<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 March 31, 1996
( ) 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 March 31, 1996 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 March 31, 1996
Class A Common Shares 1,907,989
$1.00 per share
1
<PAGE>
SOUTHERN SECURITY LIFE INSURANCE COMPANY
Part I
FINANCIAL INFORMATION
INDEX
ITEM 1
Page
FINANCIAL STATEMENTS
Balance sheets - December 31, 1995 and
March 31, 1996 3-4
Statements of Income and Retained Earnings -
Three Months Ended March 31, 1996 and 1995 5
Shareholders' Equity 6
Statement of Cash Flows - March 31,
1996 and 1995 7-8
Notes to Financial Statements 9-33
ITEM 2
Management's Discussion and Analysis of the
Statements of Income March 31, 1996 34-42
Signature Page 43
2
<PAGE>
SOUTHERN SECURITY LIFE INSURANCE COMPANY
BALANCE SHEETS
MARCH 31, 1996 AND DECEMBER 31, 1995
<TABLE>
<CAPTION>
ASSETS
March 31, December 31,
1996 1995
<S> <C> <C>
Investments (Note 3):
Fixed maturities held to
maturity (fair value,
$16,837,380 and $15,494,540
at March 31, 1996 and December
31, 1995 respectively) $16,696,686 $15,165,395
Securities available for sale, At fair value:
Fixed maturities (cost of
$20,929,865 at March 31, 1996
and $21,077,410 at December 31,
1995 21,123,879 21,812,096
Equity securities (cost,
$1,490,270 and $1,297,041
at March 31, 1996 and December
31, 1995 respectively) 1,970,090 1,715,386
Policy and student loans 6,470,816 9,971,653
Short-term investments 2,034,651 1,499,100
Other Invested Assets 20,732 22,578
------ ------
48,316,854 50,186,208
Cash & Cash Equivalents 1,420,619 406,752
Accrued investment income 729,659 638,809
Deferred policy acquisition
costs (Note 4) 18,497,167 18,145,111
Policyholders' account
balances on deposit with
reinsurer (note 7) 8,500,563 8,440,660
Reinsurance receivable (note 7) 508,264 514,341
Due from affiliated insurance
agency (Note 11) 37,628 -
Receivables:
Agent balances 87,331 345,014
Other 456,465 318,274
Refundable income taxes -
Property and equipment, net
at cost, (Note 5) 2,819,688 2,877,181
---------- ---------
Total Assets
$81,374,238 $81,872,350
=========== ===========
</TABLE>
3
<PAGE>
SOUTHERN SECURITY LIFE INSURANCE COMPANY
BALANCE SHEETS (CONTINUED)
MARCH 31, 1996 AND DECEMBER 31, 1995
Balance sheets (continued):
<TABLE>
<CAPTION>
LIABILITIES AND SHAREHOLDERS' EQUITY
March 31, December 31,
1996 1995
<S> <C> <C>
Liabilities:
Policy liabilities and accruals:
(Notes 6 and 7):
Future policy benefits $1,037,738 $1,050,498
Policyholder's account balances 51,223,943 50,624,276
Unearned premiums 9,166,724 9,116,890
Other policy claims and benefits
payable 765,340 191,955
Other policyholders funds,
dividend and endowment
accumulations 56,415 57,444
Funds held in reinsurance treaties
with reinsurers (note 7) 1,024,802 977,416
Note payable (Note 8) - 1,400,553
Note payable to related
party (note 9) 1,000,000 1,000,000
Due to affiliated insurance agency
(Note 11) - 243,368
Other liabilities 1,351,089 1,461,990
Income taxes payable 16,350 16,350
Deferred income taxes
(Note 10) 846,098 905,000
------- -------
66,488,499 67,045,740
---------- ----------
Shareholders' equity (Notes 2, 3 and 12):
Common stock, $1 par, authorized
3,000,000 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
Unrealized appreciation (depreciation)
on securities available for
sale 446,611 548,647
Retained earnings 8,519,620 8,358,455
--------- ---------
14,885,739 14,826,610
---------- ----------
$81,374,238 $81,872,350
=========== ===========
</TABLE>
4
<PAGE>
SOUTHERN SECURITY LIFE INSURANCE COMPANY
STATEMENTS OF INCOME AND RETAINED EARNINGS
FOR THE THREE MONTHS ENDED MARCH 31, 1996 AND 1995
<TABLE>
<CAPTION>
THREE MONTHS
ENDED MARCH 31,
1996 1995
---------------------------------
<S> <C> <C>
Revenues:
Premium income $2,414,599 $2,704,538
Less reinsurance ceded (434,811) (526,474)
-------- --------
Net premium income 1,979,788 2,178,064
Net investment income
(Notes 3 and 8) 866,597 772,643
Realized gain (loss) on
investments (Note 3) 13,387 (7,850)
------ ------
2,859,772 2,942,857
Benefits, losses & expenses:
Annuity, death and other
benefits 1,229,201 1,065,585
Decrease in future policy
benefits (12,760) (41,569)
Amortization of deferred policy
acquisitions costs (Note 4) 796,178 660,795
Operating Expenses (Note 11) 599,565 645,656
Interest expense with related
party (Note 9) 22,500 22,500
------ ------
2,634,684 2,352,967
--------- ----------
Income before income taxes 225,088 589,890
Income tax expense (benefit)
(Note 10) 63,923 221,209
------ -------
Net income $161,165 $368,681
-------- --------
Retained Earnings, beginning 8,358,455 7,243,552
--------- ---------
Retained Earnings, ending 8,519,620 7,612,233
--------- ---------
Earnings per share, based on
1,907,989 weighted average shares
outstanding in 1996 and 1995 .08 .19
--- ---
</TABLE>
See notes to financial statements.
5
<PAGE>
SOUTHERN SECURITY LIFE INSURANCE COMPANY
STATEMENTS OF SHAREHOLDERS' EQUITY
PERIODS ENDED MARCH 31, 1996, DECEMBER 31, 1995 AND 1994
<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,
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
--------- --------- ---------- --------- ------- ---------
Net income for
the year - - - - - 1,114,903
Unrealized
appreciation
of securities
available
for sale - - - 1,067,182 - -
--------- --------- ---------- --------- -------- -------
Balances,
December
31, 1995 1,907,989 $1,907,989 4,011,519 548,647 - 8,358,455
--------- ---------- --------- --------- --------- ---------
Capital Stock
issued
Net income for
the year to
date - - - - - 161,165
Unrealized
depreciation
of securities
available
for sale
investments (102,036)
Balances,
March 31,
1996 1,907,989 $1,907,989 4,011,519 446,611 - 8,519,620
--------- ---------- --------- ------- ------- ---------
</TABLE>
6
<PAGE>
SOUTHERN SECURITY LIFE INSURANCE COMPANY
STATEMENTS OF CASH FLOWS
FOR THREE MONTHS ENDED MARCH 31, 1996 AND 1995
INCREASE (DECREASE) IN CASH
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Cash flows provided by (used in) operating activities:
Net income (including net
realized gains and losses on
investments) $182,085 $368,681
Adjustments to reconcile net
income to net cash provided
by (used in) operating
activities:
Depreciation and amortization 47,235 32,130
Net realized (gains) or
losses on investments (13,387) 11,944
Loss on disposal of property,
plant and equipment 27 -
Deferred income taxes 613,769 319,493
Amortization of deferred
policy acquisition costs 796,178 969,747
Acquisition costs deferred (1,148,234) (600,795)
Change in assets and liabilities
affecting cash provided by
operations:
Accrued investment income (90,850) (62,020)
Due from affiliated insurance
agency (37,628) (1,999)
Accounts receivable 119,492 85,748
Reinsurance Receivable 6,077 (107,903)
Other policy claims and
future benefits payable 560,625 167,618
Policyholders' Account
Balances 582,336 604,545
Funds held under
reinsurance 47,386 66,329
Unearned premiums (245,675) (277,647)
Dividend and endowment
accumulations (1,029) (2,468)
Payable to affiliated
insurance agent (243,368) (225,213)
Income tax payable - 206,208
Other liabilities (110,902) (817,618)
Other policyholders'
funds - -
-------- ----
Net cash provided by
(used in) operating
activities 1,064,137 736,780
</TABLE>
(Continued)
7
<PAGE>
SOUTHERN SECURITY LIFE INSURANCE COMPANY
STATEMENTS OF CASH FLOWS (CONTINUED)
FOR THREE MONTHS ENDED MARCH 31, 1996 AND 1995
INCREASE (DECREASE) IN CASH
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Cash flows from (used in) investing activities:
Purchase of investments - (2,602,149)
Purchase of investments held to
maturity (3,436,270) -
Purchase of investments available
For sale (equity and fixed maturity) (2,168,200) -
Proceeds from maturity of held
to maturity securities 100,000 336,070
Proceeds from maturity of
available for sale securities 77,060 25,128
Proceeds from sale of available
for sale securities (equity and
fixed maturity) 2,039,678 -
Proceeds from sales of investments - 135,323
Proceeds from sale of held to maturity 1,815,750 -
Net change in policy and student loans 3,500,837 3,524,988
Net change in other investments 1,848 -
Net change in short term investments (535,551) 40,298
Acquisition of property & equipment (2,297) (116,774)
------- --------
Net cash provided by (used in)
investing activities 1,392,855 1,342,884
---------- ---------
Cash flows from financing activities:
Receipts from universal life
and certain annuity policies
credited to policyholder
account balances 2,467,014 1,416,328
Return of policyholder account
balances on universal life
and certain annuity policies (2,509,586) (1,110,797)
Proceeds from short-term
borrowings 2,500,000 1,000,000
Repayment of short-term
borrowings (3,900,553) (1,891,823)
---------- ----------
Net cash provided by financing
activities (1,443,125) (586,292)
---------- --------
Increase (decrease) in cash 1,013,867 1,493,372
Cash and cash equivalents at
beginning of year 406,752 882,737
------- -------
Cash and cash equivalents at
end of quarter $1,420,619 $2,376,109
========== ==========
</TABLE>
See notes to financial statements
8
<PAGE>
SOUTHERN SECURITY LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 1996 AND 1995
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 nine states in which the Company is licensed to conduct
business account for over 10% of the Company's total business.
The following is a description of the most significant risks
facing life and health insurers and how the Company mitigates
those risks:
Legal/Regulatory Risk is the risk that changes in the legal or
regulatory environment in which an insurer operates will create
additional expenses not anticipated by the insurer in pricing its
products. That is, regulatory initiatives designed to reduce
insurer profits, new legal theories or insurance company
insolvencies through guaranty fund assessments may create costs
for the insurer beyond those recorded in the consolidated
financial statements. The Company seeks to mitigate this risk
through geographic marketing of their insurance products.
Credit Risk is the risk that issuers of securities owned by the
Company will default or that other parties, including reinsurers,
which owe the Company money, will not pay. The Company minimizes
this risk by adhering to a conservative investment strategy, by
maintaining sound reinsurance and by providing for any amounts
deemed uncollectible.
Interest Rate Risk is the risk that interest rates will change
and cause a decrease in the value of an insurer's investments.
This change in rates may cause certain interest-sensitive
products to become uncompetitive or may cause disintermediation.
The Company mitigates this risk by charging fees for
nonconformance with certain policy provisions, by offering
products that transfer this risk to the purchaser, and/or by
attempting to match the maturity schedule of its assets with the
expected payouts of its liabilities. To the extent that
9
<PAGE>
SOUTHERN SECURITY LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 1996 AND 1995
1. Nature of business and summary of significant accounting
policies (continued):
(a) Nature of Business (continued):
liabilities come due more quickly than assets mature, an insurer
would have to sell assets prior to maturity and potentially
recognize a gain or loss.
(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) 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.
The estimates susceptible to significant change are those used in
determining the liability for future policy benefits and claims,
deferred income taxes and deferred policy acquisition costs.
Although some variability is inherent in these estimates,
management believes that the amounts provided are adequate.
(d) 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
10
<PAGE>
SOUTHERN SECURITY LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 1996 AND 1995
1. Nature of business and summary of significant accounting
policies (continued):
(d) Investments (continued):
debt and equity securities not included in the above two
categories are classified as securities available-for-sale.
Securities available-for-sale are carried at fair value, with
unrealized holding gains and losses reported as a separate
component of stockholders' equity, net of tax and a valuation
allowance against deferred acquisition costs. At December 31,
1995 and 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.
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 losses 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
un-collectible. The Company's policy is that 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.
(e) 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 THREE MONTHS ENDED MARCH 31, 1996 AND 1995
1. Nature of business and summary of significant accounting
policies (continued):
(f) Deferred Policy Acquisition Costs:
The costs of acquiring new business, net of the effects of
reinsurance, principally commissions and those home office
expenses that tend to vary with and are primarily related to
the production of new business, have been deferred. 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.
Beginning January 1, 1994, deferred policy acquisition costs
are adjusted to reflect the impact of unrealized gains and
losses on fixed maturity securities available for sale.
The Company has performed several tests concerning the
recoverability of deferred acquisition costs. These methods
include those typically used by many companies in the life
insurance industry. Further, the Company conducts a sensitivity
analysis of its assumptions that are used to estimate the
future expected gross profits, which management has used to
determine the future recover-ability of the deferred
acquisition costs.
(g) Depreciation
Depreciation is being provided on the straight-line method over
the estimated useful lives of the assets.
(h) Future Policy Benefits:
The liability for future policy benefits has been provided on
a net level premium basis based upon 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.
12
<PAGE>
SOUTHERN SECURITY LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
FOR THE THREE MONTHS ENDED MARCH 31, 1996 AND 1995
1. Nature of business and summary of significant accounting
policies(continued):
(i) Recognition of Premium Revenue and Related Costs:
Premiums are recognized as revenue as follows:
Universal life policies - premiums received from
policy-holders are reported as deposits. Cost of insurance,
policy administration and surrender charges which are charged
against the policyholder account balance during the period,
are recognized as revenue as earned. Amounts assessed against
the policyholder account balance that represent compensation
to the Company for services to be provided in future periods
are reported as unearned revenue and recognized in income
using the same assumptions and factors used to amortize
acquisition costs capitalized.
Annuity contracts with flexible terms - premiums received from
policyholders are reported as deposits.
All other policies - recognized as revenue over the premium
paying period.
(j) 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.
(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.
13
<PAGE>
SOUTHERN SECURITY LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
FOR THE THREE MONTHS ENDED MARCH 31, 1996 AND 1995
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,(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.
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 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.
14
<PAGE>
SOUTHERN SECURITY LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
FOR THE THREE MONTHS ENDED MARCH 31, 1996 AND 1995
2. Basis of financial statements (continued):
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.
k. Reinsurance assets and liabilities are reported on a
gross basis rather than shown on a net basis as permitted
by statutory accounting practices.
A reconciliation of net income (loss) for the years ended December 31,
1995, 1994 and 1993 and shareholders' equity as of December 31, 1995
and 1994 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 THREE MONTHS ENDED MARCH 31, 1996 AND 1995
2. Basis of financial statements (continued):
<TABLE>
<CAPTION>
Shareholders'
Net Income equity
Years Ended December 31, December 31,
1995 1994 1993 1995 1994
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
As reported
on a statutory
basis $ 232,180 55,816 195,794 8,770,411 8,759,282
----------- ----------- ----------- ------------ ------------
Adjustments:
Deferred policy
acquisition
costs, net (290,344) 724,549 152,801 18,145,111 20,104,624
Future policy
benefits, un-
earned premiums
and policy-
holders' funds 1,006,862 586,243 189,956 (12,340,766) (14,632,156)
Deferred
income taxes 221,000 (430,000) 142,000 (905,000) (474,000)
Asset valuation
reserve - - - 807,899 481,454
Interest main-
tenance reserve 24,909 (4,092) 52,501 227,957 203,048
Non-admitted
assets - - - 265,507 431,092
Unrealized losses
-SFAS 115 - - - 734,686 (1,374,628)
Capital and
surplus note - - - (1,000,000) (1,000,000)
Other adjustments,
net (79,704) 81,463 (28,400) 120,805 145,809
----------- ----------- ----------- ----------- ------------
Net increase
(decrease) 882,723 958,163 508,858 6,056,199 3,885,243
----------- ----------- ----------- ----------- ------------
As reported on a
GAAP basis $1,114,903 $1,013,979 704,652 14,826,610 12,644,525
=========== =========== =========== =========== ============
</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 $1,800,000.
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 Company's surplus as to policy-holder's derived from
realized net operating profits on its
16
<PAGE>
SOUTHERN SECURITY LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
FOR THE THREE MONTHS ENDED MARCH 31, 1996 AND 1995
2. Basis of financial statements (continued):
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 1996 without prior approval is
approximately $200,000.
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,
1995.
3. Investments:
(a) Equity Securities and Fixed Maturities:
Equity securities consist of $1,715,386 and $1,380,761 of common stock
at December 31, 1995 and 1994, respectively.
Unrealized (depreciation) appreciation in investments in equity
securities for the years ended December 31, 1995, and 1994 is
$406,611, and $(108,809), respectively.
17
<PAGE>
SOUTHERN SECURITY LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
FOR THE THREE MONTHS ENDED MARCH 31, 1996 AND 1995
3. Investments (continued:
(a) Equity Securities and Fixed Maturities (continued):
The amortized cost and estimated fair values of investments in debt
securities are as follows:
<TABLE>
<CAPTION>
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
<S> <C> <C> <C> <C>
December 31, 1995:
Held to maturity:
U.S. Treasury
securities and
obligations of U.S.
government corpora-
tions and agencies
(guaranteed) 6,410,291 157,709 - 6,568,000
Corporate securities 7,743,286 174,839 3,403 7,914,722
Special revenue and
special assessment
obligations and all
nonguaranteed obligations
of agencies and
authorities of
governments and
their political
subdivisions 1,011,818 - - 1,011,818
--------- ------- ----- ---------
15,165,395 332,548 3,403 15,494,540
---------- ------- ----- ----------
Available for sale:
U.S. Treasury
securities and
obligations of U.S.
government corporations
and agencies (guaranteed) 16,533,564 721,436 - 17,255,000
Corporate securities 3,931,378 33,111 16,489 3,948,000
Special revenue and
special assessment
obligations and all
nonguaranteed
obligations of agencies
and authorities of
governments and their
political subdivisions 612,468 - 3,372 609,096
------- ------- ----- -------
21,077,410 754,547 19,861 21,812,096
---------- ------- ------ ----------
$36,242,805 1,087,095 23,264 37,306,636
=========== ========= ====== ==========
</TABLE>
18
<PAGE>
SOUTHERN SECURITY LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
FOR THE THREE MONTHS ENDED MARCH 31, 1996 AND 1995
3. Investments (continued:
(a) Equity Securities and Fixed Maturities (continued):
<TABLE>
<CAPTION>
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
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 obligations
of agencies and authorities of
governments and their
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 obligations
of agencies and authorities of
governments 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>
19
<PAGE>
SOUTHERN SECURITY LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
FOR THE THREE MONTHS ENDED MARCH 31, 1996 AND 1995
3. Investments (continued):
(a) Equity Securities and Fixed Maturities (continued):
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.
<TABLE>
<CAPTION>
Fixed maturity securities held-to-maturity:
Amortized Estimated
Cost Fair value
<S> <C> <C>
Due in one year or less $2,054,658 2,073,000
Due after one year through
5 years 9,817,945 9,984,456
Due after five years through
ten years 2,005,709 2,150,000
--------- ---------
13,878,312 14,207,456
Mortgage backed securities 1,287,083 1,287,084
--------- ---------
$15,165,395 15,494,540
=========== ==========
Fixed maturity securities available-for-sale:
Due in one year or less 2,349,434 2,350,000
Due after one year through
5 years 10,047,900 10,195,000
Due after five years through
ten years 5,279,717 5,513,000
Due after ten years 2,787,889 3,145,000
--------- ---------
20,464,940 21,203,000
Mortgage backed securities 612,470 609,096
--------- --------
$21,077,410 21,812,096
=========== ==========
</TABLE>
20
<PAGE>
SOUTHERN SECURITY LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
FOR THE THREE MONTHS ENDED MARCH 31, 1996 AND 1995
3. Investments (continued):
(a) Equity Securities and Fixed Maturities (continued):
Proceeds from sale of equity securities and fixed maturities
available for sale and related realized gains and losses are
summarized as follows:
<TABLE>
<CAPTION>
1995 1994 1993
---------- ---------- -------
<S> <C> <C> <C>
Proceeds from sale of
equity securities $854,339 650,294 670,758
======== ======= =======
Proceeds from sale of
fixed maturities
available for sale $1,809,750 - 1,821,147
========== ======= =========
Equity securities:
Gross realized gains 145,136 67,146 77,341
Gross realized (losses) (119,908) (16,474) (53,208)
Fixed maturities:
Gross realized gains 55,543 - 70,483
Gross realized (losses) (20,540) - -
$60,231 50,672 94,616
======= ====== ======
</TABLE>
Certain of the fixed maturity securities classified as available for
sale and held to maturity were called during the year ended December
31, 1995 resulting in the following realized gains and losses:
<TABLE>
<CAPTION>
1995 1994
---- ----
<S> <C> <C>
Held to maturity:
Gross realized gains $ 6 -
Available for sale:
Gross realized gains - 10,060
$ 6 10,060
=== ======
</TABLE>
(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
unsubsidized 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.
21
<PAGE>
SOUTHERN SECURITY LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
FOR THE THREE MONTHS ENDED MARCH 31, 1996 AND 1995
3. Investments (continued):
(c) Investment Income:
Net investment income for the years ended March 31, 1996 and
1995 consists of the following:
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Interest:
Fixed maturities $643,186 579,866
Policy and student loans 221,776 176,367
Short-term investments 34,528 49,583
Dividends on equity securities
Common stock, including mutual
fund 9,145 5,961
----- -----
908,635 811,777
Less investment expenses 42,038 39,134
------
$866,597 772,643
======== =======
Net investment income for the years ended December 31, 1995, 1994 and
1993 consists of the following:
1995 1994 1993
---- ---- ----
Interest:
Fixed maturities $2,319,914 2,080,464 1,485,217
Policy and student loans 483,382 768,631 1,125,035
Short-term investments 333,850 176,941 174,972
Dividends on equity securities:
Common stock, including mutual
fund 28,247 24,418 17,230
------ ------ ------
3,165,393 3,050,454 2,802,454
Less investment expenses 166,518 299,683 284,449
------- ------- -------
$2,998,875 2,750,771 2,518,005
========== ========= =========
</TABLE>
22
<PAGE>
SOUTHERN SECURITY LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
FOR THE THREE MONTHS ENDED MARCH 31, 1996 AND 1995
3. Investments (continued):
(d) Investments on Deposit:
In order to comply with statutory regulations, investments were
on deposit with the Insurance Departments of certain states as
follows:
<TABLE>
<CAPTION>
1995 1994
---- ----
<S> <C> <C>
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
========= =========
</TABLE>
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:
<TABLE>
<CAPTION>
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
Deferred policy acquisition
costs at beginning of year $20,104,624 18,279,497 18,126,696
Policy acquisition costs deferred:
Commissions 1,418,644 2,200,505 3,423,146
Underwriting and issue costs 805,794 1,060,192 1,020,134
Other 554,955 706,558 926,392
SFAS 115 (1,669,164) 1,100,578 -
---------- --------- ---------
1,110,229 5,067,833 5,369,672
--------- --------- ---------
Amortization of deferred
policy acquisition costs (3,069,742) (3,242,706) (5,216,871)
---------- ---------- ----------
Deferred policy acquisition
costs at end of year $18,145,111 20,104,624 18,279,497
=========== ========== ==========
</TABLE>
23
<PAGE>
SOUTHERN SECURITY LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
FOR THE THREE MONTHS ENDED MARCH 31, 1996 AND 1995
5. Property and equipment:
Property and equipment consists of the following:
<TABLE>
<CAPTION>
March December
1996 1995 1994
---------- ---------------------------------------
<S> <C> <C> <C>
Land $982,027 982,027 982,027
Building and improvements 2,152,203 2,152,203 2,049,150
Furniture and equipment 965,023 1,013,268 1,025,436
------- --------- ---------
4,099,253 4,147,498 4,056,613
Less accumulated depreciation 1,279,565 1,270,317 1,232,443
--------- --------- ---------
$2,819,688 $2,877,181 2,824,170
========= ========= =========
</TABLE>
Depreciation expense for the years ended December 31, 1995, 1994 and
1993 totaled $150,213, $148,355, and $163,400, respectively.
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:
<TABLE>
<CAPTION>
March December
31, 1996 1995 1994
---------- --------------------------------------
<S> <C> <C> <C>
Life insurance $732,028 746,477 701,498
Annuities 297,152 296,242 332,490
Accident & health
insurance 8,558 7,779 7,657
--------- ---------- ---------
Total life
insurance policies $1,037,738 $1,050,498 1,041,645
========== ========== =========
</TABLE>
Life insurance in-force aggregated approximately $1.3 billion and $1.5
billion at December 31, 1995, and 1994, 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.
24
<PAGE>
SOUTHERN SECURITY LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
FOR THE THREE MONTHS ENDED MARCH 31, 1996 AND 1995
6. Future policy benefits (continued):
For non-universal life policies written during 1983 through 1988,
interest rates used are 8.0 percent for policy years one through five,
decreasing by .1 percent per year for policy years six through twenty,
to 6.5 percent for policy years twenty-one and thereafter. For
non-universal life policies written in 1982 and prior, interest rates
vary, depending on policy type, from 7 percent for all policy years to
6 percent for policy years one through five and 5 percent for years
six and thereafter. For universal life policies written since 1988,
the interest rate used is a credited rate based upon the Company's
investment yield plus 1 percent.
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, 1995, 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 $525,662, $585,957 and
$510,469 included in reinsurance ceded, and received recoveries of
$204,171, $514,868 and $405,293 included in annuity, death and other
benefits for the years ended December 31, 1995, 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. Assets
with a market value approximating the balance of policyholder's
account balances less policy loans, on a statutory basis, ceded to the
reinsurer are held in trust for benefit of the Company. The market
value of those assets was $6,702,079 at December 31, 1995.
25
<PAGE>
SOUTHERN SECURITY LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
FOR THE THREE MONTHS ENDED MARCH 31, 1996 AND 1995
7. Reinsurance (continued):
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 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 recover-ability of such
costs. Based upon management's and actuarial evaluation of such costs,
approximately $200,000, $500,000 and $300,000 of the amount deferred
was amortized against deferred acquisition costs during 1995, 1994 and
1993, respectively.
For the years ended December 31, 1995 and 1994, the Company ceded
premiums of $675,770 and $758,956, included in re-insurance ceded, and
received recoveries of $459,090 and $386,509, included in annuity,
death and other benefits, respectively. The funds held in reinsurance
treaties with reinsurer of $977,416 and $700,701 represent the 18%
share of policy loans ceded to the reinsurer 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
26
<PAGE>
SOUTHERN SECURITY LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
FOR THE THREE MONTHS ENDED MARCH 31, 1996 AND 1995
9. Note Payable to Related Party (continued):
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.
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, 1995, 1994 and 1993 is
summarized as follows:
<TABLE>
<CAPTION>
1995 1994 1993
------ ------ -----
<S> <C> <C> <C>
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
======= ======= =====
</TABLE>
27
<PAGE>
SOUTHERN SECURITY LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
FOR THE THREE MONTHS ENDED MARCH 31, 1996 AND 1995
10. Income taxes (continued):
Income tax expense for the years ended December 31, 1995, 1994 and
1993 differs from "expected" tax (computed by applying the U.S.
federal income tax rate of 35% in 1995 and 1994 and 34% in 1993 to
pretax income) as a result of the following:
<TABLE>
<CAPTION>
1995 1994 1993
----------- -------- ------
<S> <C> <C> <C>
Computed "expected" tax expense $ 446,200 541,000 240,000
Increase (reduction) in income
taxes resulting from:
Small life insurance
company deduction (340,200) (83,000) (252,100)
Changes in the valuation allow-
ance for deferred tax assets,
allocated to income tax expense 62,600 14,000 49,000
(Over) under accrual of prior
year expense 11,000 29,000 (37,000)
State taxes, net of federal
income tax benefit (14,600) 28,000 -
Other, net (5,000) 1,000 1,100
------- ----- -----
$160,000 530,000 1,000
======== ======= =====
</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.
At December 31, 1995, 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
28
<PAGE>
SOUTHERN SECURITY LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
FOR THE THREE MONTHS ENDED MARCH 31, 1996 AND 1995
10. Income taxes (continued):
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 1995, 1994 and 1993, AMT exceeded
regular tax by $62,600, $14,000, and $49,000, respectively. At
December 31, 1995, the AMT tax credit available to reduce future
regular tax totaled $333,600.
The principal elements of deferred income taxes consist of the
following:
<TABLE>
<CAPTION>
1995 1994 1993
--------- -------- -------
<S> <C> <C> <C>
Deferred policy acquisition costs $(783,300) 627,000 (131,000)
Future policy benefits 305,300 (42,000) (11,000)
Differences in bases in investments 299,500 (197,000) (9,000)
Other (42,500) 42,000 (9,000)
$(221,000) 430,000 (142,000)
======== ======= =======
</TABLE>
29
<PAGE>
SOUTHERN SECURITY LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
FOR THE THREE MONTHS ENDED MARCH 31, 1996 AND 1995
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, 1995 and 1994 are presented below:
<TABLE>
<CAPTION>
1995 1994
---------- -------
<S> <C> <C>
Deferred tax assets:
Unearned premiums, due to deferral of
"front-end" fee for financial
reporting purposes $3,431,100 $3,920,000
Policy liabilities and accruals,
principally due to adjustments
to reserves for tax purposes 1,984,000 1,800,000
Other 39,200 19,000
Investments - 518,000
Alternative minimum tax credit
carry forwards 333,600 271,000
------- -------
Total gross deferred tax assets 5,787,900 6,528,000
Less valuation allowance (333,600) (271,000)
-------- --------
Net deferred tax assets 5,454,300 6,257,000
--------- ---------
Deferred tax liabilities:
Deferred acquisition costs,
principally due to deferrals
for financial reporting
purposes (5,862,500) (6,646,000)
Other (62,800) (85,000)
Investments (434,000) -
-------- -----
Total gross deferred tax liabilities (6,359,300) (6,731,000)
---------- ---------
Net deferred tax liability $(905,000) (474,000)
======== ========
</TABLE>
The net change in the total valuation allowance for the years ended
December 31, 1995, 1994, and 1993 was an increase of $62,000, $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
30
<PAGE>
SOUTHERN SECURITY LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
FOR THE THREE MONTHS ENDED MARCH 31, 1996 AND 1995
10. Income taxes (continued):
deductible differences, net of the existing valuation
allowances at December 31, 1995.
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 represent unearned commission
advances paid to Insuradyne. The Company incurred commission expense
to Insuradyne aggregating $422,121, $582,059 and $910,936, in 1995,
1994, and 1993, respectively. These amounts are included as components
of acquisition costs deferred and related amortization. Insuradyne
incurred insurance-related expenses aggregating $35,271, $192,332, and
$230,478 in 1995, 1994 and 1993, respectively.
12. Agents' Incentive Stock Bonus Plan:
The Company had 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. 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
31
<PAGE>
SOUTHERN SECURITY LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
FOR THE THREE MONTHS ENDED MARCH 31, 1996 AND 1995
13. Disclosures About Fair Value of Financial Instruments
(continued):
by the Company in estimating fair values of financial instruments as
disclosed herein:
Cash and cash equivalents, short-term investments and policy and
student loans: The carrying amount reported in the balance sheet for
these instruments approximate their fair value.
Investment securities available-for-sale and held-to-maturity: Fair
value for fixed maturity and equity securities is based on quoted
market prices at the reporting date for those or similar investments.
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.
<TABLE>
<CAPTION>
1995 1994
----------------------------- -----------------------------
Carrying Estimated Carrying Estimated
amount fair value amount fair value
<S> <C> <C> <C> <C>
Financial assets:
Fixed maturities
held to Maturity
(see note 3) $15,165,395 15,494,540 $12,816,337 12,474,924
Fixed maturities
Available for
Sale (see note 3) 21,812,096 21,812,096 18,641,197 18,641,197
Equity securities
Available for sale 1,715,386 1,715,386 1,380,761 1,380,761
Policy and student
loans 9,971,653 9,971,653 8,866,968 8,866,968
Short-term invest-
ments 1,499,100 1,499,100 1,875,758 1,875,758
Cash and cash
equivalents 406,752 406,752 638,079 638,079
Financial liabilities:
Policy liabilities-
Policyholders'
Account balances 50,624,276 50,624,276 47,618,490 47,618,490
</TABLE>
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.
32
<PAGE>
SOUTHERN SECURITY LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
FOR THE THREE MONTHS ENDED MARCH 31, 1996 AND 1995
14. Legal proceedings (continued):
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.
33
<PAGE>
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operation.
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.
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. Should a policy
surrender in its early years, the Company assesses a surrender fee against these
same cash accumulations, based on 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 (FAS 97), premiums received from policyholders on universal
life products are credited to policyholder 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 suggests
that earlier estimates be revised. Thus, variations in the amortization of the
deferred policy acquisition costs, from one period to the next, are a normal
aspect of universal life insurance business
34
<PAGE>
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operation (continued).
and are generally attributed to the recognition of current and emerging
experience in accordance with the principles of FAS 97.
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.
An additional source of income to the Company is investment revenue.
The Company invests those funds deposited by policy-holders of universal life
and annuity products in debt and equity securities in order to earn interest and
dividend income, a portion of which is credited back to the policyholders.
Interest rates and maturities of the Company's investment portfolio play a part
in determining the interest rates credited to policyholders.
Product profitability is affected by several different factors, such as
mortality experience ( actual versus expected), interest rate spreads (excess
interest earned over interest credited to policyholders) and controlling policy
acquisition costs and other costs of operation. The results of any one reporting
period may be significantly affected by the level of death claims or other
policyholder benefits incurred due to the Company's relatively small size.
(The remainder of this page is intentionally left blank)
35
<PAGE>
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operation (continued).
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 March 31 (Increase or Decrease)
1996 1995 1994 96-95 95-94
------ ------ ------ ------- ------
<S> <C> <C> <C> <C> <C>
Premium Income 69% 74% 70% (9%) 2%
Net Investment Income 31 26 28 12% (11)
Other Income 2
Total Revenues 100% 100% 100% (3%) (2%)
Losses, claims and
loss adjustment
expenses 42% 35% 22% 19% 56%
Acquisition costs 28 22 37 17% (41)
Other operating
costs and
expenses 22 23 27 (7%) (19)
---- ---- ---- ---- ----
Total Expenses 92% 80% 86% 12% (9%)
Income before income
taxes 8% 20% 14% (61%) 44%
Provision for
taxes 2 7 5 (71%) 46
--- --- ---- ---- ----
Net Income 6% 13% 9% 56% 43%
</TABLE>
Results of Operations.
New business written was 124, 189 and 330 million dollars in face value
for 1995, 1994 and 1993, respectively. New business written declined again in
1995, as it did in 1994, as the Company continued its efforts to license new
products and develop marketing distribution channels. Delays in obtaining
admission of new products into various states has cost the Company anticipated
sales as well as agency forces over the past two years. Yet, by year end 1995,
some key marketing strategies were accomplished which have already begun to show
a positive impact on 1996 production figures. One such marketing strategy
included the hiring of a new marketing director. The new director, a seasoned
insurance executive, brings to the Company a product expertise and market
expansion knowledge that will enable the Company to accomplish its long term
goals.
36
<PAGE>
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operation (continued).
Another key development was the creation of a lead generation program designed
to provide new business leads in order to increase production.
The first quarter 1996 new business trend continued that of the past
two years. However, second quarter is already showing increases over previous
periods. The implementation of new marketing concepts and programs is having a
positive impact on new business production in the second quarter and the Company
anticipates this trend continuing throughout 1996. The Company introduced its
new BasicLife series products which are partially responsible for the increased
production shown thus far in second quarter. In addition, increased recruiting
and the hiring of Statewide Sales Directors will benefit future production.
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 1993 versus 1994, 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.
Premium income for the first quarter of 1996 was down from that of the
same period in 1995. Insurance in force impacts this figure as well as reduced
new business production. As stated above, a reduction in business in force means
a reduction to administrative and mortality fees. As new production increases,
which is anticipated, this trend should cease and a more positive trend result.
Increased investment in debt securities coupled with reduced expenses
for student loan processing accounted for the 9% increase in investment income
for the year 1995. The Company's investment in student loans is declining each
year in response to increased costs designated by the government. This trend is
expected to continue and show significant change in 1996.
37
<PAGE>
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operation (continued).
Investment income for first quarter 1996 grew by 12% from that of 1995.
This is due, in part, to increased investments as well as increased rental
income. While investment income grew, the investment expenses related to that
income did not grow at the same rate. Here again, the expenses associated with
student loans have declined due to out-sourcing.
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.
For first quarter 1996, death claims showed a significant increase. The
Company anticipates that this abnormality will smooth, over the remainder of the
year. As discussed previously, a significant increase in death claims in any
given quarter can have a noticeable impact on operating results. Second quarter
1996 claims are far behind those of first quarter so this should help to smooth
the effects of death claims in second quarter.
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.
The amortization of deferred policy acquisition costs for the first
quarter of 1996 increased over that of the same period in 1995. The lapses of
the past several years in conjunction with the decreased new business are having
an impact on the amortization of the remaining deferred acquisition costs, even
after unlocking considerations.
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
38
<PAGE>
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operation (continued).
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.
Operating Expenses for first quarter 1996 were down 7% from the same
period for 1995. The Company continues to make every effort to contain costs,
while promoting sales.
Reinsurance premiums ceded for 1995 and 1994 were $2,112,884 and
$2,508,749, respectively. Policy benefits were reduced due to reinsurance
$405,345 and $679,622 for 1995 and 1994 respectively. Reinsurance commissions
amounted to $397,253 for 1995 and $445,309 for 1994. In addition, under the
terms of the Company's treaty with Mega Life (formerly United Group Insurance
Company) expenses of $911,452 were transferred to the reinsurer for 1995 and
$1,163,842 for 1994. The Company has also amortized the remaining $200,000 of
deferred gain, under the aforementioned treaty, against deferred acquisition
costs for 1995 (see Note 7).
Reinsurance premiums ceded for the first quarter 1996 amounted to
$434,811. Policy benefits were reduced by $485,011, reinsurance commissions
received were $74,905 and expenses of $219,173 were transferred to the
reinsurers.
Income, before income taxes, in 1995 was $1,274,903 compared to
$1,543,979 in 1994 and $705,652 in 1993. The 1995 income declined 17% from prior
year as a result of reduced premium income and level amortization expenses. 1993
income suffered from higher death benefit expenses than the following two years.
Income, before income taxes, for first quarter 1996, was down in
comparison with first quarter 1995. Reduced premium revenues, increased death
and increased amortization of deferred acquisition costs account for this change
in income for first quarter. The Company anticipates an increase in premium
revenue throughout the year and a softening in death claim expenses.
Liquidity and Capital Resources.
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 required 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
39
<PAGE>
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operation (continued).
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 market value, with unrealized
holding gains and losses included in earnings. All other debt and equity
securities not included in the above two categories are classified as securities
available-for-sale. Securities available-for-sale are carried at 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's insurance operations have historically provided adequate
positive cash flow enabling the Company to continue to meet operational needs as
well as increase its investment-grade securities to provide ample protection for
policyholders.
Student loans are a service the Company makes available to the public
as well as an investment. While the Company anticipates the seasonal demand for
student loan funds and the subsequent sale of such loans to the Student Loan
Marketing Association (SLMA), there are times when additional funds are required
to meet demand for student loans until such time as the sale thereof to SLMA can
be completed. In 1995 the Company renewed its $15,000,000 line of credit with
SLMA in order to meet these seasonal borrowing requirements. The Company made
several draws against this line of credit throughout the seasonal period. The
Company anticipates continued borrowings to be made through this line of credit
with SLMA to the extent that student loan borrowings are required for 1996. SLMA
offers a more competitive rate of interest on such borrowings than the Company
has been able to obtain through banks.
(The remainder of this page is intentionally left blank)
40
<PAGE>
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operation (continued).
The following table displays pertinent information regarding the
short-term borrowings of the Company as they relate to these credit lines:
<TABLE>
<CAPTION>
1995 1994 1993 1993
==== ==== ==== ====
SLMA SLMA SUN TRUST SLMA
<S> <C> <C> <C> <C>
Balance
@ Year
End $1,400,553.30 $891,823.47 - 0 - $9,438,067.96
Weighted
Avg.
Interest
@ Year
End 6.3705% 6.566% - 0 - 3.975%
Maximum
Balance $1,891,823.47 $3,823,957.61 $1,910,000.00 $9,438,067.96
Average
Balance $1,159,300.15 $1,443,478.84 $1,276,666.67 $4,516,551.99
Weighted
Rate 6.3705% 6.1024% 6.0000% 3.95881%
</TABLE>
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.
Except as otherwise provided herein, management believes that cash flow
levels in future periods will be such that the Company will be able to continue
its prior growth patterns in writing life insurance policies, fund Federally
insured student loans and meet normal operating expenses.
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.
41
<PAGE>
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operation (continued).
The Company recently executed a lease with a new tenant for the
remaining 1200 square foot of rentable space on the first floor of the office
building. The contract includes the build-out of the space to serve as office
space. The Company has agreed to cover expenditures of the build-out and the
lessee has agreed to rent the space for a five year period. The build-out is
estimated to have a cost of $16,000. The Company, at this time, has no other
material commitments for capital expenditures through the balance of this year.
42
<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:
MAY 17, 1996 BY: /s/ David C. Thompson
David C. Thompson
Executive Vice-President, Secretary
Treasurer, Chief Operating Officer
and Director
43
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 7
<S> <C> <C>
<PERIOD-TYPE> 3-MOS YEAR
<FISCAL-YEAR-END> DEC-31-1996 DEC-31-1995
<PERIOD-END> MAR-31-1996 DEC-31-1995
<DEBT-HELD-FOR-SALE> 21,123,879 21,812,096
<DEBT-CARRYING-VALUE> 16,696,686 15,165,395
<DEBT-MARKET-VALUE> 16,837,380 15,494,540
<EQUITIES> 1,970,090 1,715,386
<MORTGAGE> 0 0
<REAL-ESTATE> 0 0
<TOTAL-INVEST> 48,316,854 50,186,208
<CASH> 1,420,619 406,752
<RECOVER-REINSURE> 508,264 514,341
<DEFERRED-ACQUISITION> 18,497,167 18,145,111
<TOTAL-ASSETS> 81,374,238 81,872,350
<POLICY-LOSSES> 1,037,738 1,050,498
<UNEARNED-PREMIUMS> 9,166,724 9,116,890
<POLICY-OTHER> 765,340 191,955
<POLICY-HOLDER-FUNDS> 56,415 57,444
<NOTES-PAYABLE> 1,000,000 2,400,553
0 0
0 0
<COMMON> 1,907,989 1,907,989
<OTHER-SE> 4,011,519 4,011,519
<TOTAL-LIABILITY-AND-EQUITY> 81,374,238 81,872,350
1,979,788 8,158,938
<INVESTMENT-INCOME> 866,597 2,998,875
<INVESTMENT-GAINS> 13,387 60,237
<OTHER-INCOME> 0 0
<BENEFITS> 1,216,441 4,048,125
<UNDERWRITING-AMORTIZATION> 796,178 3,069,742
<UNDERWRITING-OTHER> 599,565 2,735,280
<INCOME-PRETAX> 225,088 1,274,903
<INCOME-TAX> 63,923 160,000
<INCOME-CONTINUING> 161,165 1,114,903
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 161,165 1,114,903
<EPS-PRIMARY> .08 .58
<EPS-DILUTED> .08 .58
<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>
