UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C.
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For Quarter Ended September 30, 2000 Commission File Number: 2-35669
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SOUTHERN SECURITY LIFE INSURANCE COMPANY
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Exact Name of Registrant.
FLORIDA 59-1231733
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(State or other jurisdiction of IRS Identification Number
incorporation or organization)
755 Rinehart Road, Lake Mary, Florida 32746
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including Area Code (407) 321-7113
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Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES XX NO
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Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class A Common Stock, $1.00 par value 1,907,989
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Title of Class Number of Shares Outstanding as
of September 30, 2000
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SOUTHERN SECURITY LIFE INSURANCE COMPANY
FORM 10Q
QUARTER ENDED SEPTEMBER 30, 2000
TABLE OF CONTENTS
PART I - FINANCIAL INFORMATION
Item 1 Financial Statements Page No.
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Statements of Income - Nine and Three Months ended
September 30, 2000 and 1999 (unaudited).......................3
Balance Sheets - September 30, 2000 (unaudited)
and December 31, 1999.......................................4-5
Statements of Cash Flows - Nine months ended September 30,
2000 and 1999 (unaudited).....................................6
Notes to Condensed Financial Statements.......................7
Item 2
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Management's Discussion and Analysis....................... 7-9
Item 3
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Quantitative and Qualitative Disclosure of Market Risk........9
PART II - OTHER INFORMATION
Other Information.........................................10-11
Signature Page...............................................12
2
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<TABLE>
<CAPTION>
SOUTHERN SECURITY LIFE INSURANCE COMPANY
Statements of Income
(Unaudited)
Nine Months Ended September 30, Three Months Ended September 30,
2000 1999 2000 1999
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
Revenues:
<S> <C> <C> <C> <C>
Net insurance revenues $5,043,640 $5,224,546 $1,657,732 $2,048,276
Net investment income 2,918,690 2,903,288 948,429 779,650
Other -- 760,143 -- 38,239
---------- ---------- ---------- ----------
7,962,330 8,887,977 2,606,161 2,866,165
---------- ---------- ---------- ----------
Benefits, claims and expenses:
Benefits and claims 3,118,400 3,448,452 908,264 679,563
Amortization of deferred policy
acquisition costs 2,144,805 2,189,984 770,850 715,578
Operating expenses
2,487,807 2,572,349 849,218 1,048,292
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7,751,012 8,210,785 2,528,332 2,443,433
---------- ---------- ---------- ----------
Income before income taxes 211,318 677,192 77,829 422,732
Income tax expense 43,097 261,396 17,000 162,920
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Net income $168,221 $415,796 $60,829 $259,812
========= ======== ========== ==========
Basic and diluted net income
(loss) per share of common stock $0.09 $0.22 $0.03 $0.14
===== ===== ===== =====
Weighted average outstanding
common shares 1,907,989 1,907,989 1,907,989 1,907,989
========= ======== ========== ==========
</TABLE>
See accompanying notes to financial statements.
3
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SOUTHERN SECURITY LIFE INSURANCE COMPANY
BALANCE SHEETS
September 30, 2000 December 31,
(Unaudited) 1999
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Assets:
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Investments:
Fixed maturities held-to-maturity $5,427,042 $3,978,871
Securities available-for-sale,
at fair value:
Fixed maturities 22,993,613 23,951,111
Equity securities 369,369 378,440
Mortgage loans 2,304,475 1,497,688
Policy and student loans 8,277,083 8,458,972
Short-term investments 8,272,099 8,595,093
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47,643,681 46,860,175
Cash and cash equivalents 1,441,421 4,080,484
Accrued investment income 797,604 582,908
Deferred policy acquisition costs 12,520,520 12,874,219
Policyholders' account balances on
deposit with reinsurer 7,489,264 7,806,866
Reinsurance receivable 337,143 373,459
Receivables:
Agent balances 1,335,740 1,215,756
Other 705,825 193,506
Refundable income taxes 34,951 34,951
Property and equipment, net, at cost 2,562,267 2,435,565
Investment in affiliate at cost 1,566,173 751,052
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Total assets $76,434,589 $77,208,941
=========== ===========
See accompanying notes to financial statements.
4
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SOUTHERN SECURITY LIFE INSURANCE COMPANY
BALANCE SHEETS (Continued)
September 30, 2000 December 31,
(Unaudited) 1999
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Liabilities and Shareholders' Equity:
------------------------------------
Liabilities:
Policy liabilities and accruals $1,919,167 $1,648,976
Future policy benefits:
Policyholders' account balances 48,905,655 50,377,101
Unearned revenue 4,756,905 5,323,954
Other policy claims and benefits
payable 978,132 540,407
Other policyholders' funds, dividend
and endowment accumulations 74,033 69,789
Funds held related to reinsurance
treaties 1,524,487 1,475,512
Note payable to related party 1,000,000 1,000,000
Due to affiliated companies 119,109 195,785
General expenses accrued 131,415 137,884
Unearned investment income 342,089 324,750
Other liabilities 154,278 63,753
Income taxes 496,135 413,710
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Total liabilities 60,401,405 61,571,621
Shareholders' equity:
Common stock, $1 par, authorized
3,000,000 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
Accumulated other comprehensive loss (248,944) (476,583)
Retained earnings 10,362,616 10,194,395
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Total shareholders' equity 16,033,184 15,637,320
Commitments and contingencies -- --
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Total liabilities and
shareholders' equity $76,434,589 $77,208,941
=========== ===========
See accompanying notes to financial statements.
5
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SOUTHERN SECURITY LIFE INSURANCE COMPANY
STATEMENTS OF CASH FLOWS
(Unaudited)
Nine Months Ended September 30,
2000 1999
Net cash provided by operating activities $1,489,353 $(1,266,923)
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Cash flows (used in) provided by
investing activities:
Purchase of investments
held-to-maturity (2,606,749) (405,349)
Purchase of investments equity
securities (815,121) --
Proceeds from maturity of
held-to-maturity securities 1,157,574 130,301
Proceeds from maturity of available
for-sale securities 1,220,543 2,833,129
Purchase of mortgage loans (825,000) --
Mortgage loan repayments 18,213 --
Net change in short-term investments 322,994 835,584
Net change in policy and student loans 181,889 210,784
Acquisition of property and equipment (216,523) --
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Net cash (used in) provided by
investing activities (1,562,180) 3,604,449
Cash flow used in financing activities:
Receipts from universal life and
certain annuity policies credited
to policyholder account balances 4,391,476 5,030,285
Return of policyholder balances
on universal life and certain
annuity policies (6,957,712) (4,968,735)
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Net cash used in financing activities (2,566,236) 61,550
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(Decrease) increase in cash and
cash equivalents (2,639,063) 2,399,076
Cash and cash equivalents at beginning
of period 4,080,484 682,389
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Cash and cash equivalents at
end of period $1,441,421 $3,081,465
========== ==========
See accompanying notes to financial statements.
6
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SOUTHERN SECURITY LIFE INSURANCE COMPANY
Notes to Condensed Financial Statements
September 30, 2000
(Unaudited)
1. Basis of Presentation
The accompanying unaudited condensed financial statements have been prepared by
management in conformity with generally accepted accounting principles for
interim financial information and with the instructions to Form 10-Q and
Regulation S-X. Accordingly, they do not include all of the disclosures required
by generally accepted accounting principles for complete financial statements.
All adjustments and accruals considered necessary for fair presentation of
financial information have been included in the opinion of management, and are
of a normal recurring nature. Quarterly results of operations are not
necessarily indicative of annual results. These statements should be read in
conjunction with the financial statements and the notes thereto included in the
Southern Security Life Insurance Company 1999 Annual Report on Form 10- K for
the fiscal year ended December 31, 1999 (file number 2-35669).
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts reported in the financial statements and accompanying notes.
Actual results could differ from those estimates.
The estimates susceptible to significant change are those used in determining
the liability for future policy benefits and claims. Although some variability
is inherent in these estimates, management believes the amounts provided are
adequate.
2. Comprehensive Income
For the nine months ended September 30, 2000 and 1999, total comprehensive
income (loss) was $395,863 and $(304,693), respectively.
For the three months ended September 30, 2000 and 1999, total comprehensive
income was $383,323 and $227,052 respectively.
Item 2. Management's Discussion and Analysis
Overview
This analysis of the results of operations and financial condition of Southern
Security Life should be read in conjunction with the Condensed Financial
Statements and Notes to the Condensed Financial Statements included in this
report.
In recent years, the Company has primarily issued two types of insurance
products: universal life and final expense products. Universal life provides
insurance coverage with flexible premiums, within limits, which allow
policyholders to accumulate cash values. The accumulated cash values are
credited with tax-deferred interest, as adjusted by the Company on a periodic
basis. Deducted from the cash accumulations are administrative charges and
mortality costs. Should a policy surrender in its early years, the Company
assesses a surrender fee against the cash value accumulations based on a graded
formula.
Final expense products are traditional endowment type insurance policies written
for the senior market. Because the products are written to a senior market they
are designed to accommodate adverse health conditions. Because of the size of
the policies, the products are usually issued with only limited underwriting.
The coverage size of the policy is roughly equivalent to the insured's
anticipated funeral costs.
An additional source of income to the Company is investment income. The Company
invests those funds deposited by policyholders of 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 an important part in
determining the interest rates credited to policyholders.
7
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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.
Results of Operations
Nine Months ended September 30, 2000, Compared to Nine Months Ended September
30, 1999
Total revenues decreased by $926,000, or 10.4%, to $7,962,000 for the nine
months ended September 30, 2000, from $8,888,000 for the nine months ended
September 30, 1999. Contributing to this reduction in revenues was a $181,000
decrease in net insurance revenues and a $760,000 decrease in other revenues.
Net insurance revenues decreased by $181,000, or 3.5%, to $5,044,000 for the
nine months ended September 30, 2000, from $5,225,000 for the nine months ended
September 30, 1999. This decrease was primarily the result of a reduction in
universal life policyholder income.
Net investment income increased by $15,000, or .5%, to $2,919,000 for the nine
months ended September 30, 2000, from $2,903,000 for the nine months ended
September 30, 1999. This increase was primarily due to an improved yield on the
Company's invested assets.
Other revenues decreased by $760,000, or 100.0%, to no other revenues for the
nine months ended September 30, 2000, from $760,000 for the nine months ended
September 30, 1999. The other revenues for the nine months ended September 30,
1999 consisted of the proceeds from a settlement of insurance claims filed for
the recovery of the litigation costs relating to a case against a former officer
of the Company.
Benefits and claims decreased by $330,000, or 9.6%, to $3,118,000 for the nine
months ended September 30, 2000, from $3,448,000 for the comparable period in
1999. This decrease was primarily due to a reduction in interest crediting for
universal life policyholder account balances.
The amortization of deferred policy acquisition costs decreased by $45,000, or
2.1%, to $2,145,000, for the nine months ended September 30, 2000, from
$2,190,000 for the comparable period in 1999. This decrease was primarily the
result of a decline in universal life deferred policy acquisition cost balances.
Operating expenses decreased by $85,000, or 3.3%, to $2,488,000 for the nine
months ended September 30, 2000, from $2,573,000 for the same period in 1999.
This decrease was primarily the result of the deferral of additional acquisition
expenses.
Third Quarter of 2000 Compared to Third Quarter of 1999
Total revenues decreased by $260,000, or 9.1%, to $2,606,000 for the three
months ended September 30, 2000, from $2,866,000 for the three months ended
September 30, 1999. Contributing to this decrease was a $391,000 decrease in net
insurance revenues and $38,000 decrease in other revenues.
Net insurance revenues decreased by $391,000 or 19.1%, to $1,658,000 for the
three months ended September 30, 2000, from $2,049,000 for the three months
ended September 30, 1999. This decrease was primarily the result of a reduction
in assumed group business.
Net investment income increased by $169,000, or 21.6%, to $948,000 for the three
months ended September 30, 2000, from $780,000 for the three months ended
September 30, 1999. This increase was due to additional policy loan interest
income.
Other revenues decreased by $38,000, or 100.0%, to no other revenues for the
three months ended September 30, 2000, from $38,000 for the three months ended
September 30, 1999. The other revenues for the three months ended September 30,
1999 consisted of the proceeds from a settlement received in 1999 of insurance
claims filed for the recovery of the litigation costs relating to a case against
a former officer of the Company.
8
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Benefits and claims increased by $229,000, or 33.7%, to $908,000 for the three
months ended September 30, 2000, from $679,000 for the comparable period in
1999. This increase was primarily due to an increase in interest crediting for
universal life policyholder account balances.
The amortization of deferred policy acquisition costs increased by $55,000, or
7.7%, to $771,000 for the three months ended September 30, 2000, from $716,000
for the comparable period in 1999. This increase was in line with actuarial
assumptions.
Operating expenses decreased by $199,000, or 19.0%, to $849,000 for the three
months ended September 30, 2000, from $1,048,000 for the same period in 1999.
This decrease was primarily the result of the deferral of additional acquisition
expenses.
Liquidity and Capital Resources
The Company attempts to match the duration of invested assets with its
policyholder liabilities. The Company may sell investments other than those
held-to-maturity in the portfolio to help in this timing; however, to date, that
has not been necessary. The Company purchases short-term investments on a
temporary basis to meet the expectations of short-term requirements of the
Company's products. The Company's investment philosophy is intended to provide a
rate of return which will persist during the expected duration of policyholder
liabilities regardless of future interest rate movements.
The Company's investment policy is to invest predominantly in fixed maturity
securities, mortgage loans, and warehouse mortgage loans on a short-term basis
before selling the loans to investors in accordance with the requirements and
laws governing life insurance companies. Bonds owned by the Company amounted to
$28,421,000 as of September 30, 2000, as compared to $27,930,000 as of December
31, 1999. This represents 57.9% and 54.8% of the total investments as of
September 30, 2000 and December 31, 1999, respectively. Generally, all bonds
owned by the Company are rated by the National Association of Insurance
Commissioners. Under this rating system, there are six categories used for
rating bonds. At September 30, 2000, and at December 31, 1999, the Company did
not have investments in bonds in rating categories three through six, which are
considered non-investment grade.
The Company has classified certain of its fixed income securities as available
for sale, with the remainder classified as held to maturity. However, in
accordance with Company policy, any such securities purchased in the future will
be classified as held to maturity. Business conditions, however, may develop in
the future which may indicate a need for a higher level of liquidity in the
investment portfolio. In that event the Company believes it could sell
short-term investment grade securities before liquidating higher-yielding longer
term securities.
The Company is subject to risk based capital guidelines established by statutory
regulators requiring minimum capital levels based on the perceived risk of
assets, liabilities, disintermediation, and business risk. At September 30, 2000
and December 31, 1999, the Company exceeded the regulatory criteria.
Lapse rates measure the amount of insurance terminated during a particular
period. The Company's lapse rate for life insurance in 1999 was 9.1% as compared
to a rate of 17.4% for 1998. The 2000 lapse rate is approximately the same as
1999.
At September 30, 2000, $8,458,000 of the Company's consolidated stockholders'
equity represented the statutory stockholders' equity. The Company cannot pay a
dividend to its parent company without the approval of insurance regulatory
authorities.
The Company has no material commitments for capital expenditures.
Item 3. Quantitative and Qualitative Disclosure of Market Risk
There have been no significant changes since the annual report Form 10-K filed
for the year ended December 31, 1999.
9
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Part II Other Information:
Item 1. Legal Proceedings
An action was brought against the Company in July 1999 by Dorothy
Ruth Campbell in the Circuit Court of Escambia County, Alabama.
The action arises out of a denial of coverage for a policy with
coverage for $10,000. The claims are for breach of contract, bad
faith and fraudulent misrepresentation. In the action, Campbell
seeks compensatory and punitive damages plus interest. The
Company intends to continue to vigorously defend the matter.
An action was brought against the Company in late 1999 by Larry
Boyd in the Circuit Court of Jefferson County, Alabama. The
action involves the alleged purchase by Boyd and his deceased
wife of two college funds with respective death benefits of
$58,454 and $58,556 for Boyd's two sons. The allegations in the
complaint include an alleged representation by the Company
through its sales agent that when Boyd's sons, the insureds,
reached college they would receive monthly payments for college.
Boyd further contends that he lost the value of his deposits on
the college fund policies, lost interest, does not have the
college funds promised to him, and suffered mental anguish and
emotional distress. The claims are based on fraud and
misrepresentation and negligence by the Company in hiring,
training and supervising the sales agent. Boyd seeks compensatory
and punitive damages, plus costs. The complaint was responded to
and discovery is in progress. The Company intends to continue to
vigorously defend the action.
The Company is not a party to any other legal proceedings outside
the ordinary course of the Company's business or to any other
legal proceedings which, if adversely determined, would have a
material adverse effect on the Company or its business.
Item 2. Changes in Securities
NONE
Item 3. Defaults Upon Senior Securities
NONE
Item 4. Submission of Matters to a Vote of Security Holders
NONE
10
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Item 5. Other Information
NONE
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
3. A. Articles of Incorporation, as amended, and By-laws, as amended, dated
September 1994, incorporated by reference from the Annual Report
filed on Form 10-K for fiscal year ended December 31, 1994.
10.A Revolving Financing Agreement between the Company and the Student
Loan Marketing Association, dated September 19, 1996, incorporated
by reference from Annual Report on Form 10-K for fiscal year ended
December 31, 1997.
B. Reinsurance Agreement between the Company and United Group Insurance
Company, dated as of December 31, 1992 incorporated by reference
from Annual Report on Form 10-K for fiscal year ended December 31,
1992.
C. Agency Agreement between the Company and Insuradyne Corporation
incorporated by reference from Annual Report on Form 10-K for fiscal
year ended December 31, 1993.
D. Administrative Services Agreement between the Company and Security
National Financial Corporation effective December 17, 1998,
incorporated by reference from Annual Report on Form 10-K for fiscal
year ended December 31, 1998.
E. Agency Agreement between the Company and Security National Mortgage
Company dated December 28, 1998 incorporated by reference from Annual
Report on Form 10-K for fiscal year ended December 31, 1999.
F. Loan Funding and Fee Agreement between the Company and Security
National Mortgage Company dated December 28, 1998, incorporated by
reference from Annual Report on Form 10-K for fiscal year ended
December 31, 1999.
27. Financial Data Schedule
(b) Reports on Form 8-K:
NONE
11
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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 thereunto duly authorized.
REGISTRANT
SOUTHERN SECURITY LIFE INSURANCE COMPANY
Registrant
DATED: November 14, 2000 By: George R. Quist,
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Chairman of the Board,
President and Chief Executive
Officer (Principal Executive
Officer)
DATED: November 14, 2000 By: Scott M. Quist
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First Vice President, General
Counsel and Treasurer (Principal
Financial and Accounting Officer)
12
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