<PAGE>
Form 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 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 September 30, 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:
Title of Class Number Outstanding at
Class A Common Shares September 30, 1997
--------------------- --------------------
$1.00 per share 1,907,989
1
<PAGE>
SOUTHERN SECURITY LIFE INSURANCE COMPANY
Part I
FINANCIAL INFORMATION
INDEX
ITEM 1
Page
FINANCIAL STATEMENTS
Balance sheets - December 31, 1996 and
September 30, 1997 3-4
Statements of Income and Retained Earnings -
Nine Months Ended September 30, 1997 and 1996 5
Shareholders' Equity 6
Statement of Cash Flows - September 30, 1997
and 1996 7-8
Notes to Financial Statements 9-33
ITEM 2
Management's Discussion and Analysis of the
Statements of Income September 30, 1997 34-42
Signature Page 43
2
<PAGE>
SOUTHERN SECURITY LIFE INSURANCE COMPANY
BALANCE SHEETS
SEPTEMBER 30, 1997 AND DECEMBER 31, 1996
ASSETS
<TABLE>
<CAPTION>
Sept.30, December 31,
1997 1996
<S> <C> <C>
Investments (Note 3):
Fixed maturities held to maturity
(fair value, $10,664,026 and
$15,140,919 at Sept. 30, 1997
and December 31, 1996 respectively) $10,518,650 $14,974,962
Securities available for sale, At fair value:
Fixed maturities (cost of
$33,354,627 at Sept. 30, 1997
and $24,298,618 at December 31,
1996) 33,734,032 24,476,239
Equity securities (cost,
$200,000 and $0 at Sept. 30,
1996 and December 31, 1996
respectively) 211,555 -
Policy and student loans 7,577,329 7,315,809
Short-term investments 100,000 4,539,106
Other Invested Assets 11,639 13,100
------ ------
52,153,205 51,319,216
Cash & Cash Equivalents 493,122 206,056
Accrued investment income 1,055,136 687,699
Deferred policy acquisition
costs (Note 4) 15,657,794 16,979,612
Policyholders' account
balances on deposit with
reinsurer (note 7) 8,439,371 8,522,449
Reinsurance receivable (note 7) 337,010 379,692
Receivables:
Agent balances 485,362 588,290
Other 750,074 340,680
Refundable income taxes 172,939 -
Property and equipment, net
at cost, (Note 5) 2,697,874 2,785,666
--------- ---------
Total Assets $82,241,887 $81,809,360
========== ==========
</TABLE>
3
<PAGE>
SOUTHERN SECURITY LIFE INSURANCE COMPANY
BALANCE SHEETS (CONTINUED)
SEPTEMBER 30, 1997 AND DECEMBER 31, 1996
Balance sheets (continued):
LIABILITIES AND SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
Sept. 30, December 31,
1997 1996
<S> <C> <C>
Liabilities:
Policy liabilities and accruals:
(Notes 6 and 7):
Future policy benefits $1,063,058 $985,720
Policyholder's account balances 52,484,133 52,347,996
Unearned premiums 7,442,725 8,249,190
Other policy claims and benefits
payable 839,634 293,221
Other policyholders funds, dividend
and endowment accumulations 61,588 59,596
Funds held in reinsurance treaties
with reinsurers (note 7) 1,292,048 1,193,366
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 1,132,833 894,131
Unearned investment income 257,287 228,032
Other liabilities 152,920 204,845
Income taxes payable - 70,164
Deferred income taxes (Note 10) 582,158 588,100
------- -------
66,308,384 66,147,772
---------- ----------
Shareholders' equity (Notes 2, 3 and 12):
Common stock, $1 par, authorized
2,000,000 shares; issued and
outstanding 1,907,989 shares 1,907,989 1,907,989
Capital in excess of par 4,011,519 4,011,519
Unrealized appreciation (depreciation)
on securities available for sale 251,142 (8,880)
Retained earnings 9,762,853 9,750,960
--------- ---------
15,933,503 15,661,588
---------- ----------
$82,241,887 $81,809,360
=========== ===========
</TABLE>
4
<PAGE>
SOUTHERN SECURITY LIFE INSURANCE COMPANY
STATEMENTS OF INCOME AND RETAINED EARNINGS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996
<TABLE>
<CAPTION>
THREE MONTHS NINE MONTHS
ENDED SEPT. 30, ENDED SEPT. 30,
1997 1996 1997 1996
--------------------- --------- -------------------
<S> <C> <C> <C> <C>
Revenues:
Premium income $2,610,318 $2,624,593 $7,209,168 $7,762,505
Less reinsurance ceded (387,678) (458,411) 1,173,315 (1,352,201)
-------- -------- --------- ----------
Net premium income 2,222,640 2,166,182 6,035,853 6,410,304
Net investment income
(Notes 3 and 8) 946,362 852,254 2,665,363 2,507,330
Realized gain (loss) on
investments (Note 3) 378,906 (313) 430,147 52,082
------- ------- ------- -------
$3,547,908 $3,018,123 $9,131,363 $8,969,716
Benefits, losses & expenses:
Annuity, death and
other benefits 1,038,678 858,681 3,392,010 2,927,110
Decrease in future
policy benefits 46,730 (24,662) 77,338 (28,493)
Amortization of
deferred policy
acquisitions
costs (Note 4) 1,430,092 842,602 3,020,314 2,456,850
Operating Expenses
(Note 11) 925,031 743,077 2,831,873 2,251,054
Interest expense with
related party
(Note 9) 22,500 22,500 67,500 67,500
------ ------ ------ ------
$3,463,031 $2,442,198 $9,389,035 7,674,021
--------- ---------- ---------- ---------
Income (loss) before
income taxes 84,877 575,925 (257,672 1,295,695
Income tax expense
(benefit) (Note 10) (141,110) 215,972 (269,565) 485,886
-------- ------- -------- -------
Net income $225,987 $359,953 $11,893 $809,809
======= ======= ====== =======
Retained Earnings,
beginning 9,536,866 8,808,311 9,750,960 8,358,455
--------- --------- --------- ---------
Retained Earnings,
ending 9,762,853 9,168,264 9,762,853 9,168,264
========= ========= ========= =========
Earnings per share, based on
1,907,989 weighted average
shares outstanding in 1997
and 1996 $.12 $.19 $.01 $.42
=== === === ===
</TABLE>
See notes to financial statements.
5
<PAGE>
SOUTHERN SECURITY LIFE INSURANCE COMPANY
STATEMENTS OF SHAREHOLDERS' EQUITY
PERIODS ENDED SEPTEMBER 30, 1997 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 - - - - - 11,893
Unrealized
depreciation
of securities
available
for sale
investments - - - 260,022 - -
--------- --------- -------- --------- -------- ---
Balances,
Sept. 30,
1997 1,907,989 $1,907 989 $4,011,519 $251,142 - $9,762,853
--------- ---------- ---------- -------- ------- ----------
</TABLE>
6
<PAGE>
SOUTHERN SECURITY LIFE INSURANCE COMPANY
STATEMENTS OF CASH FLOWS
FOR NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996
INCREASE (DECREASE) IN CASH
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Cash flows provided by (used in) operating activities:
Net income (loss) (including net
realized gains and losses on
investments) $ 11,893 $809,809
Adjustments to reconcile net
income to net cash provided
by (used in) operating
activities:
Depreciation 167,081 129,630
Net realized (gains) or
losses on investments (428,686) (52,082)
Loss on disposal of property,
plant and equipment 99 124
Deferred income taxes - 945,731
Amortization of deferred
policy acquisition costs 3,020,314 2,668,106
Acquisition costs deferred (1,457,487) (2,456,850)
Change in assets and liabilities
affecting cash provided by
operations:
Accrued investment income (367,437) (148,702)
Due from affiliated insurance
agency - (48,712)
Accounts receivable (306,466) (603,888)
Reinsurance Receivable 42,682 146,109
Income Tax Receivable (172,939) -
Other policy claims and
future benefits payable 623,751 504,817
Policyholders' Account
Balances 1,769,578 1,988,407
Funds held under reinsurance 98,682 156,658
Unearned premiums (1,006,733) (815,641)
Dividend and endowment
accumulations 1,992 1,649
Payable to affiliated
insurance agent (33,411) (243,368)
Income tax payable (70,164) -
Other liabilities 216,032 (182,673)
Other policyholders'
Funds - -
-------- -------
Net cash provided by (used in)
operating activities 2,108,781 2,799,124
</TABLE>
(Continued)
7
<PAGE>
SOUTHERN SECURITY LIFE INSURANCE COMPANY
STATEMENTS OF CASH FLOWS (CONTINUED)
FOR NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996
INCREASE (DECREASE) IN CASH
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Cash flows from (used in) investing activities:
Purchase of investments:
Purchase of investments held to maturity - (7,400,416)
Purchase of investments available
for sale (equity and fixed maturity) (32,560,685) (2,515,277)
Proceeds from maturity of held to maturity
Securities 3,000,000 1,915,750
Proceeds from sale of held to
maturity securities - -
Proceeds from maturity of available
for sale securities 489,438 571,234
Proceeds from sale of available
for sale securities (equity and
fixed maturity) 23,174,923 3,911,838
Proceeds from sales of held to maturity 1,472,528 -
Net change in short term investments 4,439,106 351,091
Net change in policy and student loans (261,520) 3,332,004
Net change in other investments - 3,970
Acquisition of property & equipment (25,141) (41,378)
-------- --------
Net cash provided by (used in)
investing activities (271,351) 128,816
-------- ----------
Cash flows from financing activities:
Receipts from universal life
and certain annuity policies
credited to policyholder
account balances 6,281,275 5,793,753
Return of policyholder account
balances on universal life
and certain annuity policies (7,831,638) (6,440,803)
Proceeds from short-term borrowings - 2,500,000
Repayment of short-term borrowings - (3,900,553)
---------- ----------
Net cash provided by financing activities (1,550,363) (2,047,603)
---------- ----------
Increase (decrease) in cash and
Cash equivalents 287,067 880,337
Cash and cash equivalents at beginning
of year 206,056 406,752
------- -------
Cash and cash equivalents at end of quarter $ 493,123 $1,287,089
========= ==========
</TABLE>
See notes to financial statements
8
<PAGE>
SOUTHERN SECURITY LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 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
9
<PAGE>
SOUTHERN SECURITY LIFE INSURANCE COMPANY
Notes to Financial Statements (continued)
For the Six Months Ended June 30, 1997 and 1996
1. Nature of business and summary of significant accounting
policies, continued
(a) 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 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
10
<PAGE>
SOUTHERN SECURITY LIFE INSURANCE COMPANY
Notes to Financial Statements (continued)
For the Six Months Ended June 30, 1997 and 1996
1. Nature of business and summary of significant accounting
policies, continued
(d) 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
fair value, with un- realized 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 approximages 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 Nine Months Ended September 30, 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 esti-images 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
12
<PAGE>
SOUTHERN SECURITY LIFE INSURANCE COMPANY
Notes To Financial Statements (continued)
For the Nine Months Ended September 30, 1997 and 1996
1. Nature of business and summary of significant accounting
policies, continued
(h) industry data and the Company's past experience as adjusted to
provide 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 Nine Months Ended September 30, 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 ratesfor 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.
14
<PAGE>
SOUTHERN SECURITY LIFE INSURANCE COMPANY
Notes to Financial Statements (continued)
For the Nine Months Ended September 30, 1997 and 1996
2. Basis of financial statements, continued
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.
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 Nine Months Ended September 30, 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,
16
<PAGE>
SOUTHERN SECURITY LIFE INSURANCE COMPANY
Notes to Financial Statements (continued)
For the Nine Months Ended September 30, 1997 and 1996
2. Basis of financial statements, continued
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 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:
17
<PAGE>
SOUTHERN SECURITY LIFE INSURANCE COMPANY
Notes to Financial Statements (continued)
For the Nine Months Ended September 30, 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 Nine Months Ended September 30, 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 Nine Months Ended September 30, 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 Nine Months Ended September 30, 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 Nine Months Ended September 30, 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 nine months ended September 30,
1997 and 1996 consists of the following:
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Interest:
Fixed maturities $2,145,201 1,907,499
Policy and student loans 337,262 446,024
Short-term investments 74,117 122,703
Dividends on equity securities, Common
stock, including mutual fund 28,468 23,582
Rents 99,565 88,574
------ ------
2,684,613 2,588,382
Less investment expenses 19,250 81,052
------ ------
$2,665,363 2,507,330
========= =========
</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 Nine Months Ended September 30, 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>
Sept. 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 1,033,046 1,019,621 1,013,268
--------- --------- ---------
4,189,028 4,175,603 4,147,498
Less accumulated depreciation 1,491,154 1,389,937 1,270,317
--------- --------- ---------
$2,697,874 $2,785,666 $2,877,181
========== ========= =========
</TABLE>
23
<PAGE>
SOUTHERN SECURITY LIFE INSURANCE COMPANY
Notes to Financial Statements (continued)
For the Nine Months Ended September 30, 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 nine months ended September 30, 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>
Sept. 30, December 31,
1997 1996 1995
<S> <C> <C> <C>
Life insurance $757,932 $672,913 746,477
Annuities 296,224 304,394 296,242
Accident & health
insurance 8,902 8,413 7,779
----- ----- -----
Total life
insurance policies $1,063,058 $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 Nine Months Ended September 30, 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 Nine Months Ended September 30, 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 Nine Months Ended September 30, 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>
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 Nine Months Ended September 30, 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.
28
<PAGE>
SOUTHERN SECURITY LIFE INSURANCE COMPANY
Notes to Financial Statements (continued)
For the Nine Months Ended September 30, 1997 and 1996
10. Income taxes, continued
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 $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:
(The remainder of this page is intentionally left blank)
29
<PAGE>
SOUTHERN SECURITY LIFE INSURANCE COMPANY
Notes to Financial Statements (continued)
For the Nine Months Ended September 30, 1997 and 1996
10. Income taxes, continued
<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
--------- ---------
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
30
<PAGE>
SOUTHERN SECURITY LIFE INSURANCE COMPANY
Notes to Financial Statements (continued)
For the Nine Months Ended September 30, 1997 and 1996
10. Income taxes, continued
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 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.
31
<PAGE>
SOUTHERN SECURITY LIFE INSURANCE COMPANY
Notes to Financial Statements (continued)
For the Nine Months Ended September 30, 1997 and 1996
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.
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>
32
<PAGE>
SOUTHERN SECURITY LIFE INSURANCE COMPANY
Notes to Financial Statements (continued)
For the Nine Months Ended September 30, 1997 and 1996
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.
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 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
34
<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)
35
<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 Sept. 30 (Increase or Decrease)
1997 1996 1995 97-96 96-95
------ ------ ------ ------- ------
<S> <C> <C> <C> <C> <C>
Insurance Revenues 66% 72% 74% (6%) (2%)
Net Investment Income 34 28 26 6 9
Other Income - - - - -
--- --- --- -- --
Total Revenues 100% 100% 100% 2% 0%
Losses, claims and
loss adjustment
expenses 38% 32% 34% 20% (6%)
Acquisition costs 33 28 25 23 9
Other operating
costs and expenses 32 26 22 25 20
-- -- -- -- --
Total Expenses 103% 86% 81% 22% 6%
Income (loss) before
income taxes (3%) 14% 19% (120%) (22%)
Provision for taxes 3 5 7 (155%) (22%)
--- --- -- ---- -----
Net Income (loss) 0% 9% 12% (98%) (23%)
</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.
36
<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 new business premium placed inforce for the first nine months of
1997 was equal to that of the first nine months of 1996. The new Basic Life
service product represents 52% of all new business placed inforce.
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
37
<PAGE>
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operation.
to year end 1996. This created a significant increase in realized 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 nine months increase over the nine
months of 1996 by $158,000 as a result of the restructuring at the end of 1996.
Reinvesting during 1997 has been into a stock mutual market fund and fixed
securities available for sale.
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.
Total revenues for the nine months of 1997 were more than the same
period in 1996. A $375,000 gain on the sale of investments was realized during
the third quarter.
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.
Death claims increased in the third quarter over the second quarter of
1997. With the increase of the 1997 claims, they are approximately $300,000
higher for the same period in 1996. A significant increase or decrease in death
claims in any given year can have a marked impact on the result of operation in
a small company.
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
the same period in 1996. The lapses of the past several years have had an impact
on the amortization of the
38
<PAGE>
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operation.
remaining deferred acquisition cost. The Company is making adjustments to
current deferrals so as not to further increase amortization cost. A
conservation program that has been implemented is also improving 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 has adjusted its method of deferring acquisition
costs which had a direct impact on operating expenses. The
adjustment has reduced the deferral of these costs. 53% of the
increase in total operating expenses was caused by this change in
method. The balance of the increase, 47% 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 nine months of 1997 amounted to
1,173,315. Policy benefits were reduced by $242,356, reinsurance commissions
received were $217,288 and expenses of $827,396 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
39
<PAGE>
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operation.
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.
The net income for the nine months of 1997 is approximately $800,000 less than
the same period of 1996. Increased operating expenses (due to method of
deferring acquisition cost), claims and amortization of deferred policy
acquisition cost (due to persistency) created this difference.
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
40
<PAGE>
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operation.
credit throughout the seasonal period for 1996. 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 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.
41
<PAGE>
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operation.
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.
Item 8. Financial Statements and Supplementary Data.
(The remainder of this page is intentionally left blank)
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:
November 18, 1997 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> 9-MOS YEAR
<FISCAL-YEAR-END> DEC-31-1997 DEC-31-1996
<PERIOD-END> SEP-30-1997 DEC-31-1996
<DEBT-HELD-FOR-SALE> 33,734,032 24,476,239
<DEBT-CARRYING-VALUE> 10,518,650 14,974,962
<DEBT-MARKET-VALUE> 10,664,026 15,140,919
<EQUITIES> 211,555 0
<MORTGAGE> 0 0
<REAL-ESTATE> 0 0
<TOTAL-INVEST> 52,153,205 51,319,216
<CASH> 493,122 206,056
<RECOVER-REINSURE> 337,010 379,692
<DEFERRED-ACQUISITION> 15,657,794 16,979,612
<TOTAL-ASSETS> 82,241,887 81,809,360
<POLICY-LOSSES> 1,063,058 985,720
<UNEARNED-PREMIUMS> 7,442,725 8,249,190
<POLICY-OTHER> 839,634 293,221
<POLICY-HOLDER-FUNDS> 61,588 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> 82,241,887 81,809,360
6,035,853 7,915,027
<INVESTMENT-INCOME> 2,665,363 3,318,627
<INVESTMENT-GAINS> 430,147 869,502
<OTHER-INCOME> 0 0
<BENEFITS> 3,469,348 3,813,361
<UNDERWRITING-AMORTIZATION> 3,020,314 3,364,738
<UNDERWRITING-OTHER> 2,831,873 3,246,552
<INCOME-PRETAX> (257,672) 1,588,505
<INCOME-TAX> (269,565) 196,000
<INCOME-CONTINUING> 11,893 1,392,505
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 11,893 1,392,505
<EPS-PRIMARY> .01 .73
<EPS-DILUTED> .01 .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>
