<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, 1997
( ) 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, 1997 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, 1997
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, 1996 and
March 31, 1997 3-4
Statements of Income and Retained Earnings -
Three Months Ended March 31, 1997 and 1996 5
Shareholders' Equity 6
Statement of Cash Flows - March 31, 1997 and 1996 7-8
Notes to Financial Statements 9-32
ITEM 2
Management's Discussion and Analysis of the
Statements of Income March 31, 1997 33-42
Signature Page 43
2
<PAGE>
SOUTHERN SECURITY LIFE INSURANCE COMPANY
Balance Sheets
March 31, 1996 and December 31, 1996
<TABLE>
<CAPTION>
Assets March 31, December 31
1997 1996
<S> <C> <C>
Investment (note 3):
Fixed maturities held to maturity
(fair value, $13,517,283 and
$15,140,919 at March 31, 1997
and December 31, 1996, respectively) $13,506,712 $14,974,962
Securities available for sale,
at fair value:
Fixed maturities (cost of
$26,810,425 at March 31,
1997 and $24,298,618 at
December 31, 1996) 26,441,317 24,476,239
Equity securities (cost,
$2,005,143 and $0, at
March 31, 1997 and
December 31, 1996,
respectively) 1,922,563 -
Policy and student loans 7,188,541 7,315,809
Short-term investments 100,000 4,539,106
Other invested assets 4,367 13,100
49,163,500 51,319,216
Cash and cash equivalents 1,964,150 206,056
Accrued investment income 989,114 687,699
Deferred policy acquisition costs
(note 4) 16,838,925 16,979,612
Policyholders' account balances on
deposit with reinsurer (Note 7) 8,546,224 8,522,449
Reinsurance receivable (note 7) 368,508 379,692
Receivables:
Agent balances 484,489 588,290
Other 463,830 340,680
Refundable income taxes 43,295 -
Property and equipment, net,
at cost (note 5) 2,758,209 2,785,666
81,620,244 $81,809,360
</TABLE>
See accompanying notes to financial statements
3
<PAGE>
SOUTHERN SECURITY LIFE INSURANCE COMPANY
Balance Sheets (continued)
March 31, 1996 and December 31, 1996
<TABLE>
<CAPTION>
March 31, December 31
Liabilities and Shareholders' Equity 1997 1996
<S> <C> <C>
Liabilities:
Policy liabilities and accruals (notes 6 and 7):
Future policy benefits 977,107 985,720
Policyholders' account balances 52,542,431 52,347,996
Unearned premiums 8,143,490 8,249,190
Other policy claims and benefits
payable 420,006 293,221
Other policyholders' funds, dividend
and Endowment accumulations 65,750 59,596
Funds held in reinsurance treaties
with Reinsurers (note 7) 1,244,175 1,193,366
Note payable (note 8) -
Note payable to related party
(note 9) 1,000,000 1,000,000
Due to affiliated insurance
agency (note 11) - 33,411
General expenses accrued 1,235,051 894,131
Unearned investment income 217,802 228,032
Other liabilities 55,110 204,845
Income taxes payable - 70,164
Deferred income taxes (note 10) 449,315 588,100
66,350,237 66,147,772
Shareholders' equity (notes 2,3 and 12):
Common stock, $1 par, authorized
2,000,000 shares; issued and out-
standing, 1,907,989 shares 1,907,989 1,907,989
Capital in excess of par 4,011,519 4,011,519
Unrealized appreciation (depreciation)
on securities available for sale (321,527) (8,880)
Retained earnings 9,672,026 9,750,960
15,270,007 15,661,588
$81,620,244 $81,809,360
</TABLE>
4
<PAGE>
SOUTHERN SECURITY LIFE INSURANCE COMPANY
Statements of Income and Retained Earnings
For The Three Months Ended March 31, 1997 and 1996
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
1997 1996
<S> <C> <C>
Revenues:
Premium and policy charges $2,499,040 $2,414,599
Less reinsurance ceded (398,608) (434,811)
Net premium income 2,100,432 1,979,788
Net investment income
(Notes 3 and 8) 861,081 866,597
Realized gain on invest-
ments (Note 3) (114,354) 13,387
$2,847,159 $2,859,772
Benefits, losses & expenses:
Annuity, death, surrender and
other benefits 1,094,880 1,229,201
Decrease in future policy
benefits (8,613) (12,760)
Amortization of deferred
policy acquisitions
costs (Note 4) 948,033 796,178
Operating Expenses (Note 11) 900,393 599,565
Interest expense with
related party (Note 9) 22,500 22,500
$2,957,193 $2,634,684
Income (loss) before income
taxes (110,034) 225,088
Income tax expense
(benefit) (Note 10) (31,100) 63,923
Net income (loss) $(78,934) $161,165
Retained Earnings,
beginning 9,750,960 8,358,455
Retained Earnings, ending 9,672,026 8,519,620
Earnings per share,
based on 1,907,989
weighted average shares
outstanding in 1997 and 1996 .(04) .08
</TABLE>
See notes to financial statements.
5
<PAGE>
SOUTHERN SECURITY LIFE INSURANCE COMPANY
Statements of Shareholders' Equity
Period ended March 31, 1997 and December 31, 1996 and 1995
<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,
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
Net income for
the year to
date - - - - - 1,392,505
Unrealized
depreciation
of securities
available
for sale
investments - - - (557,527) - -
Balances,
December 31,
1996 1,907,989 $1,907,989 4,011,519 (8,880) - 9,750,960
Net income for
the year to
date - - - - - (78,934)
Unrealized
depreciation
of securities
available
for sale
investments - - - (312,647) - -
Balances,
March 31,
1997 1,907,989 $1,907,989 4,011,519 (321,527) - 9,672,026
</TABLE>
See accompanying notes to financial statements.
6
<PAGE>
SOUTHERN SECURITY LIFE INSURANCE COMPANY
Statements of Cash Flows
For Three Months Ended March 31, 1997 And 1996
<TABLE>
<CAPTION>
1997 1996
<S> <C> <C>
Cash flows provided by (used in) operating activities:
Net income (including net realized
gains and losses on investments) ($78,934) $182,085
Adjustments to reconcile net
cash provided by (used in)
operating activities:
Depreciation 52,091 47,235
Net realized (gains) or
losses on investments 114,354 (13,387)
Loss on disposal of property,
plant and equipment 99 27
Deferred income taxes 386,879 613,769
Amortization of deferred
policy acquisition costs 948,033 796,178
Acquisition costs deferred (807,346) (1,148,234)
Change in assets and liabilities
affecting cash provided by
operations:
Accrued investment income (301,415) (90,850)
Due from affiliated insurance
agency - (37,628)
Accounts receivable (19,349) 119,492
Reinsurance Receivable 11,184 6,077
Other policy claims and
future benefits payable 118,172 560,625
Policyholders' Account Balances 581,346 582,336
Funds held under reinsurance 50,809 47,386
Unearned premiums (305,968) (245,675)
Dividend and endowment
accumulations 6,154 (1,029)
Payable to affiliated
insurance agent (33,411) (243,368)
Income tax payable (70,164) -
Other liabilities 180,955 (110,902)
Income tax receivable (43,295) -
Net cash provided by (used in)
operating activities 790,194 1,064,137
</TABLE>
(Continued)
7
<PAGE>
SOUTHERN SECURITY LIFE INSURANCE COMPANY
Statements of Cash Flows
For Three Months Ended March 31, 1997 And 1996
<TABLE>
<CAPTION>
1997 1996
<S> <C> <C>
Cash flows from (used in) investing activities:
Purchase of investments:
Purchase of investments held to
maturity - (3,436,270)
Purchase of investments available
for sale (Equity & Fixed Maturity) (19,319,503) (2,168,200)
Proceeds from sale of held to
maturity securities 1,472,528 100,000
Proceeds from maturity of
available for sale securities - 77,060
Proceeds from sale of available
for sale securities (equity and
fixed maturity) 14,670,012 2,039,678
Proceeds from sale of held to maturity - 1,815,750
Net change in short term investments 4,439,106 (535,551)
Net change in policy and student loans 127,268 3,500,837
Net change in other investments - 1,848
Acquisition of property & equipment (10,825) (2,297)
Net cash provided by (used in)
investing activities 1,378,586 1,392,855
Cash flows from financing activities:
Receipts from universal life
and certain annuity policies
credited to policyholder
account balances 949,942 2,467,014
Return of policyholder account
balances on universal life
and certain annuity policies (1,360,628) (2,509,586)
Proceeds from short-term
borrowings - 2,500,000
Repayment of short-term
borrowings - (3,900,553)
Net cash provided by financing
activities (410,686) (1,443,125)
Increase (decrease) in cash and
Cash equivalents) 1,758,094 1,013,867
Cash and cash equivalents at
beginning of year 206,056 406,752
Cash and cash equivalents at
end of quarter $1,964,150 $1,420,619
</TABLE>
See notes to financial statements
8
<PAGE>
SOUTHERN SECURITY LIFE INSURANCE COMPANY
Notes to Financial Statements
For The Three Months Ended March 31, 1997 and 1996
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 (43%), Georgia (13%) and Texas (14%). None of
the remaining eleven states in which the Company is licensed to
conduct business account for over 10% of the Company's total
business.
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
9
<PAGE>
SOUTHERN SECURITY LIFE INSURANCE COMPANY
Notes to Financial Statements (continued)
For The Three Months Ended March 31, 1997 and 1996
1. Nature of business and summary of significant accounting
policies, continued
(a) 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 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
Investments in all debt securities and those equity securities
with readily determinable market values are classified into one
of three categories: held-to-maturity, trading or
available-for-sale. Classification of investments is based upon
management's current intent. Debt securities which management
has a positive intent and ability to hold until maturity are
classified as securities held-to-maturity and are carried at
amortized cost. Unrealized holding gains and losses on
securities held-to-maturity are not reflected in the financial
statements. Debt and equity securities that are purchased for
short-term resale are classified as trading securities. Trading
securities are carried at fair value, with unrealized holding
gains and losses included in
10
<PAGE>
SOUTHERN SECURITY LIFE INSURANCE COMPANY
Notes to Financial Statements (continued)
For The Three Months Ended March 31, 1997 and 1996
1. Nature of business and summary of significant accounting
policies, continued
(d) 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 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, 1996
and 1995, the Company did not have any investments
categorized as trading securities.
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 uncol-
lectible. The Company's policy is that policy loans are not 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, 1997 and 1996
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. 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 manage-ment has used to determine
the future recoverability 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
12
<PAGE>
SOUTHERN SECURITY LIFE INSURANCE COMPANY
Notes To Financial Statements (continued)
For The Three Months Ended March 31, 1997 and 1996
1. Nature of business and summary of significant accounting
policies, continued
(h) for possible adverse deviation from the estimates.
(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.
13
<PAGE>
SOUTHERN SECURITY LIFE INSURANCE COMPANY
Notes to Financial Statements (continued)
For The Three Months Ended March 31, 1997 and 1996
1. Nature of business and summary of significant accounting
policies, continued
(l) Reclassification
Certain amounts presented in the 1995 and 1994 financial
statements have been restated to conform to the 1996
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,(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.
14
<PAGE>
SOUTHERN SECURITY LIFE INSURANCE COMPANY
Notes to Financial Statements (continued)
For The Three Months Ended March 31, 1997 and 1996
2. Basis of financial statements, continued
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.
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,
1996, 1995 and 1994 and shareholders' equity as of December 31, 1996 and
1995 between the amounts reported on a statutory basis and the related
amounts presented on the basis of generally accepted accounting
principles is as follows:
(The remainder of this page is intentionally left blank)
15
<PAGE>
SOUTHERN SECURITY LIFE INSURANCE COMPANY
Notes to Financial Statements (continued)
For The Three Months Ended March 31, 1997 and 1996
2. Basis of financial statements, continued
<TABLE>
<CAPTION>
Shareholders'
Net income equity
Years ended December 31, December 31,
1996 1995 1994 1996 1995
<S> <C> <C> <C> <C> <C>
As reported
on a statutory
basis 1,022,183 $232,180 55,816 9,283,928 8,770,411
Adjustments:
Deferred policy
acquisition
costs, net (1,346,695) (290,344) 724,549 16,979,611 18,145,111
Future policy
benefits, un-
earned premiums
and policy-
holders' funds 1,626,090 1,006,862 586,243 (10,643,224) (12,340,766)
Deferred
income taxes (16,900) 221,000 (430,000) (588,100) (905,000)
Asset valuation
reserve - - - 307,364 807,899
Interest main-
tenance reserve (18,221) 24,909 (4,092) 209,736 227,957
Non-admitted
assets - - - 795,659 265,507
Unrealized gains
-SFAS 115 - - - 177,621 734,686
Capital and
surplus note - - - (1,000,000) (1,000,000)
Other adjustments,
net 126,048 (79,704) 81,463 138,993 120,805
Net increase
(decrease) 370,322 882,723 958,163 6,377,660 6,056,199
As reported on a
GAAP basis $1,392,505 1,114,903 1,013,979 15,661,588 14,826,610
</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
16
<PAGE>
SOUTHERN SECURITY LIFE INSURANCE COMPANY
Notes to Financial Statements (continued)
For The Three Months Ended March 31, 1997 and 1996
2. Basis of financial statements, continued
or less than the greater of: (a) 10% of the 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 1997 without prior approval is approximately
$1,022,183.
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, 1996.
3. Investments
(a) Equity Securities and Fixed Maturities
Equity securities consist of $0 and $1,715,385 of common stock at
December 31, 1996 and 1995 respectively.
Unrealized (depreciation) appreciation in investments in equity
securities for the years ended December 31, 1996, 1995, and 1994 is $0,
$406,611 and ($108,809), respectively.
The amortized cost and estimated market values of investments in debt
securities are as follows:
(The remainder of this page is intentionally left blank)
17
<PAGE>
SOUTHERN SECURITY LIFE INSURANCE COMPANY
Notes to Financial Statements (continued)
For The Three Months Ended March 31, 1997 and 1996
3. Investments, continued
(a) Continued
<TABLE>
<CAPTION>
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
<S> <C> <C> <C> <C>
December 31, 1996:
Held to maturity:
U.S. Treasury securities
and obligations of U.S.
government corporations
and agencies (guaranteed) $4,503,477 61,523 - 4,565,000
Corporate securities 9,461,064 120,955 - 9,582,019
Special revenue and special
assessment obligations
and all nonguaranteed
obligations of agencies and
authorities of governments
and their political subdivisions 1,010,421 - 16,521 993,900
14,974,962 182,478 16,521 15,140,919
Available for sale:
U.S. Treasury securities
and obligations of U.S.
government corporations
and agencies (guaranteed) 20,383,080 180,672 - 20,563,752
Corporate securities 3,585,084 - 2,084 3,583,000
Special revenue and special
assessment obligations
and all nonguaranteed
obligations of agencies
and authorities of governments
and their political subdivisions 330,454 - 967 329,487
24,298,618 180,672 3,051 24,476,239
$39,273,580 363,150 19,572 39,617,158
</TABLE>
18
<PAGE>
SOUTHERN SECURITY LIFE INSURANCE COMPANY
Notes to Financial Statements (continued)
For The Three Months Ended March 31, 1997 and 1996
3. Investments, continued
(a) Continued
<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 7,743,286 171,436 - 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
15,165,395 329,145 0 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 16,622 - 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
21,077,410 738,058 3,372 21,812,096
$36,242,805 1,067,203 3,372 37,306,636
</TABLE>
19
<PAGE>
SOUTHERN SECURITY LIFE INSURANCE COMPANY
Notes to Financial Statements (continued)
For The Three Months Ended March 31, 1997 and 1996
3. Investments, continued
(a) Continued
Unrealized (depreciation) appreciation of fixed maturities for
years ending December 31, 1996, 1995 and 1994 is ($720,253),
$2,779,872 and $(2,534,413) respectively.
The amortized cost and estimated fair value of fixed maturities
at December 31, 1996, by contractual maturity, are summarized
below. Expected maturities will differ from contractual
maturities because borrowers may have the right to call or prepay
obligations with or without call or prepayment penalties.
Fixed maturity securities held-to-maturity:
<TABLE>
<CAPTION>
Amortized Estimated
Cost Fair value
<S> <C> <C>
Due in one year or less $998,865 998,865
Due after one year through
five years 11,706,730 11,862,590
Due after five years through
ten years 983,382 1,010,000
Due after ten years 275,564 275,564
13,964,541 14,147,019
Mortgage backed securities 1,010,421 993,900
$14,974,962 15,140,919
Fixed maturity securities available-for-sale:
Due in one year or less 3,005,565 3,000,000
Due after one year through
5 years 12,011,351 12,057,800
Due after five years through
ten years 6,163,237 6,138,952
Due after ten years 2,788,011 2,950,000
23,968,164 24,146,752
Mortgage backed securities 330,454 329,487
$24,298,618 24,476,239
</TABLE>
20
<PAGE>
SOUTHERN SECURITY LIFE INSURANCE COMPANY
Notes to Financial Statements (continued)
For The Three Months Ended March 31, 1997 and 1996
3. Investments, continued
(a) 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>
1996 1995 1994
<S> <C> <C> <C>
Proceeds from sale of
equity securities $2,885,010 $854,339 $650,294
Proceeds from sale of
fixed maturities
available for sale 3,482,770 $1,809,750 -
Fixed maturities:
Gross realized gains 15,013 145,136 67,146
Gross realized (losses) (18,881) (119,908) (16,474)
Equity securities:
Gross realized gains 930,919 55,543 -
Gross realized (losses) (57,620) (20,540) -
$869,431 $60,231 $50,672
</TABLE>
Certain of the fixed maturity securities classified as available for
sale and held to maturity were called during the year ended December
31, 1996, 1995 and 1994 resulting in the following realized gains and
losses:
<TABLE>
<CAPTION>
1996 1995 1994
<S> <C> <C> <C>
Held to maturity:
Gross realized gains $71 $6 -
Available for sale:
Gross realized gains - - $10,060
$71 $6 $10,060
</TABLE>
21
<PAGE>
SOUTHERN SECURITY LIFE INSURANCE COMPANY
Notes to Financial Statements (continued)
For The Three Months Ended March 31, 1997 and 1996
3. Investments, continued
(b) Concentrations of credit risk
At December 31, 1996 and 1995, 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 $514,483 and $4,403,061 at December 31, 1996 and
1995, respectively, which are guaranteed by the U.S. government.
Subsequent to December 31, 1996, all of these loans were sold at
their unpaid principal balance.
(c) Investment Income
Net investment income for the quarters ended March 31, 1997 and
1996 consists of the following:
<TABLE>
<CAPTION>
1997 1996
<S> <C> <C>
Interest:
Fixed maturities $691,693 643,186
Policy and student loans 128,265 221,776
Short-term investments 75,486 34,528
Dividends on equity securities
Common stock, including mutual
fund 5,084 9,145
900,528 908,635
Less investment expenses 39,447 42,038
$861,081 866,597
</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:
<TABLE>
<CAPTION>
1996 1995 1994
<S> <C> <C> <C>
Florida $1,718,751 1,735,900 1,744,017
Alabama 100,000 100,000 100,000
South Carolina 306,028 304,696 305,356
Georgia 255,024 251,193 250,000
Indiana 199,752 - -
$2,579,555 2,391,789 2,399,373
</TABLE>
22
<PAGE>
SOUTHERN SECURITY LIFE INSURANCE COMPANY
Notes to Financial Statements (continued)
For The Three Months Ended March 31, 1997 and 1996
3. Investments, continued
(d) Continued
Certain of these assets, totaling approximately $650,000 for each
of the years ended December 31, 1996 and 1995, are restricted for
the future benefit of policyholders in a particular state.
4. Deferred policy acquisition costs
Deferred policy acquisition costs at December 31, 1996, 1995 and 1994
consist of the following:
<TABLE>
<CAPTION>
1996 1995 1994
<S> <C> <C> <C>
Deferred policy acquisition
costs at beginning of year 18,145,111 $20,104,624 18,279,497
Policy acquisition costs
deferred:
Commissions 1,030,875 1,418,644 2,200,505
Underwriting and issue
costs 652,868 805,794 1,060,192
Other 334,300 554,955 706,558
Change in unrealized
appreciation (depreciation) 181,196 (1,669,164) 1,100,578
2,199,239 1,110,229 5,067,833
Amortization of deferred
policy acquisition costs (3,364,738) (3,069,742) (3,242,706)
Deferred policy acquisition
costs at end of year 16,979,612 $18,145,111 20,104,624
</TABLE>
5. Property and equipment
Property and equipment consists of the following:
<TABLE>
<CAPTION>
March December
1997 1996 1995
<S> <C> <C> <C>
Land $982,027 $982,027 $982,027
Building and improvements 2,173,955 2,173,955 2,152,203
Furniture and equipment 1,027,052 1,019,621 1,013,268
4,183,034 4,175,603 4,147,498
Less accumulated depreciation 1,424,824 1,389,937 1,270,317
$2,758,209 $2,785,666 $2,877,181
</TABLE>
23
<PAGE>
SOUTHERN SECURITY LIFE INSURANCE COMPANY
Notes to Financial Statements (continued)
For The Three Months Ended March 31, 1997 and 1996
5. Property and equipment, continued
Depreciation expense for the years ended December 31, 1996, 1995 and 1994
totaled $151,950, $150,213, and $148,355, respectively.
6. Future policy benefits
At quarter ended March 31, 1997 and years ended December 31, 1996 and
1995, future policy benefits, exclusive of universal life and flexible
term annuities consist of the following:
<TABLE>
<CAPTION>
March 31, December 31,
1997 1996 1995
<S> <C> <C> <C>
Life insurance $658,807 $672,913 746,477
Annuities 309,651 304,394 296,242
Accident & health
insurance 8,649 8,413 7,779
Total life
insurance policies $977,107 $985,720 $1,050,498
</TABLE>
Life insurance in-force aggregated approximately $1.2 billion and $1.3
billion at December 31, 1996, and 1995, 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 credited rate based upon the Company's
investment yield plus 1 percent.
24
<PAGE>
SOUTHERN SECURITY LIFE INSURANCE COMPANY
Notes to Financial Statements (continued)
For The Three Months Ended March 31, 1997 and 1996
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, 1996, 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
$448,327, $525,662 and $585,957 included in reinsurance ceded, and
received recoveries of $608,355, $204,171 and $514,868 included in
annuity, death and other benefits for the years ended December 31, 1996,
1995 and 1994, 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 them responsible for
18% of all future claims and policyholder loans relating to the ceded
policies. In addition, the Company receives certain commission and
expense reimbursements.
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 recoverability of such costs. Based upon
management's and actuarial evaluation of such costs, approximately $0,
$200,000 and $500,000 of the amount deferred was amortized against
deferred acquisition costs during 1996, 1995 and 1994, respectively.
For the years ended December 31, 1996, 1995 and 1994, the Company ceded
premiums of $582,346, $675,770 and $758,956, included in reinsurance
ceded, and received recoveries of
25
<PAGE>
SOUTHERN SECURITY LIFE INSURANCE COMPANY
Notes to Financial Statements (continued)
For The Three Months Ended March 31, 1997 and 1996
7. Reinsurance, continued
$367,295, $459,090 and $386,509, included in annuity, death death and
other benefits, respectively. The funds held in reinsurance treaties with
reinsurer of $1,193,366 and $977,416 represent the 18% share of policy
loans ceded to the reinsurer at December 31, 1996 and 1995, respectively.
8. Notes Payable
The note payable of $0, and $1,400,553 at December 31, 1996 and 1995
respectively, secured by student loans equaling 115% of the unpaid
principal balance, relates to advances under a $5,000,000 line of credit
($5,000,000 available to be drawn at December 31, 1996). The note bears
interest at a variable rate and matures on September 18, 1997.
Interest expense relating to these notes payable during the three years
ended December 31, 1996, 1995 and 1994 totaled $12,094, $26,240, and
$60,864, 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, 1996, the note
bears interest at 9.0% percent (payable monthly); principal repayment is
contingent upon the Company maintain-ing 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 1996, 1995 and 1994 aggregated $90,000, $90,000, and
$90,000 respectively.
26
<PAGE>
SOUTHERN SECURITY LIFE INSURANCE COMPANY
Notes to Financial Statements (continued)
For The Three Months Ended March 31, 1997 and 1996
10. Income taxes
Total income taxes for the years ended December 31, 1996, 1995, and 1994
were allocated as follows:
<TABLE>
<CAPTION>
1996 1995 1994
<S> <C> <C> <C>
Net income 196,000 160,000 530,000
Unrealized appreciation
(depreciation) of
investments (675) 331,000 (319,500)
195,325 491,000 210,500
</TABLE>
Income taxes for the years ended December 31, 1996, 1995 and 1994 is
summarized as follows:
<TABLE>
<CAPTION>
1996 1995 1994
<S> <C> <C> <C> <C> <C> <C>
Current:
Federal $167,700 $370,800 $100,000
State 11,400 10,200 -
179,100 381,000 100,000
Deferred:
Federal 14,450 (188,700) 387,000
State 2,450 (32,300) 43,000
16,900 (221,000) 430,000
$196,000 $160,000 $530,000
</TABLE>
27
<PAGE>
SOUTHERN SECURITY LIFE INSURANCE COMPANY
Notes to Financial Statements (continued)
For The Three Months Ended March 31, 1997 and 1996
10. Income taxes, continued
Income tax expense for the years ended December 31, 1996, 1995 and 1994
differs from "expected" tax (computed by applying the U.S. federal
income tax rate of 35% in 1996, 35% in 1995 and 1994 and to pretax
income) as a result of the following:
<TABLE>
<CAPTION>
1996 1995 1994
<S> <C> <C> <C>
Computed "expected" tax expense 540,100 446,200 541,000
Increase (reduction) in income
taxes resulting from:
Small life insurance
company deduction (346,000) (340,200) (83,000)
Changes in the valuation
allowance for deferred
tax assets, allocated to
income tax expense 64,900 62,600 14,000
(Over) under accrual of
prior year expense (82,000) 11,000 29,000
State taxes, net of federal
income tax benefit 9,000 (14,600) 28,000
Other, net 10,000 (5,000) 1,000
$196,000 $160,000 530,000
</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, 1996, the balance of the Policyholders' Surplus account
aggregated approximately $236,000. The Company has not recorded
deferred income taxes totaling approximately
28
<PAGE>
8
SOUTHERN SECURITY LIFE INSURANCE COMPANY
Notes to Financial Statements (continued)
For The Three Months Ended March 31, 1997 and 1996
10. Income taxes, continued
$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 1996, 1995 and 1994, AMT exceeded regular tax by
$64,900, $62,600, and $14,000, respectively. At December 31, 1996, the
AMT tax credit available to reduce future regular tax totaled $398,500.
The principal elements of deferred income taxes consist of the
following:
<TABLE>
<CAPTION>
1996 1995 1994
<S> <C> <C> <C>
Deferred policy acquisition costs (431,500) $(155,500) 213,000
Future policy benefits 532,000 (23,000) 175,000
Other (83,600) (42,500) 42,000
16,900 (221,000) 430,000
</TABLE>
The tax effect of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at
December 31, 1996 and 1995 are presented below:
<TABLE>
<CAPTION>
1996 1995
<S> <C> <C>
Deferred tax assets:
Unearned premiums, due to deferral of
"front-end" fee $3,180,000 $3,542,000
Policy liabilities and accruals,
principally due to adjustments
to reserves for tax purposes 1,814,000 1,984,000
Deferred policy acquisition costs
related to unrealized appreciation
(depreciation) 68,900 103,100
Other 141,900 39,200
Alternative minimum tax credit
carry forwards 398,500 333,600
Total gross deferred tax assets 5,603,300 6,001,900
Less valuation allowance (398,500) (333,600)
Net deferred tax assets 5,204,800 5,668,300
</TABLE>
29
<PAGE>
SOUTHERN SECURITY LIFE INSURANCE COMPANY
Notes to Financial Statements (continued)
For The Three Months Ended March 31, 1997 and 1996
10. Income taxes, continued
<TABLE>
<CAPTION>
1996 1995
<S> <C> <C>
Deferred tax liabilities:
Deferred policy acquisition costs,
principally due to
deferrals (5,645,000) (6,076,500)
Other (81,100) (62,800)
Unrealized appreciation (66,800) (434,000)
Total gross deferred tax liabilities (5,792,900) (6,573,300)
Net deferred tax asset (liability) (588,100) (905,000)
</TABLE>
The net change in the total valuation allowance for the years ended
December 31, 1996, 1995, and 1994 was an increase of $64,900, $62,000
and $14,000, respectively.
In assessing the realizability of deferred tax assets, management
considers whether it is more likely than not that some portion or all
of the deferred tax assets will not be realized. The ultimate
realization of deferred tax assets is dependent upon the generation of
future taxable income during the periods in which those temporary
differences become deductible. Management considers the scheduled
reversal of deferred tax liabilities, projected future taxable income,
and tax planning strategies in making this assessment. Based upon the
level of historical taxable income and projections for future taxable
income over the periods which the deferred tax assets are deductible,
management believes it is more likely than not the Company will
realize the benefits of these deductible differences, net of the
existing valuation allowances at December 31, 1996.
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 $344,904, $422,121 and $582,059, in 1996,
1995, and 1994, respectively. These amounts are included as components
of acquisition costs
30
<PAGE>
SOUTHERN SECURITY LIFE INSURANCE COMPANY
Notes to Financial Statements (continued)
For The Three Months Ended March 31, 1997 and 1996
11. Related party transactions continued
deferred and related amortization. Insuradyne incurred
insurance-related expenses aggregating $31,703, $35,271, and $192,332
in 1996, 1995 and 1994, 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 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.
31
<PAGE>
SOUTHERN SECURITY LIFE INSURANCE COMPANY
Notes to Financial Statements (continued)
For The Three Months Ended March 31, 1997 and 1996
13. Disclosures About Fair Value of Financial Instruments,
continued
The following table presents the carrying amounts and estimated fair
values of financial instruments held at December 31, 1996 and 1995.
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>
1996 1995
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) $14,974,962 15,140,919 $15,165,395 15,494,540
Fixed maturities
Available for
sale (see note 3) 24,476,239 24,476,239 21,812,096 21,812,096
Equity securities
Available for sale 0 0 1,715,386 1,715,386
Policy and student
loans 7,315,809 7,315,809 9,971,653 9,971,653
Short-term invest-
ments 4,539,106 4,539,106 1,499,100 1,499,100
Cash and cash
equivalents 206,056 206,056 406,752 406,752
Financial liabilities:
Policy liabilities-
Policyholders'
account balances 52,347,996 52,347,996 50,624,276 50,624,276
</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.
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.
32
<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 Statement of Financial
Accounting Standards No. 97 (SFAS 97), premiums received from policyholders on
universal life products are credited to policyholder account balances, a
liability, rather than income. Revenues 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 SFAS 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. SFAS 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
33
<PAGE>
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operation.
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 SFAS 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)
34
<PAGE>
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operation.
The following table sets forth certain percentages reflecting financial
data and results of operations (a) for 1997, 1996 and 1995 premium and
investment revenues and (b) for period to period increases and (decreases).
<TABLE>
<CAPTION>
Relationships to
Total Revenues Period to Period
Period Ended March 31 (Increase or Decrease)
1997 1996 1995 97-96 96-95
<S> <C> <C> <C> <C> <C>
Insurance Revenues 74% 69% 74% 6% (9%)
Net Investment Income 26 31 26 (15%) 12%
Other Income
Total Revenues 100% 100% 100% 0% (3%)
Losses, claims and
loss adjustment
expenses 38% 42% 35% (11%) 19%
Acquisition costs 33 28 22 19% 17%
Other operating
costs and
expenses 32 22 23 48% (7%)
Total Expenses 103% 92% 80% 12% 12%
Income before income
taxes (4%) 8% 20% (149%) (61%)
Provision for
taxes 1 2 7 (148%) (71%)
Net Income (3%) 6% 13% (149%) 56%
</TABLE>
Results of Operations.
New business written was 122, 124 and 189 million dollars in face value
for 1996, 1995 and 1994, respectively. While the face amount issued declined
again in 1996, new business production actually increased. The company entered a
new market known as the final expense market. Generally, policies issued in this
market are of a lesser face value than those of the Universal Life market. That
being the case, the face amount of insurance appears to have declined, however
the actual number of policies issued increased. In 1995 the Company issued 1,696
new policies. In 1996, 2,702 policies were issued for an increase of 59%. The
Company is encouraged by these results and anticipates a continuation of this
trend throughout 1997.
35
<PAGE>
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operation.
Premium and policy charges for 1996 was recorded at $7.7 million, 1995
was recorded at $7.9 million and 1994 at $9.1 million. While policy production
was up for 1996, premium and policy charges went down.
The first quarter new business trend continued as in the past three
years. The new Basic Life series products represented 63% of all new business
production.
The 1996 premium and policy charges for 1996 was recorded at 7.7%.
Several factors have combined to create this decline. Continued lapsation in the
universal life book of business has resulted in reduced revenues in
administrative and mortality fees. New production has not increased as
significantly as would be needed to be beneficial and the new product currently
being marketed has lower premiums than those of the universal life product.
Surrender fee income declined 13.7% from that of 1995. Surrender fee income is
dependent upon the duration and value of the policies lapsing. Should the
policies be in their early years, the fee is high, however, limited to the value
in the policy which is smaller in the early years. The older policies have lower
surrender fees and greater account values from which to collect those fees.
The 1995 decline of 13% in premium and policy charges was attributed
somewhat to the decline in the Company's insurance in force and therefore an
associated reduction in administrative and mortality fees. Surrender fees for
1995 decreased by approximately 5% from 1994.
The balance of the decline in 1996, 1995 and 1994 premium and policy
charges is related to the unlocking, for current and future experience, of
unearned premium. 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 spreads, 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 ongoing refinement process.
Increased investment in debt securities coupled with reduced expenses
for student loan processing are responsible for the 10% increase in 1996 and 9%
increase in 1995 investment income. The Company continues to review its
investment strategies to increase its earned interest rate. As a part of this
process of review and refinement, the Company sold its entire stock portfolio
just prior to year end 1996. This created a significant increase in realized
36
<PAGE>
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operation.
gains for 1996. The resulting funds are to be invested in a more aggressive
stock market fund which should create an increased yield for the Company.
Additional changes in the Company's holdings are being planned for 1997.
Investment income for the first quarter remained constant with first
quarter of 1996. The Company sold its entire stock portfolio at year end. The
funds were put in short-term investments and reinvested during the first quarter
of 1997 in a stock mutual market fund.
The investment portfolio was restructured during the first quarter
1997, to extend the maturity of securities. During the restructure, bonds
classified as held-to-maturity were inadvertently disposed. The amortized cost
was $1,467,846. A realized gain of $4,682 was recorded on the books of the
Company.
Annuity, death and other benefits decreased slightly in both 1996 and
1995. This expense line is a combination of several expenses with death claims,
annuity benefits and surrender benefits comprising the most significant portion
of the total line. In 1996 each of these expenses declined slightly, whereas in
1995 death claims actually rose slightly. 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.
While first quarter 1997 death claims show a decline from first quarter
1996, a significant increase in death claims in any given quarter can have a
noticeable effect on operating results. In comparison with 1996, claims are down
year-to-date approximately $241,000.
The amortization of deferred acquisition costs increased in 1996,
following a two year decline in 1995 and 1994. 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.
Amortization of deferred policy acquisition costs have increased over
that of the same period in 1996 by approximately 19%. The lapses of the past
several years have had an impact on the amortization of the remaining deferred
acquisition cost. The Company is making adjustments to current deferral so as
not to further increased amortization cost. A conservation program is
37
<PAGE>
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operation.
being implemented to improve persistency.
Operating expenses for the Company were $3.3 million, $2.7 million and
$3.2 million for 1996, 1995 and 1994, respectively. Several items are
responsible for the increased operating costs of 1996. The lead program used to
introduce and promote our new product was not without cost. The Company also
attempted some new marketing procedures in 1996 which added to these costs. In
addition, legal expenses were higher in 1996 than in 1995. The Company has
reviewed its promotional expenses and now that the new product has established a
market, has cut back on these expenses. The increased legal costs were related
to the settlement of another lawsuit whereby the Company received settlement of
approximately $400,000, which flowed through income and paid the associated
attorneys fees. Operating expenses for 1994 also reflect increased legal
expenses, however these expenses were associated with settlements paid rather
than received.
The Company's has adjusted its method of deferring acquisition costs
which had a direct impact on operating expenses. The Company has reduced the
deferral of these costs. 60% of the increase in total operating expenses was
caused by this change in method. The balance of the increase, 40% was caused by
a) new product development, b) legal costs c) financial support servicing.
Reinsurance premiums ceded for 1996, 1995 and 1994 were $1,767,418,
$2,112,884 and $2,508,749 respectively. Policy benefits were reduced due to
reinsurance recoveries of $709,643, $405,345 and $679,622 for 1996, 1995 and
1994, respectively. Reinsurance commissions amounted to $308,179 for 1996 and
$397,253 and $679,522 for 1995 and 1994 respectively. In addition, under the
terms of the Company's treaty with Mega Life (formerly United Group Insurance
Company) expenses of $956,143 were transferred for 1996 and $911,452 and
$1,163,843 for 1995 and 1994 respectively. In 1995, the company amortized the
remaining $200,000 of deferred gain, under the aforementioned treaty, against
deferred acquisition costs for 1995.
Reinsurance premiums ceded for the first quarter 1996 amounted to
398,608. Policy benefits were reduced by $41,717, reinsurance commissions
received were $72,215 and expenses of $151,810 were transferred to the
reinsurers.
Income, before income taxes, in 1996 was $1,588,505, inclusive of gain
on equity securities of $873,299, compared to $1,274,903 in 1995 and $1,543,979
in 1994. The 1995 income declined 17% from prior year as a result of reduced
premium income and level amortization expenses.
38
<PAGE>
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operation.
A loss before income taxes, resulted for the first quarter of 1997 as
compared to a gain, before income tax for the first quarter 1996. Increased
operating expenses and deferred acquisition cost account for the change in
income for the first quarter. The implantation of the new product line and a
conservation of existing business will improve the income over the balance of
the year.
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 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 $5,000,000 line of credit with
SLMA in order to meet these seasonal borrowing requirements. The Company made no
draws against this line of credit throughout the seasonal period for 1996. The
Company anticipates continued borrowings to be made through this line of
39
<PAGE>
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operation.
credit with SLMA to the extent that student loan borrowings are required for
1997. SLMA offers a more competitive rate of interest on such borrowings than
the Company has been able to obtain through banks.
The following table displays pertinent information regarding the
short-term borrowings of the Company as they relate to these credit lines:
<TABLE>
<CAPTION>
1995 SLMA 1994 SLMA
<S> <C> <C>
Balance @ Year End $1,400,553.30 $891,823.47
Weighted Avg. Interest
@ Year End 6.3705% 6.566%
Maximum Balance $1,891,823.47 $3,823,957.61
Average Balance $1,159,300.15 $1,443,478.84
Weighted Rate 6.3705% 6.1024%
</TABLE>
The Company began a new association with USA Group, CAP Program in
1996, for the purpose of making more student loan funds available without
increased costs to the Company. This association aided in eliminating borrowings
for 1996. In 1995, a similar program was in effect with University Support
Services.
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,
1996, the Company had statutory surplus well in excess of any RBC action level
requirements.
The Company has now fully leased all rentable space on the first floor
of its office building. The Company has no material commitments for capital
expenditures throughout the balance of the year 1997.
40
<PAGE>
Item 8. Financial Statements and Supplementary Data.
(The remainder of this page is intentionally left out)
41
<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 19, 1997 BY: /s/ David C. Thompson
David C. Thompson
Executive Vice-President, Secretary
Treasurer, Chief Operating Officer
and Director
42
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 7
<S> <C> <C>
<PERIOD-TYPE> 3-MOS YEAR
<FISCAL-YEAR-END> DEC-31-1997 DEC-31-1996
<PERIOD-END> MAR-31-1997 DEC-31-1996
<DEBT-HELD-FOR-SALE> 26,441,317 24,476,239
<DEBT-CARRYING-VALUE> 13,506,712 14,974,962
<DEBT-MARKET-VALUE> 13,517,283 15,140,919
<EQUITIES> 1,922,563 0
<MORTGAGE> 0 0
<REAL-ESTATE> 0 0
<TOTAL-INVEST> 49,163,500 51,319,216
<CASH> 1,964,150 206,056
<RECOVER-REINSURE> 368,508 379,692
<DEFERRED-ACQUISITION> 16,838,925 16,979,612
<TOTAL-ASSETS> 81,620,244 81,809,360
<POLICY-LOSSES> 977,107 985,720
<UNEARNED-PREMIUMS> 8,143,490 8,249,190
<POLICY-OTHER> 420,006 293,221
<POLICY-HOLDER-FUNDS> 65,750 59,596
<NOTES-PAYABLE> 1,000,000 1,000,000
0 0
0 0
<COMMON> 1,907,989 1,907,989
<OTHER-SE> 4,011,519 4,011,519
<TOTAL-LIABILITY-AND-EQUITY> 81,620,244 81,809,360
2,100,432 7,915,027
<INVESTMENT-INCOME> 861,081 3,318,627
<INVESTMENT-GAINS> (114,354) 869,502
<OTHER-INCOME> 0 0
<BENEFITS> 1,086,267 3,813,361
<UNDERWRITING-AMORTIZATION> 948,033 3,364,738
<UNDERWRITING-OTHER> 900,393 3,246,552
<INCOME-PRETAX> (110,034) 1,588,505
<INCOME-TAX> (31,100) 196,000
<INCOME-CONTINUING> (78,934) 1,392,505
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (78,934) 1,392,505
<EPS-PRIMARY> .08 .73
<EPS-DILUTED> .08 .73
<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>
