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. One-hundred percent of the remaining rentable space was leased as of December 31, 2002.
The Company has primarily issued three types of insurance products: universal life, 10-Pay Whole Life with an Annuity Rider, and final expense products. Universal life provides insurance coverage with flexible premiums, within limits, which allow policyholders to accumulate cash values. The accumulated cash values are credited with tax-deferred interest, as adjusted by the Company on a periodic basis. Deducted from the cash accumulations are administrative charges and mortality costs. Should a policy surrender in its early years, the Company assesses a surrender fee against the cash value accumulations based on a graded formula.
The 10-Pay Whole Life with an Annuity Rider product is designed for the student loan market. The savings aspect of the Annuity Rider is marketed as a tool for parents to help fund their children's higher education. The product is offered to parents who have children under the age of 25.
The Company established a lead generation program that has been coupled with a recruiting program for new sales agents to help generate new business.
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, 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, 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.
In accordance with accounting principles generally accepted in the United States (GAAP), premiums and considerations received for interest sensitive products such as universal life insurance and ordinary annuities are reflected as increases in liabilities for policyholder account balances and not as revenues. Revenues reported for these products consist of policy charges for the cost of insurance, administration charges, amortization of policy initiation fees and surrender charges assessed against policyholder account balances. Surrender benefits paid relating to these products are reflected as decreases in liabilities for policyholder account balances and not as expenses. The Company receives investment income earned from the funds deposited into account balances, a portion of which is passed through to the policyholders in the form of interest credited. Interest credited to policyholder account balances and benefit claims in excess of policyholder account balances are reported as expenses in the financial statements.
The costs related to acquiring new business, including certain costs of issuing policies and other variable selling expenses (principally commissions), defined as deferred policy acquisition costs, are capitalized and amortized into expense. For traditional life products, these costs are amortized over the premium paying period of the related policies, in proportion to the ratio of annual premium revenues to total anticipated premium revenues. Such anticipated premium revenues are estimated using the same assumption used for computing liabilities for future policy benefits and are generally "locked in" at the date the policies are issued. For interest sensitive products, these costs are amortized generally in proportion to expected gross profits from surrender charges and investment, mortality and expense margins. This amortization is adjusted when the Company revises the estimate of current or future gross profits or margins. For example, deferred policy acquisition costs are amortized earlier than originally estimated when policy terminations are higher than originally estimated or when investments backing the related policyholder liabilities are sold at a gain prior to their anticipated maturity.
Net investment income decreased by $32,000, or .8%, to $3,835,000 for fiscal year 2002 from $3,867,000 for fiscal year 2001. Investment yield slightly decreased for the fiscal year 2002 from 7.65% in 2001 to 7.41% in 2002.
Net insurance revenues increased by $37,000, or .6%, to $6,736,000 for fiscal year 2001 from $6,699,000 for fiscal year 2000. This increase was primarily the result of an increase in traditional life sales.
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.
Operating expenses increased by $305,000, or 8.6%, to $3,835,000 for fiscal year 2001 from $3,530,000 for the same period in 2000. The increase was primarily due to increased marketing and legal expenses and an increase in the provision for doubtful accounts.
The Company has no other financial instruments that would be materially susceptible to market risk.
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 2002 and 2001.
This Annual Report of Form 10-K contains forward-looking statements, together with related data and projections, about the Company's projected financial results and its future plans and strategies. However, actual results and needs of the Company may vary materially from forward-looking statements and projections made from time to time by the Company on the basis of management's then-current expectations. The business in which the Company is engaged involves changing and competitive markets, which may involve a high degree of risk, and there can be no assurance that forward-looking statements and projections will prove accurate.
In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets". SFAS No. 144 establishes an accounting model for long-lived assets to be disposed of by sale that applies to all long-lived assets, including discontinued operations. SFAS No. 144 requires that those long-lived assets be measured at the lower of carrying amount or fair value less cost to sell, whether reported in continuing operations or in discontinued operations. The provisions of SFAS No. 144 are effective for financial statements issued for fiscal years beginning after December 15, 2001. Adoption of SFAS No. 144 did not have a material impact on the Company's financial condition or results of operations.
Statement of Cash Flows - years ended December 31, 2002, 2001 and 2000..................................24
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, 2002 and 2001, and the results of its operations and its cash flows for the three years in the period ended December 31, 2002, 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 2002 2001 Liabilities: Policy liabilities and accruals (notes 6 and 7): $3,517,481 $2,901,599 Future policy benefits: Policyholders' account balances 47,222,857 47,601,259 Unearned revenue 4,551,265 4,694,563 Other policy claims and benefits payable 701,312 1,147,403 Other policyholders' funds, dividend and endowment accumulations 78,811 64,045 Funds held related to reinsurance treaties (note 7) 1,334,963 1,379,640 Note payable to related party (note 9) 1,000,000 1,000,000 Due to affiliated insurance agency (note 11) 83,941 193,689 General expenses accrued 98,480 93,436 Unearned investment income 355,529 357,322 Other liabilities 111,786 247,665 Income taxes (note 10) 1,062,802 895,437 ----------- ----------- Total liabilities 60,119,227 60,576,058 ----------- ----------- Shareholders' equity (notes 2,3 and 12): Common stock, $1 par, authorized 3,000,000 shares; issued and out- standing, 2,003,388 shares in 2002 and 1,907,989 in 2001 2,003,388 1,907,989 Capital in excess of par 4,267,189 4,011,519 Accumulated other comprehensive income 871,197 558,131 Retained earnings 10,003,996 10,425,631 ----------- ----------- Total shareholders' equity 17,145,770 16,903,270 Commitments and contingencies (notes 7 and 15) -- -- ----------- ----------- Total liabilities and shareholders' equity $77,264,997 $77,479,328 =========== ===========
2002 2001 2000 Revenues: Net insurance revenues $7,075,257 $6,736,027 $6,698,869 Net investment income (notes 3 and 11) 3,835,420 3,866,966 3,935,607
Realized loss on investments (1,038) -- -- ------------ ----------- ----------- Total revenues 10,909,639 10,602,993 10,634,476 ------------ ----------- ----------- Benefits, claims and expenses:
Benefits and claims 5,343,573 4,482,588 5,109,411 Amortization of deferred policy acquisition costs (note 4) 1,969,966 2,197,399 1,797,320 Operating expenses (notes 9 and 11) 3,678,920 3,835,165 3,529,380 ----------- ----------- ----------- Total benefits, claims and expenses 10,992,459 10,515,152 10,436,111 ----------- ----------- ----------- Income (loss) before income taxes (82,820) 87,841 198,365
Cash and cash equivalents at beginning of year 1,969,055 2,513,668 4,080,484 ----------- ---------- ---------- Cash and cash equivalents at end of year $ 3,067,284 $1,969,055 $2,513,668 =========== ========== ========== Supplemental schedule of cash flow information: Interest paid during the year $ 90,000 $ 97,240 $ 105,000 =========== ========== ========== Income taxes paid during the year $ 4,246 $ 57,470 $ 94,365 =========== ========== ========== Change in market value adjustments- investments available-for-sale: Fixed maturities $456,823 $956,773 $786,282 Equity securities (62,965) 24,632 (121,202)
Change in deferred acquisition costs 257,686 61,405 (71,611) Change in premium deposit funds (154,613) (36,843) 42,967 Deferred income tax asset (liability) (183,865) (372,208) (235,481) ----------- --------- ----------- Accumulated comprehensive income Net change in unrealized appreciation $313,066 $633,759 $400,955 ========= ========= =========
(a) Nature of business ------------------ 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 (12%), Florida (43%), and Georgia (11%). 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.
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 75.0% of the Company's voting securities at December 31, 2002.
Mortgage loans on real estate and mortgage loans held as short term investments are reported at the unpaid principal balances, adjusted for amortization of premium or accretion of discount, less allowance for possible losses.
(j) Policyholders' account balances ------------------------------- 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.
(l) Income taxes ------------ Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.
(m) Impairment of Long-Lived Assets ------------------------------- 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.
(o) Stock-based Compensation ------------------------ The Company measures expense for stock-based employee compensation using the intrinsic value method and provides pro-forma disclosures of net income (loss) and net income (loss) per common share as if the fair value method had been applied in measuring compensation expense.
In June 2001, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 142, "Goodwill and Other Intangible Assets". Under SFAS No. 142, amortization of goodwill is precluded, however, its recoverability must be periodically (at least annually) reviewed and tested for impairment. Goodwill must be tested at the reporting unit level for impairment in the year of adoption, including an initial test performed within six months of adoption. If the initial test indicates a potential impairment, then a more detailed analysis to determine the extent of impairment must be completed within twelve months of adoption. SFAS No. 142 also requires that useful lives for intangibles other than goodwill be reassessed and remaining amortization periods be adjusted accordingly. The adoption of SFAS No. 142 did not have a material impact on the Company's financial condition or results of operations.
The more significant U.S. 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 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 No. 97, rather than on the statutory rates for mortality and interest.
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, 2002.
Unrealized (depreciation) appreciation in investments in equity securities for the years ended December 31, 2002, 2001, and 2000 is $(62,965), $24,632 and $(121,202), respectively.
The amortized cost and estimated fair value of fixed maturities at December 31, 2002, 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.
Fixed maturity securities held-to-maturity: Amortized Estimated Cost Fair value Due in 2003 $ -- $ -- Due in 2004 through 2007 863,469 930,401 Due in 2008 through 2012 2,037,355 2,137,037 Due after 2012 789,745 811,507
There were no realized gains and losses for fixed maturity securities classified as available-for-sale and held-to-maturity that were called during the year ended December 31, 2002, 2001 and 2000.
2002 Carrying Amount Dean Witter Discover $4,049,379 Philip Morris, Inc. 5,529,454
Federal Express $2,036,560 Dean Witter Discover 4,252,500 Philip Morris Inc. 5,813,260
At December 31, 2002 and 2001, the Company owned $485,000 and $482,000, respectively, of less-than-investment grade corporate debt securities. The Company also invests in subsidized and unsubsidized student loans totaling $97,671 and $95,819 at December 31, 2002 and 2001, respectively, which are guaranteed by the U.S. government. Subsequent to December 31, 2002, all of these loans were sold at their unpaid principal balance.
Net investment income for the years ended December 31, 2002, 2001, and 2000 consists of the following:
Dividends on equity securities common stock, including mutual fund 384 -- 33,412 ---------- ---------- ---------- 3,846,090 3,876,421 3,959,061 Less investment expenses 10,670 9,455 23,454 ---------- ---------- ---------- $3,835,420 $3,866,966 $3,935,607
Certain of these assets, totaling approximately $850,000 for each of the years ended December 31, 2002 and 2001, are restricted for the future benefit of policyholders in a particular state.
December 31, December 31, 2002 2001 ------------ ------------ Land $982,027 $982,027 Building and improvements 2,441,849 2,397,325 Furniture and equipment 968,761 956,533 ---------- ----------- 4,392,637 4,335,885 Less accumulated depreciation (1,962,233) (1,844,823) ---------- ---------- $2,430,404 $2,491,062 ========== ==========
Depreciation expense for the years ended December 31, 2002, 2001, 2000 totaled $129,330, $129,330, and $115,425, respectively.
December 31, December 31, 2002 2001 ----------- ------------ Life insurance $3,291,275 $2,600,757 Annuities 64,738 193,744 Accident & health insurance 161,468 107,098 ---------- ---------- Total life & health future policy benefits $3,517,481 $2,901,599 ========== ==========
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.
Under reinsurance agreements exclusive of the MEGA agreement discussed below, the Company has ceded premium of $303,536, $278,828, and $275,288 included in reinsurance premiums ceded, and received recoveries of $286,817, $624,314 and $131,886, included in annuity, death and other benefits for the years ended December 31, 2002, 2001, 2000, respectively.
On December 31, 1992, the Company entered into a reinsurance agreement with The MEGA Life and Health Insurance Company ("MEGA"), ceding an 18% share of all universal life policies in force at December 31, 1992 as a measure to manage the future needs of the Company. The reinsurance agreement is a co-insurance treaty entitling the assuming company to 18% of all future premiums, while making them responsible for 18% of all future claims and policyholder loans relating to the ceded policies. In addition, the Company receives certain commission and expense reimbursements.
For the years ended December 31, 2002, 2001, 2000, the Company ceded premiums to MEGA of $344,981, $365,247 and $419,353, included in reinsurance ceded, and received recoveries of $496,751, $494,683 and $478,485, included in annuity, death and other benefits, respectively. The funds held related to reinsurance treaties of $1,334,963 and $1,379,640 represent the 18% share of policy loans ceded to the reinsurer at December 31, 2002 and 2001, respectively.
Tax expense (benefit) in operations $(12,254) $16,865 $38,105 Tax on unrealized appreciation (depreciation) of investments 183,865 372,208 235,481 -------- -------- -------- $171,611 $389,073 $273,586 ======== ======== ========
Income tax expense (benefit) for the years ended December 31, 2002, 2001, 2000 is summarized as follows:
Deferred tax assets: Unearned revenue, due to deferral of "front-end" fee $1,717,492 $1,829,505 Policy liabilities and accruals, principally due to adjustments to reserves for tax purposes 1,718,852 1,683,457 Deferred policy acquisition costs related to unrealized appreciation (depreciation) 89,390 128,365
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, 2002 and 2001 the Company had outstanding loan purchases of $16,283,759 and $13,860,534, respectively. Included in investment income is $1,130,231 and $984,872 for the years ended December 31, 2002 and 2001, respectively.
The Company received for the years ended December 31, 2002 and 2001, $168,933 and $132,141 respectively, as rental income from Security National for a lease of office space in the Company's building under the terms of the Administrative Services Agreement.
Dilutive potential common shares -- -- -- Denominator for diluted earnings per share weighted average shares and assumed conversions 1,979,291 1,907,989 1,907,989 Basic earnings (loss) per share $(.04) $.04 $.08 Diluted earnings (loss) per share $(.04) $.04 $.08
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, 2002. 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 2002, 2001, and 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.
The following table presents the carrying amounts and estimated fair values of financial instruments held at December 31, 2002 and 2001. The fair value of a financial instrument is the amount at which the instrument could be exchanged in a current transaction between willing parties.