<PAGE>
Form 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1995
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
For Quarter Ended September 30, 1995 Commission File No. 2-35669
SOUTHERN SECURITY LIFE INSURANCE COMPANY
(Exact name of registrant as specified in its charter)
Florida 59-1231733
(State of incorporation) (I.R.S. tax number)
755 Rinehart Road, Lake Mary, FL 32746
Registrant's telephone number, including area code: (407) 321-7113
Securities registered pursuant to Section 12(b) of the Act:
Name of Each Exchange on
Title of Each Class Which Registered
None None
Securities registered pursuant to Section 12(g) of the Act:
None
(Title of Class)
Indicate by check mark whether the Registrant (1) has filed all annual,
quarterly and other reports required to be filed with the Commission during the
preceding 12 months and (2) has been subject to the filing requirements for at
least the past 90 days.
Yes X No
The number of Registrant's shares outstanding as of the close of the period
covered by this report is as follows:
Number Outstanding at
Title of class September 30, 1995
Class A Common Shares 1,907,989
$1.00 per share
<PAGE>
SOUTHERN SECURITY LIFE INSURANCE COMPANY
Part I
FINANCIAL INFORMATION
INDEX
ITEM 1
Page
FINANCIAL STATEMENTS
Balance sheets - December 31, 1994 and
September 30, 1995 3-4
Statements of Income and Retained
Earnings - Nine Months Ended September 30,
1995 and 1994 5-6
Shareholders' Equity 7
Statement of Cash Flows - September 30,
1995 and 1994 8-9
Notes to Financial Statements 10-32
ITEM 2
Management's Discussion and Analysis of the
Statements of Income 33-37
September 30, 1995
Signature Page 38
2
<PAGE>
FINANCIAL STATEMENTS
SOUTHERN SECURITY LIFE INSURANCE COMPANY
BALANCE SHEETS
SEPTEMBER 30, 1995 AND DECEMBER 31, 1994
<TABLE>
<CAPTION>
ASSETS
September 30, December 31,
1995 1994
<S> <C> <C>
Investments (Note 3):
Fixed maturities held to maturity
(market value $12,474,924 at
December 31, 1994 and $13,220,244
at September 30, 1995 $12,918,087 $12,816,337
Securities available for sale:
Fixed maturities at the fair value
at March 31, 1995 and December 31, 1994
(cost of $21,234,606 at September 30,
1995 and $20,015,825 at December 31,
1994 respectively) 21,421,683 18,641,197
Equity securities (cost, $1,353,530 and
$1,369,028 September 30, 1995 and
December 31, 1994, respectively) 1,646,015 1,380,761
Policy and student loans 7,740,776 8,866,968
Short-term investments 4,207,012 1,875,758
Other Invested Assets 25,560 31,054
----------- -----------
$47,959,133 $43,612,075
Cash & Cash Equivalents $ 1,098,758 $ 638,079
Accrued investment income 744,886 604,851
Deferred policy acquisition costs (Note 4) 19,053,704 20,104,624
Policyholders' account balances on
deposit with reinsurer (note 7) 8,429,305 8,098,655
Reinsurance receivable (note 7) 349,778 323,184
Due from affiliated insurance agency (Note 11) 13,769 10,419
Receivables:
Agent balances 92,304 521,076
Other 815,756 333,721
Refundable income taxes 175,011 114,216
Property and equipment at cost, (Note 5) 2,891,167 2,824,170
----------- -----------
Total Assets $81,623,571 $77,185,070
----------- -----------
</TABLE>
3
<PAGE>
SOUTHERN SECURITY LIFE INSURANCE COMPANY
BALANCE SHEETS
SEPTEMBER 30, 1995 AND DECEMBER 31, 1994
<TABLE>
<CAPTION>
LIABILITIES AND SHAREHOLDERS' EQUITY
September 30, December 31
1995 1994
<S> <C> <C>
Liabilities:
Policy liabilities and accruals:
(Notes 6 and 7)
Future policy benefits $ 982,367 $ 1,041,645
Policyholder's account balances 50,145,067 47,618,490
Unearned premiums 9,494,495 10,416,064
Other policy claims and benefits payable 737,184 297,376
Other policyholders funds, dividend and
endowment accumulations 55,327 55,375
Funds held in reinsurance treaties with
unauthorized reinsurers (note 7) 904,756 700,701
Note payable (Note 8) 916,505 891,823
Note payable to related party (note 9) 1,000,000 1,000,000
Due to affiliated insurance agency
(Note 11) - 225,213
Other liabilities 1,311,750 1,819,858
Deferred income taxes (Note 10) 1,298,161 474,000
----------- -----------
$66,845,612 $64,540,545
Shareholders' equity (Notes 2, 3 and 12):
Common stock, $1 par, authorized
2,000,000 shares; issued and
outstanding 1,907,989 shares $ 1,907,989 $ 1,907,989
Capital in excess of par 4,011,519 4,011,519
Outstanding agents' incentive stock
bonus (note 12) -
Unrealized appreciation (depreciation)
of equity securities available for
sale 563,984 (518,535)
Retained earnings 8,294,467 7,243,552
----------- ----------
14,777,959 12,644,525
Commitments and contingencies
(notes 7, and 14) - -
----------- ----------
$ 81,623,571 $ 77,185,070
----------- -----------
See notes to financial statements.
</TABLE>
4
<PAGE>
SOUTHERN SECURITY LIFE INSURANCE COMPANY
STATEMENTS OF INCOME AND RETAINED EARNINGS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1995 AND 1994
<TABLE>
<CAPTION>
THREE MONTHS NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
1995 1994 1995 1994
---------------------- ----------------------
<S> <C> <C> <C> <C>
Revenues:
Premium income $ 2,638,278 $ 3,016,060 $ 8,058,434 $8,937,095
Less reinsurance
ceded (396,455) (633,663) (1,480,292) (1,932,678)
------------ ------------ ------------ -----------
Net premium income 2,241,823 2,382,397 6,578,142 7,004,417
Net investment
income (Notes 3 & 8) 764,369 652,087 2,249,740 2,097,636
Realized gain (loss)
on investments
(Note 3) 115,800 14,837 94,768 48,468
------------ ----------- ------------ ----------
Total Revenue $ 3,121,992 $ 3,049,321 $ 8,922,650 $9,150,521
Benefits, losses &
expenses:
Annuity, death and
other benefits 1,046,092 786,185 3,133,095 2,863,719
Change in future
policy benefits (13,296) 1,598 (59,278) (8,393)
Amortization of
deferred policy
acquisitions costs
(Note 4) 720,209 956,819 2,244,001 2,545,380
Operating Expenses
(Note 11) 665,395 546,352 1,866,749 1,914,261
Interest expense with
related party
(Note 9) 22,500 22,500 67,500 67,500
----------- ----------- ----------- ----------
Total Expenses $ 2,440,900 $ 2,313,454 $ 7,252,067 $7,382,467
----------- ----------- ----------- ----------
Income before
income taxes 681,092 735,867 1,670,583 1,768,054
Income tax expense
(benefit)(Note 10) 248,609 281,108 619,668 662,791
----------- ----------- ----------- ----------
Net income $ 432,483 $ 454,759 $ 1,050,915 $1,105,263
</TABLE>
5
<PAGE>
SOUTHERN SECURITY LIFE INSURANCE COMPANY
STATEMENTS OF INCOME AND RETAINED EARNINGS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1995 AND 1994
<TABLE>
<CAPTION>
THREE MONTHS NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
1995 1994 1995 1994
---------------------- ----------------------
<S> <C> <C> <C> <C>
Retained Earnings,
beginning 7,861,984 6,880,077 7,243,552 6,229,573
----------- ----------- ----------- -----------
Retained Earnings,
ending 8,294,467 7,334,836 8,294,467 7,334,077
----------- ----------- ----------- -----------
Earnings per share,
based on 1,907,989
weighted average
shares outstanding
in 1994 & 1995 $ .23 $ .24 $ .55 $ .58
---------- ----------- ----------- -----------
See notes to financial statements.
</TABLE>
6
<PAGE>
SOUTHERN SECURITY LIFE INSURANCE COMPANY
STATEMENTS OF SHAREHOLDERS' EQUITY
PERIODS ENDED SEPTEMBER 30, 1995, DECEMBER 31, 1994, AND 1993
<TABLE>
<CAPTION>
Unrealized
appreciation
(depreciation) Agents
Capital of equity Incentive
Common stock in excess security Stock Retained
Shares Amount of par investments Bonus earnings
<S> <C> <C> <C> <C> <C> <C>
Balances,
December 31,
1992 1,844,694 $1,844,694 3,918,292 64,633 - 5,524,921
Net income for
the year - - - - - 704,652
Stock bonus - - - - 125,000 -
Unrealized
appreciation
of equity
security
investments - - - 55,909 - -
-------- ---------- ---------- ---------- --------- ------
Balances,
December
31, 1993 1,844,694 1,844,694 3,918,292 120,542 125,000 6,229,573
--------- ---------- ---------- ---------- --------- ---------
Capital Stock
issued 63,295 63,295 93,227 - ( 125,000)
Net income for
the year - - - - - 1,013,979
Unrealized
depreciation
of securities
available
for sale
investments - - - (639,077) - -
--------- ---------- ---------- ----------- --------- ------
Balances,
December
31, 1994 1,907,989 $1,907,989 4,011,519 (518,535) - 7,243,552
--------- ---------- ---------- ----------- --------- ---------
Capital Stock
issued
Net income for
the year to
date - - - - - 1,050,915
Unrealized
depreciation
of securities
available
for sale
investments - - - 1,082,519 - -
--------- ---------- ---------- ----------- --------- ------
Balances,
September 30,
1995 1,907,989 $1,907,989 4,011,519 563,984 - 8,294,467
--------- ---------- ---------- ----------- ========= ---------
</TABLE>
7
<PAGE>
SOUTHERN SECURITY LIFE INSURANCE COMPANY
STATEMENTS OF CASH FLOWS
FOR NINE MONTHS ENDED SEPTEMBER 30, 1995 AND 1994
INCREASE (DECREASE) IN CASH
<TABLE>
<CAPTION>
1995 1994
---- ----
<S> <C> <C>
Cash flows provided by (used in) operating activities:
Net income (including net realized
gains and losses on investments) $ 1,050,915 $ 1,105,263
Adjustments to reconcile net
income to net cash provided by
(used in) operating activities:
Depreciation 132,756 111,442
Net realized (gains) or
losses on investments (74,777) (48,468)
Loss (Gains) on Disposable of
property, plant & equipment 917 4,410
Deferred income taxes 504,161 12,117
Amortization of deferred
policy acquisition costs 2,244,001 3,012,827
Acquisition costs deferred (2,293,150) (3,687,521)
Change in assets and liabilities
affecting cash provided by
operations:
Accrued investment income (140,035) 801,496
Due from affiliated insurance
agency (3,350) (4,623)
Accounts receivable (114,058) (448,369)
Other policy claims and
future benefits payable 380,530 ( 65,246)
Reinsurance Receivable (26,594)
Policyholders' Account
Balances 1,811,603
Funds held under
reinsurance 204,055 159,952
Unearned premiums (345,859) (141,231)
Dividend and endowment
accumulations (48) 2,817
Payable to affiliated
insurance agent (225,213)
Income tax payable
Other liabilities (508,108) (1,321,698)
Other policyholders'
funds 2,076,294
---------- -----------
Net cash provided by (used in)
operating activities 2,597,746 1,569,462
</TABLE>
(continued)
8
<PAGE>
SOUTHERN SECURITY LIFE INSURANCE COMPANY
STATEMENTS OF CASH FLOWS (CONTINUED)
FOR NINE MONTHS ENDED SEPTEMBER 30, 1995 AND 1994
INCREASE (DECREASE) IN CASH
<TABLE>
<CAPTION>
1995 1994
---- ----
<S> <C> <C>
Cash flows from (used in) investing activities:
Purchase of investments:
Held to maturity (992,860) (5,980,536)
Available for sale (3,001,641) (7,637,859)
Equity & other (2,824,671) (11,607,774)
Proceeds from maturity of held to
maturity securities 885,203
Proceeds from maturity of available
for sale securities 1,883,210
Proceeds from sale of available for
sale securities 550,758
Proceeds from sales of investments 32,610,926
Proceeds from maturities of investments
Net change in policy and student loans 1,126,192 (1,361,170)
Net change in other investments 3,425
Acquisition of property and equipment (175,689) (40,037)
------------ ------------
Net cash provided by (used in)
investing activities (2,546,073) 5,983,550
------------ ------------
Cash flows from financing activities:
Receipts from universal life and
certain annuity policies credited
to policyholder account balances 4,116,338 5,301,505
Return of policyholder account
balances on universal life and
certain annuity policies (3,732,014) (3,700,890)
Proceeds from short-term borrowings 2,000,000 4,061,932
Repayment of short-term
borrowings (1,975,318) (12,114,752)
------------ ------------
Net cash provided by financing
activities 409,006 (6,452,205)
------------ ------------
Increase (decrease) in cash 460,679 1,100,807
Cash and cash equivalents at
beginning of year 638,079 89,461
------------ ------------
Cash and cash equivalents at
end of quarter $ 1,098,758 $ 1,190,268
============ ============
</TABLE>
See notes to financial statements.
9
<PAGE>
SOUTHERN SECURITY LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1995 AND 1994
1. Nature of business and summary of significant accounting policies
(a) Nature of Business
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 (50%), Georgia
(15%) and Texas (11%). None of the remaining eight states in which the
Company is licensed to conduct business account for over 10% of the
Company's total business.
(b) Basis of Financial Statements
The financial statements have been prepared on the basis of generally
accepted accounting principles ("GAAP"), which vary from reporting
practices prescribed or permitted by regulatory authorities.
(c) Investments
Effective January 1, 1994, the Company adopted Statement of Financial
Accounting Standards No. 115 ("SFAS 115") "Accounting for Certain
Investments in Debt and Equity Securities." SFAS 115 requires that
investments in all debt securities and those equity securities with
readily determinable market values be 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 a 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, 1994, the Company
did not have any investments categorized as trading securities.
Adoption of this statement had no effect on the income of the Company.
Prior to January 1, 1994, the Company classified investments in fixed
maturity securities, in accordance with emerging practice for financial
10
<PAGE>
SOUTHERN SECURITY LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1995 AND 1994
1. Nature of business and summary of significant accounting policies
(continued)
institutions. Fixed maturity securities that the Company had the
ability and intent to hold until maturity were classified as fixed
maturities held to maturity and were carried at amortized cost. Fixed
maturity securities which may have been sold prior to maturity due to
changes in interest rates, prepayment risks, liquidity needs, tax
planning purposes or other similar factors, were classified as
securities available for sale, and were carried at the lower of
aggregate amortized cost or market. If the aggregate market value for
fixed maturities available for sale was less than the aggregate
amortized cost of such securities, the excess was an unrealized loss
which was reported net of income taxes in a separate component of
shareholders' equity along with the change in unrealized gains or
losses on equity securities also shown net of income taxes.
The Company's carrying value for investments in the held-to-maturity
and available-for-sale categories is reduced to its estimated
realizable value if a decline in the market value is deemed other than
temporary. Such reductions in carrying values are recognized as
realized losses and charged to income.
Interest on fixed maturities and short-term investments is credited to
income as it accrues on the principal amounts outstanding adjusted for
amortization of premiums and discounts computed by the scientific
method, which approximates the effective yield method. Realized gains
and loses on disposition of investments are included in net income. The
cost of investments sold is determined on the specific identification
method. Dividends are recorded as income on the ex-dividend dates.
Policy loans and student loans are carried at the unpaid principal
balance, less any amounts deemed to be uncollectible. No policy loans
are 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.
(d) Cash and Cash Equivalents
For purposes of the statements of cash flows, the Company considers all
highly liquid debt instruments purchased with an original maturity of
one month or less to be cash equivalents.
11
<PAGE>
SOUTHERN SECURITY LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1995 AND 1994
1. Nature of business and summary of significant accounting policies
(continued)
(e) 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. Deferred policy acquisition costs applicable to
non-universal 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 receipt of 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 at a constant rate based on the present value of the
estimated gross profit amounts expected to be realized over the life of
the policies.
Several tests are performed by the Company's consulting actuarial firm
concerning the recoverability of the DAC. These methods include those
typically used by many companies in the life insurance industry.
Further, Southern Security conducts a sensitivity analysis of its
assumptions that are used to estimate the future expected gross
profits, which are relied upon for the recoverability of the DAC.
(f) Depreciation
Depreciation is being provided on the straight-line method over the
estimated useful lives of the assets.
(g) Future Policy Benefits
The liability for future policy benefits has been provided on a net
level premium basis utilizing estimated investment yields, withdrawals,
mortality and other assumptions that were appropriate at the time the
policies were issued. Such estimates are based upon industry data and
the Company's past experience as adjusted to provide for possible
adverse deviation from the estimates.
(h) Recognition of Premium Revenue and Related Costs
Premiums are recognized as revenue as follows:
- Universal life policies - premiums received from policyholders are
reported as deposits. Cost of insurance and expense charges, which are
charged against the policyholder account balance, are recognized as
revenue as earned. Amounts assessed against the policyholder account
12
<PAGE>
SOUTHERN SECURITY LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1995 AND 1994
1. Nature of business and summary of significant accounting policies
continued
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.
Revenue on universal life policies is also recognized via surrender
fees associated with the policy. When a policy is surrendered int he
early policy years, a surrender fee is assessed. This fee is determined
based on the issue age of the insured, smoker verses non-smoker status,
sex of the insured and the duration of the policy at surrender.
Surrender fees are recognized as earned.
- Annuity contracts with flexible terms - premiums received from
policyholders are reported as deposits.
- All other policies - recognized as revenue over the premium paying
period.
(i) Reinsurance
Statement of Financial Accounting Standards ("SFAS") No. 113,
"Accounting and Reporting for Reinsurance of Short-Duration and
Long-Duration Contracts," is effective for fiscal years beginning after
December 15, 1992. SFAS No. 113, which eliminated net reporting of
reinsurance amounts in the balance sheet, provides disclosure
requirements and guidance on assessing transfer of risk in insurance
contracts that apply to ceding and assuming entities and guidance with
regard to gain recognition. The Company adopted this pronouncement in
1993.
(j) Income Taxes
In February 1992, the Financial Accounting Standards Board issued SFAS
No. 109, "Accounting for Income Taxes". Under SFAS No. 109 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.
Under SFAS No. 109, 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.
The Company adopted SFAS No. 109 in 1992 and has applied the provisions
of SFAS No. 109 retroactively to January 1, 1991.
13
<PAGE>
SOUTHERN SECURITY LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1995 AND 1994
1. Nature of business and summary of significant accounting policies
continued
(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 1993 and 1994 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:
a. Costs of acquiring new business are deferred and amortized, rather
than being charged to operations as incurred.
b. The liability for future policy benefits and expenses is based on
conservative estimates of expected mortality, morbidity, interest,
withdrawals and future maintenance and settlement expenses, rather than
on statutory rates for mortality and interest.
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, 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.
e. Deferred income taxes, if applicable, are recognized for future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective
tax bases.
f. The statutory liabilities for the asset valuation reserve and interest
14
<PAGE>
SOUTHERN SECURITY LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1995 AND 1994
2. Basis of financial statements (continued)
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.
h. Expenses attributable to the public offering of the common shares
have been reclassified from retained earnings to capital in excess of
par.
i. Realized gains or losses on the sale or maturity of investments are
included in the statement of income and not recorded net of taxes and
amounts transferred to the interest maintenance reserve as required by
statutory accounting practices.
j. Certain proceeds from a note payable (note 9) that are treated as
shareholder's equity for statutory purposes are treated as a liability
under generally accepted accounting principles.
A reconciliation of net income (loss) for the years ended December 31,
1994, 1993 and 1992 and shareholders' equity as of December 31, 1994 and
1993 between the amounts reported on a statutory basis and the related
amounts presented on the basis of generally accepted accounting
principles is as follows:
15
<PAGE>
SOUTHERN SECURITY LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1995 AND 1994
<TABLE>
<CAPTION>
Shareholders'
Net Income (Loss) Equity
Ended December 31, December 31,
1994 1993 1992 1994 1993
--------- -------- -------- ----- ------
<S> <C> <C> <C> <C> <C>
As reported
on a
statutory
basis $ 55,816 195,794 2,039,144 8,759,282 8,540,689
---------- ---------- --------- --------- ---------
Adjustments:
Deferred
policy
acquisition
costs, net 724,549 152,801 (1,991,046) 20,104,624 18,279,497
Future policy
benefits,
unearned
premiums and
policyholders'
funds 586,243 189,956 781,660 (14,632,156) (14,592,689)
Deferred
income taxes (430,000) 142,000 705,400 (474,000) (364,000)
Asset valuation
reserve - - - 481,454 461,424
Interest main-
tenance reserve (4,092) 52,501 154,639 203,048 207,140
Non-admitted
assets - - - 431,092 861,468
Unrealized
losses - SFAS
115 - - - (1,374,628) -
Capital and
surplus note - - - (1,000,000) 1,000,000)
Other
adjustments,
net 81,463 (28,400) 80,403 145,809 (155,428)
------- ----------- ---------- ------------ -------------
Net increase
(decrease) 958,163 508,858 (268,944) 3,885,243 3,697,412
-------- ---------- ----------- ----------- ------------
As reported on a
GAAP basis $1,013,979 704,652 1,770,200 12,644,525 12,238,101
========== ========== ========== =========== ============
</TABLE>
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 aggregate amount of
approximately $1,600,000.
The payment of dividends by the Company is subject to the regulation of
the State of Florida Department of Insurance. A dividend may be declared
and paid without prior Florida Insurance Commissioner's approval if the
dividend is equal to or less than the greater of: (a) 10% of the
16
<PAGE>
SOUTHERN SECURITY LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS(CONTINUED)
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1995 AND 1994
2. Basis of financial statements (continued)
Company's surplus as to policyholder's 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 payable by the Company during 1995
without prior approval is approximately $50,000.
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,
1994.
3. Investments
(a) Equity Securities and Fixed Maturities
Equity securities for 1995 have shown significant appreciation. Market
value exceeds cost as of September 30 by $292,485. The market has
rebounded well since December 31, 1994.
Equity securities consist of $1,380,761 and $1,127,990 of common stock
at December 31, 1994 and 1993, respectively.
Unrealized (depreciation) appreciation in investments in equity
securities for the years ended December 31, 1994, 1993 and 1992 is
$(108,809), $55,909 and $2,135, respectively.
The amortized cost and estimated fair values of investments in debt
securities are as follows:
17
<PAGE>
SOUTHERN SECURITY LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1995 AND 1994
3. Investments (continued)
<TABLE>
<CAPTION>
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
<S> <C> <C> <C> <C>
December 31, 1994:
Held to maturity:
U.S. Treasury securities
and obligations of U.S.
government corporations
and agencies
(guaranteed) $ 2,837,876 - 45,876 2,792,000
Corporate securities 7,848,160 14,550 254,757 7,607,953
Special revenue and
special assessment
obligations and all
nonguaranteed obli-
gations of agencies and
authorities of govern-
ments and their political
political subdivisions 2,130,301 - 55,330 2,074,971
---------- ------- --------- ----------
12,816,337 14,550 355,963 12,474,924
---------- ------- --------- ----------
Available for sale:
U.S. Treasury securities
and obligations of U.S.
government corporations
and agencies
(guaranteed) 15,340,641 - 1,014,641 14,326,000
Corporate securities 3,927,987 26,811 386,798 3,568,000
Special revenue and
special assessment
obligations and all
nonguaranteed obli-
gations of agencies and
authorities of govern-
ments and their political
subdivisions 747,197 - - 747,197
---------- ------- --------- ----------
20,015,825 26,811 1,401,439 18,641,197
---------- ------- --------- ----------
$32,832,162 41,361 1,757,402 31,116,121
=========== ======= ========= ==========
</TABLE>
18
<PAGE>
SOUTHERN SECURITY LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1995 AND 1994
3. Investments (continued)
<TABLE>
<CAPTION>
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
<S> <C> <C> <C> <C>
December 31, 1993:
Held to maturity:
U.S. Treasury securities
and obligations of
U.S. government corpora-
tions and agencies
(guaranteed) 2,846,630 219,370 - 3,066,000
Corporate securities 3,868,508 240,928 - 4,109,436
Special revenue and
special assessment
obligations and all
nonguaranteed obligations
of agencies and
authorities of govern-
ments and their political
subdivisions 1,474,122 2,149 - 1,476,271
8,189,260 462,447 - 8,651,707
Available for sale:
U.S. Treasury
securities and
obligations of U.S.
government corporations
and agencies (guaranteed) 8,036,968 301,361 24,329 8,314,000
Corporate securities 5,629,107 89,272 10,379 5,708,000
Special revenue and
special assessment
obligations and all
nonguaranteed
obligations of agencies
and authorities of
governments and their
political subdivisions 1,331,683 - - 1,331,683
----------- ------- ------- ----------
14,997,758 390,633 34,708 15,353,683
----------- ------- ------- ----------
$23,187,018 853,080 34,708 24,005,390
=========== ======= ======= ==========
</TABLE>
Unrealized (depreciation) appreciation of fixed maturities for years
ending December 31, 1994, 1993 and 1992 is $(2,534,413), $351,427 and
$212,665 respectively.
19
<PAGE>
SOUTHERN SECURITY LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1995 AND 1994
3. Investments (continued)
The amortized cost and estimated fair value of fixed maturities,
exclud-ing mortgage backed securities, at December 31, 1994, by
contractual maturity, are shown 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.
Estimated Amortized
Year of Maturity Cost Market Value
1995 $ 250,416 $ 247,500
1996-1999 17,893,220 17,122,789
2000-2004 6,974,366 6,501,530
After 2004 4,561,528 4,147,000
----------- ------------
$29,679,530 $ 28,018,819
=========== ============
The Company also invests in mortgage backed securities with amortized
cost totaling $3,152,632 and estimated fair values totaling $3,097,302
that mature at various dates.
Proceeds from sale of equity securities and fixed maturities available
for sale and related realized gains and losses are summarized as
follows:
<TABLE>
<CAPTION>
1994 1993 1992
---- ---- ------
<S> <C> <C> <C>
Proceeds from sale of
equity securities $ 650,294 670,758 491,719
---------- --------- ---------
Proceeds from sale of
fixed maturities
available for sale $ - 1,821,147 7,385,186
========== ========= =========
Equity securities:
Gross realized gains 67,146 77,341 42,288
Gross realized
(losses) ( 16,474) (53,208) ( 30,527)
Fixed maturities:
Gross realized gains - 70,483 233,153
Gross realized
(losses) - - (54,117)
Other realized (losses) - - (20,842)
---------- ---------- ----------
$ 50,672 94,616 169,955
========== ========= =========
</TABLE>
20
<PAGE>
SOUTHERN SECURITY LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1995 AND 1994
3. Investments (continued)
Certain of the fixed maturity securities classified as available for
sale and held to maturity were called during the year ended December 31,
1994 resulting in the following realized gains and losses:
1994 1993
-------- --------
Held to maturity:
Gross realized gains $ - 41,622
Gross realized loss - (2,583)
Available for sale:
Gross realized gains 10,060 15,050
Gross realized loss - (9,720)
-------- ---------
$ 10,060 $ 44,369
======== =========
(b) Concentrations of credit risk
At December 31, 1994 and 1993, 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
$4,837,123 and $21,664,394 at December 31, 1994 and 1993, respectively,
which are guaranteed by the U.S. government. Subsequent to December 31,
1994, all of these loans were sold at their unpaid principal balance.
(c) Investment Income
Net investment income for the periods ended September 30, 1995 and 1994
consists of the following:
1995 1994
---- ----
Interest:
Fixed maturities $1,691,250 1,516,595
Policy and student loans 397,273 638,046
Other investments 180,833 112,407
Dividends on equity securities:
Common stock, including
mutual funds 20,259 17,430
Rents 68,965 26,067
---------- ---------
2,358,580 2,310,545
Less investment expenses 109,110 212,909
---------- ---------
2,249,470 2,097,636
========== =========
21
<PAGE>
SOUTHERN SECURITY LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1995 AND 1994
3. Investments continued
Net investment income for the years ended December 31, 1994, 1993 and
1992 consists of the following:
<TABLE>
<CAPTION>
1994 1993 1992
---------- ---------- ----------
<S> <C> <C> <C>
Interest:
Fixed maturities $ 2,080,464 1,485,217 1,618,395
Policy and student loans 768,631 1,125,035 898,954
Short-term investments 176,941 174,972 205,529
Dividends on equity securities
Common stock, including mutual
fund 24,418 17,230 14,275
----------- ---------- ----------
3,050,454 2,802,454 2,737,153
Less investment expenses $ 299,683 284,449 291,693
----------- ---------- ----------
$ 2,750,771 2,518,005 2,445,460
=========== ========== ==========
</TABLE>
(d) Investments on Deposit
In order to comply with statutory regulations, investments were on
deposit with the Insurance Departments of certain states as follows:
1994 1993
----------- -------
Florida $ 1,744,017 1,733,163
Alabama 100,000 100,000
South Carolina 305,356 306,000
Georgia 250,000 250,000
Arizona - 199,395
----------- ---------
$ 2,399,373 2,588,558
=========== =========
Certain of these assets, totaling approximately $650,000 for each of the
years ended December 31, 1994 and 1993, are restricted for the future
benefit of policyholders in a particular state.
4. Deferred policy acquisition costs
Deferred policy acquisition costs at December 31, 1994, 1993 and 1992
consist of the following:
22
<PAGE>
SOUTHERN SECURITY LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1995 AND 1994
4. Deferred policy acquisition costs continued
<TABLE>
<CAPTION>
1994 1993 1992
---------- --------- -------
<S> <C> <C> <C>
Deferred policy
acquisition costs at
beginning of year $18,279,497 18,126,696 20,117,742
Policy acquisition costs deferred:
Commissions 2,200,505 3,423,146 5,230,021
Underwriting and
issue costs 1,060,192 1,020,134 1,271,928
Other 706,558 926,392 1,054,929
SFAS 115 1,100,578 - -
---------- ---------- -------
5,067,833 5,369,672 7,556,878
----------- ---------- ----------
Ceding commission - - (5,136,136)
Amortization of deferred
policy acquisition
costs ( 3,242,706) (5,216,871) (4,411,788)
------------ ----------- -----------
Deferred policy
acquisition costs at
end of year $20,104,624 18,279,497 18,126,696
=========== ========== ==========
</TABLE>
5. Property and equipment
Property and equipment consists of the following:
<TABLE>
<CAPTION>
September December December
1995 1994 1993
<S> <C> <C> <C>
Land $ 982,027 982,027 982,027
Building and improvements 2,129,923 2,049,150 2,049,150
Furniture and equipment 1,058,381 1,025,436 1,045,556
--------- ---------- ---------
4,170,331 4,056,613 4,076,733
Less accumulated
depreciation 1,279,164 1,232,443 1,140,669
---------- ---------- ---------
$2,891,167 $2,824,170 2,936,064
========== ========== =========
</TABLE>
23
<PAGE>
SOUTHERN SECURITY LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1995 AND 1994
5. Property and equipment continued
Depreciation expense for the years ended December 31, 1994, 1993 and
1992 totaled $148,355, $163,400, and $160,819, respectively.
6. Future policy benefits
At December 31, 1994 and 1993, future policy benefits, exclusive of
universal life and flexible term annuities consist of the following:
September December December
30, 1995 1994 1993
Life insurance $ 678,512 701,498 726,631
Annuities 295,877 332,490 360,089
Accident & health
insurance 7,978 7,657 7,688
---------- ---------- ---------
Total life
insurance policies $ 982,367 $1,041,645 1,094,408
========== ========== =========
Life insurance in-force aggregated approximately $1.5 billion and $1.65
billion at December 31, 1994, and 1993, respectively.
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. The mortality table
used in calculating benefit reserves is the 1965-1970 Basic Select and
Ultimate for males.
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 1 percent spread over the credited rate of 8
percent.
24
<PAGE>
SOUTHERN SECURITY LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1995 AND 1994
7. Reinsurance
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, 1994, 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 $585,957 and $510,469 included in
reinsurance ceded, and received recoveries of $514,868 and $405,293
included in annuity, death and other benefits for the years ended
December 31, 1994 and 1993, respectively.
On December 31, 1992, the Company entered into a reinsurance agreement
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 the ceding company
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. As the reinsurer is
unauthorized in the State of Florida, assets with a market value
totaling an amount equal to or greater than the balance of
policyholders' account balances less policy loans, on a statutory
basis, ceded to the reinsurer are held in trust for benefit of the
Company.
As of December 31, 1992, the Company ceded premiums of $5,240,058,
equal to the 18% of net statutory reserves ceded on the effective date
of the contract. In return, the Company received a commission and
expense allowance of $2,497,370. The effect of this transaction on the
financial statements at and for the year ended December 31, 1992 was as
follows:
25
<PAGE>
SOUTHERN SECURITY LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1995 AND 1994
7. Reinsurance continued
Establish policyholders' account balances
on deposit with reinsurer $6,108,839
Reduce deferred acquisition costs $5,136,136
Reduce unearned premium $2,409,468
Gain on reinsurance transaction
recognized (1) $639,455
==========
(1) The economic gain on the reinsurance transaction amounted to
approximately $1,600,000, however, management deferred approximately
$1,000,000 of the gain against deferred acquisition costs as a
provision for the recoverability of such costs. Based upon management's
and actuarial evaluation of such costs, approximately $500,000 and
$300,000 of the amount deferred was amortized against deferred
acquisition costs during 1994 and 1993, respectively.
For the year ended December 31, 1994 and 1993, the Company ceded
premiums of $758,956 and $1,108,916, included in reinsurance ceded and
received recoveries of $386,509 and $504,341, included in annuity,
death and other benefits, respectively. The funds held in reinsurance
treaties with unauthorized reinsurer of $700,701 and $497,874 represent
the 18% share of policy loans ceded to the reinsurer at December 31,
1994 and 1993, respectively.
8. Notes Payable
The note payable of $891,823 and $9,438,068 at December 31, 1994, and
1993, respectively, secured by student loans equaling 115% of the
unpaid principal balance, relates to advances under a $15,000,000 line
of credit ($14,108,177 available to be drawn at December 31, 1994). The
note bears interest at a variable rate, 6% at December 31, 1994 and
matures on August 18, 1995.
Interest expense relating to these notes payable during the three years
ended December 31, 1994, 1993 and 1992 totaled $60,864, $73,924, and
$30,644, respectively and is included in net investment income.
26
<PAGE>
SOUTHERN SECURITY LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1995 AND 1994
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, 1994, 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 1994, 1993 and 1992 aggregated
$90,000, $90,00, and $91,250 respectively.
10. Income taxes
As discussed in note 1(j), the Company adopted Statement 109 in 1992
and has applied the provisions of Statement 109 retroactively to
January 1, 1991.
Income taxes for the years ended December 31, 1994, 1993 and 1992 is
summarized as follows:
1994 1993 1992
-------- -------- ------
Current:
Federal $100,000 129,000 606,000
State - 14,000 50,000
-------- -------- --------
100,000 143,000 656,000
-------- -------- --------
Deferred:
Federal 387,000 (128,000) (637,400)
State 43,000 ( 14,000) ( 68,000)
-------- --------- ---------
430,000 (142,000) (705,400)
-------- --------- ---------
$530,000 1,000 ( 49,400)
======== ========= =========
27
<PAGE>
SOUTHERN SECURITY LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1995 AND 1994
10. Income taxes continued
Income tax expense for the years ended December 31, 1994, 1993 and 1992
differs from "expected" tax (computed by applying the U.S. federal
income tax rate of 35% in 1994 and 34% in 1993 and 1992 to pretax
income) as a result of the following:
<TABLE>
<CAPTION>
1994 1993 1992
--------- -------- ------
<S> <C> <C> <C>
Computed "expected tax
expense $ 541,000 240,000 585,000
Increase (reduction) in
income taxes resulting
from:
Small life insurance
company deduction ( 83,000) (252,100) (715,508)
Changes in the valuation
allowance for deferred
tax assets, allocated to
income tax expense 14,000 49,000 129,000
(Over) under accrual of
prior year expense 29,000 ( 37,000) -
State taxes, net of federal
income tax benefit 28,000 - ( 11,880)
Other, net 1,000 1,100 ( 36,012)
--------- -------- ---------
$ 530,000 1,000 ( 49,400)
========= ======== =========
</TABLE>
Under tax laws in effect prior to 1984, a portion of a life insurance
company's gain from operations was not currently taxed but was
accumulated in a memorandum "Policyholders' Surplus Account." As a
result of the Tax Reform Act of 1984, the balance of the Policyholders'
Surplus Account has been frozen as of December 31, 1983 and no
additional amounts will be accumulated in this account. However,
distributions from the account will continue to be taxed, as under
previous law, if any of the following conditions occur:
a. The Policyholders' Surplus exceeds a prescribed maximum, or;
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.
28
<PAGE>
SOUTHERN SECURITY LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1995 AND 1994
10. Income taxes continued
At December 31, 1994, 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 1994, 1993 and 1992, AMT exceeded
regular tax by $14,000, $49,000, and $129,000, respectively. At
December 31, 1994, the AMT tax credit available to reduce future
regular tax totaled $271,000.
The principal elements of deferred income taxes consist of the
following:
<TABLE>
<CAPTION>
1994 1993 1992
-------- --------- -------
<S> <C> <C> <C>
Deferred policy
acquisition costs $ 627,000 (131,000) (940,000)
Future policy benefits ( 42,000) ( 11,000) 258,000
Differences in bases in
investments (197,000) ( 9,000) ( 8,500)
Other 42,000 9,000 ( 14,900)
-------- --------- ---------
$ 430,000 (142,000) (705,400)
========= ========= =========
</TABLE>
29
<PAGE>
SOUTHERN SECURITY LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1995 AND 1994
10. Income taxes continued
The tax effect of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at
December 31, 1994 and 1993 are presented below:
1994 1993
------------ ------------
Deferred tax assets:
Unearned premiums, due to deferral
of "front-end" fee for financial
reporting purposes $ 3,920,000 $ 3,900,000
Policy liabilities and accruals,
principally due to adjustments to
reserves for tax purposes 1,800,000 1,778,000
Other 19,000 20,000
Investments 518,000 --
Alternative minimum tax credit
carry forwards 271,000 257,000
------------ ------------
Total gross deferred tax assets 6,528,000 5,955,000
Less valuation allowance (271,000) (257,000)
------------ ------------
Net deferred tax assets 6,257,000 5,698,000
------------ ------------
Deferred tax liabilities:
Deferred acquisition costs,
principally due to deferrals
for financial reporting
purposes (6,646,000) (6,019,000)
Other (85,000) (43,000)
------------ ------------
Total gross deferred tax liabilities (6,731,000) (6,062,000)
------------ ------------
Net deferred tax liability $ (474,000) (64,000)
============ ============
The valuation allowance for deferred tax assets established as of
January 1, 1991 was $9,000. The net change in the total valuation
allowance for the years ended December 31, 1994, 1993 and 1992 was an
increase of $14,000, $49,000, and $129,000, respectively.
At December 31, 1991, the Company had fully utilized its net operating
loss carryforwards for "regular" income tax purposes.
30
<PAGE>
SOUTHERN SECURITY LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1995 AND 1994
11. Related party transactions
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 represents unearned commission
advances paid to Insuradyne. The Company incurred commission expense to
Insuradyne aggregating $582,059, $910,936, and $1,063,934 in 1994,
1993, and 1992, respectively. These amounts are included as components
of acquisition costs deferred and related amortization. Insuradyne paid
insurance-related expenses aggregating $192,332, $230,478, and $419,410
in 1994, 1993 and 1992, respectively.
12. Agents' Incentive Stock Bonus Plan
The Company has an incentive bonus plan for agents that was adopted in
1983 and effective through December 31, 1990. Bonuses granted under the
plan were vesting over a five year period commencing on the fifth
anniversary date of the award. Once vested, the agent had the option to
receive the bonus in cash or shares of common stock. The number of
shares of common stock was determined on the date of the award as the
number of whole shares equal to the award based on the applicable stock
price on that date.
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. As of
December 31, 1993, the total award of $128,336, was payable in 63,295
shares of common stock totaling $125,000 and $3,336 in cash included in
other liabilities, as elected by the agents.
13. New Pronouncements by the Financial Accounting Standards Board
In December 1991, SFAS No. 107, "Disclosures About Fair Value of
Financial Instruments," was issued. SFAS No. 107 was effective for
years ending after December 15, 1993, except for entities, such as the
Company, with less than $150 million in total assets in the applicable
1992 statement of financial position, for which the effective date is
fiscal year ending after December 15, 1995. As required by SFAS No.
107, the Company will have to disclose the fair value of all financial
instruments, except for those financial instruments specifically
excluded, for which it is practicable.
31
<PAGE>
SOUTHERN SECURITY LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1995 AND 1994
14. Legal proceedings
Lawsuits against the Company have arisen in the normal course of the
Company's business. However, contingent liabilities arising from
litigation and other matters are not considered material in relation to
the financial position of the Company.
To the best of the Company's knowledge, it has no potential or pending
contingent liabilities that might be material to the Company's
financial condition, results of operations or liquidity, pursuant to
product and environmental liabilities. The Company maintains adequate
insurance coverage for unforeseen events and the insurance carriers
have no solvency issues.
32
<PAGE>
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
Overview.
This analysis of the results of operations and financial condition of
Southern Security Life should be read in conjunction with the Selected
Financial Data and Financial Statements and Notes to the Financial
Statements included in this report and the Company's Form 10K.
In recent years the Company has primarily issued one type of insurance
product, universal life. Universal life provides insurance coverage
with flexible premiums, within limits, which allow policyholders to
accumulate cash values. These accumulated cash values are credited with
tax-deferred interest, as adjusted by the Company on a periodic basis.
Deducted from these cash accumulations are administrative charges and
mortality costs. If a policy is surrendered in its early years, the
Company assesses a surrender fee against these same cash accumulations,
based on the issue age of the insured, smoker verses non-smoker status,
sex of the insured and the duration of the policy at the time of
surrender.
Pursuant to the accounting methods prescribed by Financial Accounting
Standards No. 97, premiums received from policyholders are credited to
policyholder account balances, a liability, rather than income.
Revenues on universal life result from the mortality and administrative
fees charged to the policyholders' 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 1993 the Company experienced an amortization rate for deferred
acquisition costs which was higher than prior periods, whereas, in
1994, the amortization rate returned to that of prior periods.
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 shall be evaluated on a regular basis, and
the total amortization to date shall be adjusted as a charge or credit
to earnings if actual experience or other evidence suggests that
earlier estimates should 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 FAS 97.
33
<PAGE>
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
Annuity products, of which the Company currently has a small amount,
are recorded in similar fashion to universal life. 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 from surrender charges.
Another source of income to the Company is investment revenue. 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 play a part in
determining the credited interest rates to policyholders.
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 in relation to
the present value of the estimated gross profits of those policies.
These costs are defined as deferred policy acquisition costs and are
shown in the asset section of the balance sheet of the Company.
Amortization of these deferred costs is adjusted as the Company revises
its current or estimated future gross profits. As an example, deferred
policy acquisi-tion costs may be amortized more quickly when
terminations are greater than anticipated or when investments are sold
at a gain prior to expected maturity. Mortality experience and interest
rate fluctuations from period to period would also impact the
amortization rate of deferred costs. Product profitability is affected
by several different factors such as mortality experience (actual
versus expected experience), interest rate spreads (excess interest
earned over interest credited to policyholders) and controlling policy
acquisition costs and other costs of operation. The operating results
of any one reporting period may be significantly affected by the level
of death or other policyholder benefits incurred due to the Company's
relatively small size.
34
<PAGE>
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
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).
<TABLE>
<CAPTION>
Relationships to
Total Revenues Period to Period
Periods Ended Increase or
Sept 30 (Decrease)
------------------------------- -----------------
1995 1994 1993 95-94 94-93
----- ------ ----- ------- ------
<S> <C> <C> <C> <C> <C>
Premium income 74% 76% 74% (6%) ( 5%)
Net investment income 26 24 24 9 22
Other income 0 - 2 - 50
---- ---- ---- ------ ----
Total Revenues 100% 100% 100% (2%) 2%
Losses, claims and
loss adjustment
expenses 34% 34% 21% 8% 25%
Acquisition costs 25 26 47 (12) (32%)
Other operating
costs and
expenses 22 23 24 (4) 8%
---- ---- ---- ----- ----
Total Expenses 81% 83% 92% (2%) (12%)
Income before income
taxes 19% 17% 8% (6%) 200%
Provision for
taxes 7 6 3 (7) 197%
---- ----- ----- ----- -----
Net Income 12% 11% 5% (5%) 203%
</TABLE>
Results of Operations
The slump in new business written has continued throughout 1995. While
1994 new business written for the same period was down from previous
periods, 1995 is behind the 1994 figures. The Company is making every
effort to reverse this trend through the introduction of new products,
new marketing techniques and distribution channels. At this time, the
Company has several new products in the development and introduction
stages, that are anticipated to open new markets for the Company thereby
increasing new business issues. In addition, the Company is in
negotiations with additional agency forces to increase market
penetration.
Premium income for 1995 has continued to decline approximately 6% from
that of the same period in 1994. The Company attributes this to a
decline in inforce policies revenue as well as a reduction in the
amortization of unearned revenues. New business declines of the last
year have had an impact on premiums. Revenues derived from surrender
fees
35
<PAGE>
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
associated with both periods in 1994 and 1995 are remaining about level.
Investment income between 1994 and 1995 has not shown any dramatic
change nor is any anticipated. However, as investments increase with the
market interest rate showing strengthening, so should investment income.
Gains and losses from the sales and maturities of stocks and bonds in
the Company's investment portfolio fluctuate as the investment manager
makes necessary adjustments to the portfolio and are not considered
indicative of any current market trends. Also, with reduced student loan
lending come reduced expenses for investments.
Annuity, death and surrender benefits expensed climbed in the third
quarter of 1995 as compared with the same period of 1994. The most
significant increase in this area was in surrender benefits paid. While
surrenders increased, the associated surrender fees did not increase at
the same rate. This is due to the fact that the book of business is
aging and surrender fees decline as a policy ages.
Operating expenses for 1995 and 1994 have come within 2% of each other
through the third quarter. In 1994, the Company was in litigation with a
former employee and experiencing the related costs of legal
represen-tation. As of third quarter 1994, the Company established a
receivable for both the legal costs and litigation costs of this case.
After due consideration of the litigation periods the Company might
encounter on the collection of these expenses from its insurers, the
costs of settle-ment and associated legal expenses, estimated at between
$500,000 and $600,000 were later expensed in that same year. Therefore,
the gap between 1994's expenses and those of 1995 will widen
significantly by year end. 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 receiv-able for only $100,000 due to the litigation delays
in receiving said funds.
Reinsurance premiums ceded for the 1995 and 1994 are $1,480,292 and
$1,932,678, respectively. Policy benefits were reduced each year by
$126,364 and $358,279, respectively. Reinsurance commissions amounted to
$283,175 for 1995 and $332,216 for 1994. In addition, under the terms of
the Company's treaty with Mega Life (formerly United Group Insurance
Company) expenses of $520,718 were transferred to the reinsurer thus far
in 1995. The Company has also amortized $150,000 of the deferred gain,
under the aforementioned treaty, against deferred acquisition costs for
the nine month period ending September 30, 1995 (see Note 7).
Liquidity and Capital Resources
The Company's insurance operations continue to provide adequate positive
cash flow to enable the Company to meet operational needs as well as
36
<PAGE>
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
student loan borrowing needs. However, the Company has begun to
experience the seasonal demand for student loan borrowings for the 1995-
1996 school year. The Company has made some short-term borrowings
against its line of credit with the Student Loan Marketing Association
in order to meet these student loan borrowing demands. The same was true
for the 1994-1995 school period.
While the Company was maintaining more liquid funds through short term
investments in order to have funds available for increased student loan
borrowings, as of third quarter 1995, a large portion of these funds
have been utilized in order to meet those student loan borrowing
demands. After these funds were disbursed the Company initiated its line
of credit borrowings.
The Company has no material capital commitments at this time.
37
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned duly authorized.
SOUTHERN SECURITY LIFE INSURANCE
COMPANY
BY: /s/ George Pihakis
George Pihakis
President, Chief Executive Officer
and Director
Date:
NOVEMBER 13, 1995 BY: /s/ David C. Thompson
------------------
David C. Thompson
Executive Vice-President, Secretary
Treasurer, Chief Operating Officer
and Director
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 7
<S> <C> <C>
<PERIOD-TYPE> 9-MOS YEAR
<FISCAL-YEAR-END> DEC-31-1995 DEC-31-1994
<PERIOD-END> SEP-30-1995 DEC-31-1994
<DEBT-HELD-FOR-SALE> 21,421,683 18,641,197
<DEBT-CARRYING-VALUE> 12,918,087 12,816,337
<DEBT-MARKET-VALUE> 13,220,244 12,474,924
<EQUITIES> 1,646,015 1,380,761
<MORTGAGE> 0 0
<REAL-ESTATE> 0 0
<TOTAL-INVEST> 47,959,133 43,612,075
<CASH> 1,098,758 638,079
<RECOVER-REINSURE> 349,778 323,184
<DEFERRED-ACQUISITION> 19,053,704 20,104,624
<TOTAL-ASSETS> 81,623,571 77,185,070
<POLICY-LOSSES> 982,367 1,041,645
<UNEARNED-PREMIUMS> 9,494,495 10,416,064
<POLICY-OTHER> 737,184 297,376
<POLICY-HOLDER-FUNDS> 55,327 55,375
<NOTES-PAYABLE> 1,916,505 1,891,823
<COMMON> 1,907,989 1,907,989
0 0
0 0
<OTHER-SE> 4,011,519 4,011,519
<TOTAL-LIABILITY-AND-EQUITY> 81,623,571 77,185,070
6,578,142 9,299,789
<INVESTMENT-INCOME> 2,249,740 2,750,771
<INVESTMENT-GAINS> 94,768 60,732
<OTHER-INCOME> 0 0
<BENEFITS> 3,133,095 4,115,257
<UNDERWRITING-AMORTIZATION> 2,244,001 3,242,706
<UNDERWRITING-OTHER> 1,866,749 3,186,386
<INCOME-PRETAX> 1,670,583 1,543,979
<INCOME-TAX> 619,668 530,000
<INCOME-CONTINUING> 1,050,915 1,013,979
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 1,050,915 1,013,979
<EPS-PRIMARY> .55 .53
<EPS-DILUTED> .55 .53
<RESERVE-OPEN> 0 0
<PROVISION-CURRENT> 0 0
<PROVISION-PRIOR> 0 0
<PAYMENTS-CURRENT> 0 0
<PAYMENTS-PRIOR> 0 0
<RESERVE-CLOSE> 0 0
<CUMULATIVE-DEFICIENCY> 0 0
</TABLE>
