Pursuant to the accounting methods prescribed by Financial Accounting Standards No. 97 (FAS 97), premiums received from policyholders on universal life products are credited to policy- holder account balances, a liability, rather than income. Revenues, described herein as premium, on such products result from the mortality and administrative fees charged to policyholder balances in addition to surrender charges assessed at the time of surrender as explained above. Such costs of insurance, expense charges, and surrender fees are recognized as revenue as earned. In addition, the Company has adopted policy designs with the characteristic of having higher expense charges during the first policy year than in renewal years. Under FAS 97, the excess of these charges are reported as unearned revenue. The unearned revenue is then amortized into income over the life of the policy using the same assumptions and factors used to amortize capitalized acquisition costs. Interest credited to policyholder balances is shown as a part of benefit expenses.
In accordance with generally accepted accounting principles, certain costs directly associated with the issuance of new policies are deferred and amortized over the lives of the policies. These costs are defined as deferred policy acquisition costs and are shown in the asset section of the balance sheet of the Company. Capitalized acquisition costs are amortized over the life of the business at a constant rate, based on the present value of the estimated gross profits expected to be realized over the life of the business. FAS 97 requires that estimates of expected gross profits used as a basis for amortization be evaluated on a regular basis, and the total amortization to date be adjusted as a charge or credit to earnings if actual experience or other evidence
Annuity products, of which the Company currently has a minor amount, are recorded in similar fashion to universal life products. Considerations received by the Company are credited to the annuity account balances which are shown as a liability in the balance sheet. Interest is credited to these accounts as well and shown as an expense of the Company. Income is derived primarily from surrender charges on this type product.
The following table sets forth certain percentages reflecting financial data and results of operations (a) for 1995, 1994 and 1993 premium and investment revenues and (b) for period to period increases and (decreases).
Premium income for 1995 was recorded at $9.4 million, for 1994 at $10.6 million and for 1993 at $12.3 million. This 1995 decline of 12% in premium income can be attributed somewhat to the decline in the Company's insurance in force and therefore an associated reduction in administrative and mortality fees. Surrender fees, another component of premium income, decreased by approximately 5% from 1994 due to the fact that the book of business is aging and as it does so, surrender fees decrease. 1994 in comparison with 1995 is much the same scenario as 1994 versus 1995, however surrender fees were greater. The new business decline of the past several years is having an impact on premium income. The balance of the decline in premium income for 1994 and 1995 is attributable to the amortization and unlocking for current and future experience of unearned premium into income. Unearned premium essentially represents the excess first year charges in the policy. With the advice and assistance of our consulting actuaries, each year the Company reviews its current experience rates for mortality, credited interest rates, lapse rates, surrender fees and the like, and adjusts its amortization of deferred acquisition costs and unearned premium to the appropriate levels for both the current experience and anticipated future experience. This is an on-going refinement process.
Annuity, death and other benefits decreased only slightly in 1995 from the results of 1994. Death claims continued their trend of less than anticipated by the actuarial assumptions but were up slightly from 1994, however, well below the 1993 figures. A significant increase or decrease in death claims in any given year can have a marked impact on the results of operations in a small company. Surrender benefits were responsible for the slight improvement in this expense area. While death claims were up slightly, surrender benefits declined enough to compensate for the increase.
The amount of the amortization of deferred acquisition costs continued its 1994 trend, declining by approximately 5%. The amortization of deferred acquisition costs is a continuous refinement process which relates to current experience in connection with revenues, mortality gains and losses, credited interest rate spreads, expense charges and surrender charges. The change in the rate of amortization of both deferred acquisition costs and unearned premium liabilities is due to "unlocking" for current and future experience based on the results of the changing experience encountered as required under FAS 97.
Operating expenses for the Company were $2.7 million. $3.2 million and $2.8 million for 1995, 1994 and 1993, respectively. In 1994, the Company settled litigation with a former employee and experienced the related costs of legal representation. After due consideration of the litigation delays the Company might encounter on the collection of these expenses from its insurers, the costs of settlement and associated legal expenses, estimated at between $500,000 and $600,000, were expensed in that same year. While the Company reasonably expects to receive reimbursement through its insurance carriers for a substantial portion of these expenses, estimated at $500,000, it has prudently established a receivable for only $100,000 due to litigation delays in receiving said funds. These expenses account for the 14% decrease in current year operating expenses in comparison with those of 1994. It can also be noted that the expenses have returned to their previous level of 1993.
above two categories are classified as securities available-for-sale. Securities available-for-sale are carried at market 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. Adoption of this statement had no effect on the income of the Company.
The Company continued its association with University Support Services throughout 1995, for the purpose of making more student loan funds available without increased costs to the Company. This association aided in keeping borrowings to a minimum for 1995. The Company is currently in negotiations with another firm that would accomplish this same benefit to a greater extent.
The National Association of Insurance Commissioners, in order to enhance the regulation of insurer solvency, issued a model law to implement risk-based capital (RBC) requirements for life insurance companies, which are designed to assess capital adequacy. Pursuant to the model law, insurers having less statutory surplus than required by the RBC calculation will be subject to varying degrees of regulatory action. While Florida, the Company's state of domicile, had yet to adopt the provisions of the RBC model law, the Company is monitoring their RBC results in anticipation of future adoption. At December 31, 1995, the Company had statutory surplus well in excess of any RBC action level requirements.
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.
As discussed in note 1(c) to the financial statements, the Company adopted the provisions of the Financial Accounting Standards Board's Statement of Financial Accounting Standards No. 115, "Accounting for Certain Investments in Debt and Equity Securities," in 1994.
(c) Use of Estimates ------------- 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.
(g) Depreciation ---------- Depreciation is being provided on the straight-line method over the estimated useful lives of the assets.
Annuity contracts with flexible terms - premiums received from policyholders are reported as deposits.
(k) Earnings Per Share --------------- Earnings per share are computed based on weighted average outstanding shares for each year.
(l) Reclassification ------------- Certain amounts presented in the 1994 and 1993 financial statements have been restated to conform to the 1995 presentation.
(2) Basis of Financial Statements ----------------------- 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 1(c), 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 including common stocks, other than stocks of affiliates, at market value.
(f) The statutory liabilities for the asset valuation reserve and interest maintenance reserve have not been provided in the financial statements.
(g) Certain assets, principally receivables from agents and equipment, are reported as assets rather than being charged directly to surplus.
Unrealized (depreciation) appreciation in investments in equity securities for the years ended December 31, 1995 and 1994 is $406,611 and $(108,809), respectively.
Unrealized (depreciation) appreciation of fixed maturities for years ending December 31, 1995, 1994 and 1993 is $2,779,872, $(2,534,413) and $351,427, respectively.
The amortized cost and estimated fair value of fixed maturities at December 31, 1995, 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.
1995 1994 ---- ---- Held to maturity: Gross realized gains $ 6 - Available for sale: Gross realized gains - 10,060 -- ----- $ 6 10,060 == ===== (b) Concentrations of Credit Risk ------------------------ At December 31, 1995 and 1994, the Company did not hold any unrated or less-than-investment grade corporate debt securities. The Company also invests in subsidized and nonsubsidized student loans totaling $4,403,061 and $4,837,123 at December 31, 1995 and 1994, respectively, which are guaranteed by the U.S. government. Subsequent to December 31, 1995, all of these loans were sold at their unpaid principal balance.
(c) Investment Income ---------------- Net investment income for the years ended December 31, 1995, 1994 and 1993 consists of the following:
1995 1994 ---- ---- Florida $ 1,735,900 1,744,017 Alabama 100,000 100,000 South Carolina 304,696 305,356 Georgia 251,193 250,000 ------- ------- 2,391,789 2,399,373 ======= ======= Certain of these assets, totaling approximately $650,000 for each of the years ended December 31, 1995 and 1994, are restricted for the future benefit of policyholders in a particular state.
(4) Deferred Policy Acquisition Costs --------------------------- Deferred policy acquisition costs at December 31, 1995, 1994 and 1993 consist of the following:
(5) Property and Equipment ------------------- Property and equipment at December 31, 1995 and 1994 consists of the following:
(6) Future Policy Benefits ------------------ At December 31, 1995 and 1994, future policy benefits, exclusive of universal life and flexible term annuities, consist of the following:
1995 1994 ---- ---- Life insurance $ 746,477 701,498 Annuities 296,242 332,490 Accident and health insurance 7,779 7,657 ------- ------- Total life insurance policies $ 1,050,498 1,041,645 ======= ======= Life insurance in-force aggregated approximately $1.3 billion and $1.5 billion at December 31, 1995 and 1994, respectively.
(8) Notes Payable ----------- The note payable of $1,400,553 and $891,823 at December 31, 1995 and 1994, respectively, secured by student loans equaling 115% of the unpaid principal balance, relates to advances under a $10,000,000 line of credit ($8,599,447 available to be drawn at December 31, 1995). The note bears interest at a variable rate, 6% at December 31, 1995 and matures on August 19, 1996.
Interest expense relating to these notes payable during the three years ended December 31, 1995, 1994 and 1993 totaled $26,240, $60,864 and $73,924, respectively and is included in net investment income.
(9) Note Payable to Related Party ------------------------ 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, 1995, the note bears interest at 9.0% percent (payable monthly); principal repayment is contingent upon the Company maintaining statutory surplus in excess of $1,750,000 and approval in advance by the Florida Department of Insurance. Interest expense relating to the balance of note payable to related party during 1995, 1994 and 1993 aggregated $90,000, $90,000 and $90,000, respectively.
Income taxes for the years ended December 31, 1995, 1994 and 1993 is summarized as follows:
1995 1994 1993 ---- ---- ---- Current: Federal $ 370,800 100,000 129,000 State 10,200 - 14,000 ------ ------ ------ 381,000 100,000 143,000 ------ ------ ------ Deferred: Federal (188,700) 387,000 (128,000) State (32,300) 43,000 (14,000) ------ ------ ------ (221,000) 430,000 (142,000) ------ ------ ------ $ 160,000 530,000 1,000 ====== ====== ======
(b) Distributions, other than stock dividends, are made to shareholders in excess of Shareholders' surplus, as defined by prior law; or
(c) The entity ceases to qualify for taxation as a life insurance company.
The net change in the total valuation allowance for the years ended December 31, 1995, 1994, and 1993 was an increase of $62,600, $14,000 and $49,000, 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, 1995.
The first awards granted became fully vested during April, 1993. On November 17, 1993, the Board of Directors approved an amendment to the plan to provide an early payment option. The agents were given an increased award in exchange for settling the awards early. During 1994, a total award was distributed in the form of 63,295 shares of common stock, totaling $125,000 and cash of $3,336.
(13) Disclosures About Fair Value of Financial Instruments ------------------------------------------- Statement of Financial Accounting Standards No. 107 Disclosures About Fair Value of Financial Instruments (SFAS 107) requires the Company to disclose estimated fair value information. The following methods and assumptions were used by the Company in estimating fair values of financial instruments as disclosed herein:
The following table presents the carrying amounts and estimated fair values of financial instruments held at December 31, 1995 and 1994. The fair value of a financial instrument is the amount at which the instrument could be exchanged in a current transaction between willing parties.