans 579,774 489,991 401,621 Short-term investments 859,699 474,949 232,342 Mortgage loans 25,759 -- -- Rental income 319,758 -- --
December 31, December 31, 1999 1998 ----------- ----------- Life insurance $1,334,887 $1,370,360 Annuities 304,414 298,456 Accident & health insurance 9,675 58,484 ---------- ---------- Total life & health
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 certain non universal life contracts written in 1996-1999, interest rates of 6.75% level have been assumed. 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 generally based upon the Company's investment yield less 1%.
As of December 31, 1999, 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 were unable to
8. Notes payable ------------- As of December 31, 1999, 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:
1999 1998 ---- ---- Current $139,160 $ -- Deferred 274,550 796,074 -------- --------- Total $413,710 $796,074 ======== ========
investments (532,532) (174,016) 163,500 --------- --------- --------- $(382,364) $(415 923) $ 217,700 ========= ========= =========
Income tax expense (benefit) for the years ended December 31, 1999, 1998 and 1997 is summarized as follows:
Income tax expense (benefit) for the years ended December 31, 1999, 1998 and 1997 differs from "expected" tax (computed by applying the U.S. federal income tax rate to pretax income as a result of the following:
1999 1998 1997 --------- --------- --------- Computed "expected" tax expense (benefit) $ 265,923 $(212,718) $ 84,800 Increase (reduction) in income taxes resulting from: Small life insurance company deduction (139,195) (12,390) (76,000) Changes in the valuation allowance for deferred tax assets, allocated to income tax expense 17,590 (17,950) 11,100 (Over) under accrual of prior year expense -- -- 6,100 State taxes, net of federal income tax benefit 5,850 1,207 18,200 Other, net -- (56) 10,000 --------- --------- --------- $ 150,168 $(241,907) $ 54,200 ========= ========= =========
At December 31, 1999, the balance of the Policyholders' Surplus account aggregated approximately $236,000. The Company has not recorded deferred income taxes totaling approximately $80,000 relating to this amount as it has no plan to distribute the amounts in Policyholders' Surplus in the foreseeable future. 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 1999, 1998 and 1997, AMT exceeded regular tax by $27,338, $156,820, and $11,100, respectively. At December 31, 1999, the AMT tax credit available to reduce future regular tax totaled $235,190.
The tax effect of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities at December 31, 1999 and 1998 are presented below:
The net change in the total valuation allowance for the years ended December 31, 1999 and 1998 was a decrease of $17,590 and $156,820, respectively. The net change in the total valuation allowance for the year ended December 31, 1997 was an increase of $11,100.
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, 1999.
Effective December 31, 1998, the Company entered into an Administrative Services Agreement with its ultimate parent Security National Financial Corporation (Security National). Under the terms of the Administrative Services Agreement, all of the Company's employees became employees of Security National. Administrative functions previously performed by the Company are now being furnished to the Company under the Agreement. The Company pays to Security National $250,000 per month or $3 million per year for the administrative services and Agency Agreement.
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 fee income from SNMC based upon how long the loans were outstanding. At December 31, 1999 and 1998 the Company had outstanding loan purchases of $8,595,093 and $3,941,020, respectively. Included in investment income is $457,861 and $534 for the years ended December 31, 1999 and 1998, respectively.
1999 1998 1997 ---- ---- ---- Numerator for basic and diluted earnings per share: Net income (loss) $ 631,958 $ (383,733) $ 195,210 Denominator: Denominator for basic earnings per share weighted average shares 1,907,989 1,907,989 1,907,989
Dilutive potential common shares -- -- 1,214 Denominator for diluted earnings per share weighted average shares and assumed conversions 1,907,989 1,907,989 1,908,203 Basic earnings per share $.33 $(0.20) $0.10 Diluted earnings per share $.33 $(0.20) $0.10
The following table presents the carrying amounts and estimated fair values of financial instruments held at December 31, 1999 and 1998. The fair value of a financial instrument is the amount at which the instrument could be exchanged in a current transaction between willing parties.
available-for-sale 378,440 378,440 250,232 250,232 Mortgage loans 1,497,688 1,497,688 -- -- Policy and student loans 8,328,847 8,328,847 8,462,438 8,462,438 Short-term investments 8,595,093 8,595,093 11,434,983 11,434,983 Cash and cash equivalents 4,013,401 4,013,401 682,389 682,389
SOUTHERN SECURITY LIFE INSURANCE COMPANY Summary of Investments Other Than Investments in Related Parties
December 31, December 31, December 31, 1999 1998 1997 ----------- ----------- -------- Fixed maturities held for sale $ 23,951,111 $ 28,479,161 $ 31,843,324 Fixed maturities held to maturity (carrying value) 3,978,871 4,956,910 10,501,712 Fixed maturities held to maturity (market value) 3,985,336 5,064,541 10,631,003 Investment in equity securities 378,440 250,232 839,973 Mortgage loans on real estate 1,497,688 -- -- Investment in real estate -- -- -- Total investments 46,730,050 53,583,724 50,870,390 Cash and cash equivalents 4,080,484 682,389 2,448,994 Reinsurance recoverable on paid losses 373,459 306,258 359,688 Deferred policy acquisition costs 12,874,219 13,583,956 15,451,689 Total assets 77,208,941 81,205,193 82,142,465 Policy liabilities-future benefits, losses, claims 1,648,976 1,727,300 1,409,031 Policy liabilities-unearned premiums 5,323,954 6,023,399 7,108,662 Policy liabilities-other claims and benefits 540,407 540,789 427,649 Other policyholder funds 69,789 64,738 59,686 Notes payable, bonds, mortgages, and similar debt 1,000,000 1,000,000 1,000,000 Preferred stocks mandatory redemption -- -- -- Preferred stocks non- mandatory redemption -- -- -- Common stock 1,907,989 1,907,989 1,907,989 Other stockholders equity 4,011,519 4,011,519 4,011,519 Total liabilities and stockholders equity 77,208,941 81,205,193 82,142,465 Premiums 6,901,546 7,228,227 7,643,650 Net investment income 3,909,373 3,587,147 3,545,311 Realized investment gains and losses -- 525,181 506,795 Other income 715,128 -- -- Benefits, claims, losses and settlement expenses 4,453,564 4,012,491 4,307,013 Underwriting acquisition and insurance expenses- amortization of deferred policy acquisition costs 3,029,223 3,484,689 3,542,617
insurance expense other $ 3,261,134 $ 4,134,686 $ 3,472,255 Income or (loss) before taxes 782,126 (625,640) 249,410 Income tax expense 150,168 (241,907) 54,200 Income (Loss) continuing operations 631,958 (383,733) 195,210 Discontinued operations -- -- -- Extraordinary items -- -- -- Cumulative effect-changes in accounting principals -- -- -- Net income (loss) 631,958 $ (383,733) $ 195,210
Earnings per share - basic $ .33 $ (.20) $ .10 Earnings per share - diluted $ .33 $ (.20) $ .10
Benefits Amortization claims of deferred losses & policy Other settlement acquisition operating expenses costs expenses -------- ----------- -------- 1999 Life and annuities 4,453,564 3,029,223 3,261,134 =========== =========== ===========