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 March 31, 2000 Commission File Number: 2-35669
SOUTHERN SECURITY LIFE INSURANCE COMPANY
Exact Name of Registrant.
FLORIDA 59-1231733
(State or other jurisdiction of IRS Identification Number
incorporation or organization
755 Rinehart Road, Lake Mary, Florida 32746
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including Area Code (407) 321-7113
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
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
- -------------------------------------- --------------------------------
Title of Class Number of Shares Outstanding as
of March 31, 2000
SOUTHERN SECURITY LIFE INSURANCE COMPANY
FORM 10Q
QUARTER ENDED MARCH 31, 2000
TABLE OF CONTENTS
PART I - FINANCIAL INFORMATION
Item 1 Financial Statements Page No.
` --------
Statements of Income - Three Months ended March 31,
2000 and 1999......................................................3
Balance Sheets - March 31, 2000 and December 31, 1999............4-5
Statements of Cash Flows - Three months ended March 31,
2000 and 1999......................................................6
Notes to Condensed Financial Statements............................7
Item 2
Management's Discussion and Analysis............................ 7-9
Item 3
Quantitative and Qualitative Disclosure of Market Risk.............9
PART II - OTHER INFORMATION
Other Information..............................................10-11
Signature Page....................................................12
2
SOUTHERN SECURITY LIFE INSURANCE COMPANY
Statements of Income
(Unaudited)
Three Months Ended March 31,
2000 1999
Revenues:
Net insurance revenues $ 1,728,054 $ 1,751,040
Net investment income 979,315 904,557
2,707,369 2,655,597
Benefits, claims and expenses:
Benefits and claims 1,177,248 1,259,894
Amortization of deferred policy
acquisition costs 649,207 828,668
Operating expenses 820,896 649,586
2,647,351 2,738,148
Income (loss) before income taxes 60,018 (82,551)
Income tax expense (benefit) 11,100 (7,648)
Net income (loss) $ 48,918 $ (74,903)
Basic and diluted net income
(loss) per share of common stock $ 0.03 $ (0.04)
See accompanying notes to financial statements.
3
SOUTHERN SECURITY LIFE INSURANCE COMPANY
BALANCE SHEETS
March 31, 2000 December 31,
(Unaudited) 1999
--------------- ------------
Assets:
Investments:
Fixed maturities held-to-maturity $ 6,031,088 $ 3,978,871
Securities available-for-sale,
at fair value:
Fixed maturities 22,812,835 23,951,111
Equity securities 410,949 378,440
Mortgage loans 2,317,476 1,497,688
Policy and student loans 8,304,123 8,458,972
Short-term investments 7,313,049 8,595,093
47,189,520 46,860,175
Cash and cash equivalents 2,591,816 4,080,484
Accrued investment income 818,738 582,908
Deferred policy acquisition costs 12,711,042 12,874,219
Policyholders' account balances on
deposit with reinsurer 7,706,844 7,806,866
Reinsurance receivable 415,491 373,459
Receivables:
Agent balances 1,195,255 1,215,756
Other 220,195 193,506
Refundable income taxes 34,951 34,951
Property and equipment, net, at cost 2,411,088 2,435,565
Investment in affiliate at cost 1,566,173 751,052
$76,861,113 $77,208,941
See accompanying notes to financial statements.
4
SOUTHERN SECURITY LIFE INSURANCE COMPANY
BALANCE SHEETS (Continued)
March 31, 2000 December 31,
(Unaudited) 1999
--------------- -----------
Liabilities and Shareholders' Equity:
Liabilities:
Policy liabilities and accruals $ 1,758,147 $ 1,648,976
Future policy benefits:
Policyholders' account balances 50,150,745 50,377,101
Unearned revenue 5,085,283 5,323,954
Other policy claims and benefits
payable 823,166 540,407
Other policyholders' funds, dividend
and endowment accumulations 71,151 69,789
Funds held related to reinsurance treaties .. 1,463,957 1,475,512
Note payable to related party 1,000,000 1,000,000
Due to affiliated insurance agency 242,271 195,785
General expenses accrued 18,697 137,884
Unearned investment income 321,480 324,750
Other liabilities -- 63,753
Income taxes 297,033 413,710
------------ ------------
61,231,930 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 (533,638) (476,583)
Retained earnings 10,243,313 10,194,395
15,629,183 15,637,320
Commitments and contingencies -- --
------------ ------------
$ 76,861,113 $ 77,208,941
============ ============
See accompanying notes to financial statements.
5
SOUTHERN SECURITY LIFE INSURANCE COMPANY
STATEMENTS OF CASH FLOWS
(Unaudited)
Three Months Ended March 31,
2000 1999
--------- --------
Net cash provided by operating activities $ 617,374 $ 84,557
Cash flows (used in) provided by
investing activities:
Purchase of investments
held-to-maturity (2,606,749) --
Purchase of investments equity
securities (815,121) --
Proceeds from maturity of
held-to-maturity securities 554,007 21,097
Proceeds from maturity of available
for-sale securities 1,008,940 --
Purchase of mortgage loans (825,000) --
Mortgage loan repayments 5,212 --
Net change in short-term investments 1,282,044 2,366,707
Net change in policy and student loans 24,724 340,299
Net cash (used in) provided by
investing activities (1,371,943) 2,728,103
Cash flow used in financing activities:
Receipts from universal life and
certain annuity policies credited
to policyholder account balances 1,521,693 1,751,831
Return of policyholder balances
on universal life and certain
annuity policies (2,188,709) (2,631,682)
Net cash used in financing activities (667,016) (879,851)
(Decrease) increase in cash and
cash equivalents (1,421,585) 1,932,809
Cash and cash equivalences at beginning
of period 4,013,401 682,389
Cash and cash equivalents at
end of period $ 2,591,816 $ 2,615,198
See accompanying notes to financial statements.
6
SOUTHERN SECURITY LIFE INSURANCE COMPANY
Notes to Condensed Financial Statements
March 31, 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 three months ended March 31, 2000 and 1999, total comprehensive loss was
$(8,137) and $(329,822), 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 revenue. The Company
invests those funds deposited by policyholders of universal life and annuity
products in debt and equity securities in order to earn interest and dividend
income, a portion of which is credited back to the policyholders. Interest rates
and maturities of the Company's investment portfolio play an important part in
determining the interest rates credited to policyholders.
7
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 First Quarter of 2000 Compared to First Quarter of 1999
Total revenues increased by $52,000, or 1.9%, to $2,707,000 for the three months
ended March 31, 2000, from $2,655,000 for the three months ended March 31, 1999.
Contributing to this increase was a $23,000 decrease in net insurance revenues
and a $75,000 increase in net investment income. Net insurance revenues
decreased $23,000, or 1.3%, to $1,728,000 for the three months ended March 31,
2000, from $1,751,000 for the three months ended March 31, 1999. This decrease
was primarily a result of a decline in new business. Net investment income
increased by $75,000, or 8.3%, to $979,000 for the three months ended March 31,
2000, from $904,000 for the three months ended March 31, 1999. This increase was
primarily the result of higher yield on investments due to investing in mortgage
loans. Benefits and claims decreased by $83,000, or 6.6%, to $1,177,000 for the
three months ended March 31, 2000, from $1,260,000 for the comparable period in
1999. This decrease was primarily the result of a decline in new business. The
amortization of deferred policy acquisition costs decreased by $180,000, or
21.7%, to $649,000, for the three months ended March 31, 2000, from $829,000 for
the comparable period in 1999. This decrease was primarily the result of a
decline in new business. Operating expenses increased by $171,000, or 26.3%, to
$821,000 for the three months ended March 31, 2000, from $650,000 for the same
period in 1999. This increase was primarily due to fewer acquisition costs being
deferred as a result of a decline in new business.
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
$28,844,000 as of March 31, 2000, as compared to $27,930,000 as of December 31,
1999. This represents 61.1% and 59.6% of the total investments as of March 31,
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 March 31,
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.
8
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 March 31, 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 March 31, 2000, $8,800,000 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
Part II Other Information:
Item 1. Legal Proceedings
The Company has been named as a party in an action brought in the Circuit
Court, Eighteenth Judicial District, Seminole County, Florida. The action
was commenced in December 1998 with an amended complaint filed in April
1999. On three occasions in the past, the Company has been involved in
litigation with the plaintiff, William Thomas. In the pending action,
Thomas asserts a claim for malicious prosecution and a claim for abuse of
process purportedly arising out of a prior action involving him and the
Company. In each of the claims, Thomas seeks compensatory damages of $1.0
million, plus punitive damages and costs of the action. Thomas undertook
formal discovery. The Company filed a motion for summary judgment on the
claims. On December 28, 1999, the court granted summary judgment in favor
of the Company thereby dismissing Thomas' claim with prejudice. Thomas
filed a notice of appeal and a memorandum in support of his appeal before
the District Court of Appeal of Florida, Fifth Circuit, Daytona Beach,
Florida for reversal of the summary judgment. On the appeal, Thomas
abandoned his abuse of process claims. The Company filed a memorandum in
opposition to the appeal and in support of the summary judgment and Thomas
filed his reply. Oral argument has been requested. Whatever the outcome of
the appeal, the Company intends to vigorously defend the action. Should the
summary judgment be reversed on appeal, the Company will likely engage in
formal discovery.
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 has filed its response to the complaint
and intends 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 intents 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
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
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: May 18, 2000 By: George R. Quist,
Chairman of the Board,
President and Chief Executive
Officer (Principal Executive
Officer)
DATED: May 18, 2000 By: Scott M. Quist
First Vice President, General
Counsel, Treasurer and Director
(Principal Financial and Accounting
Officer)
12
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 7
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> MAR-31-2000
<DEBT-HELD-FOR-SALE> 22,812,835
<DEBT-CARRYING-VALUE> 6,031,088
<DEBT-MARKET-VALUE> 6,031,909
<EQUITIES> 410,949
<MORTGAGE> 2,317,476
<REAL-ESTATE> 0
<TOTAL-INVEST> 47,189,520
<CASH> 2,591,816
<RECOVER-REINSURE> 415,491
<DEFERRED-ACQUISITION> 12,711,042
<TOTAL-ASSETS> 76,861,113
<POLICY-LOSSES> 1,758,147
<UNEARNED-PREMIUMS> 5,085,283
<POLICY-OTHER> 71,151
<POLICY-HOLDER-FUNDS> 50,150,745
<NOTES-PAYABLE> 1,000,000
0
0
<COMMON> 1,907,989
<OTHER-SE> 4,011,519
<TOTAL-LIABILITY-AND-EQUITY> 76,861,113
1,728,054
<INVESTMENT-INCOME> 979,315
<INVESTMENT-GAINS> 0
<OTHER-INCOME> 0
<BENEFITS> 1,177,248
<UNDERWRITING-AMORTIZATION> 649,207
<UNDERWRITING-OTHER> 820,896
<INCOME-PRETAX> 60,018
<INCOME-TAX> 11,100
<INCOME-CONTINUING> 48,918
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 48,918
<EPS-BASIC> 0.03
<EPS-DILUTED> 0.03
<RESERVE-OPEN> 0
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 0
<PAYMENTS-PRIOR> 0
<RESERVE-CLOSE> 0
<CUMULATIVE-DEFICIENCY> 0
</TABLE>
