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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 June 30, 2000 Commission File Number: 2-35669
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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
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(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
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Title of Class Number of Shares Outstanding as
of June 30, 2000
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SOUTHERN SECURITY LIFE INSURANCE COMPANY
FORM 10Q
QUARTER ENDED JUNE 30, 2000
TABLE OF CONTENTS
PART I - FINANCIAL INFORMATION
Item 1 Financial Statements Page No.
Statements of Income - Six and Three Months ended
June 30, 2000 and 1999.............................................3
Balance Sheets - June 30, 2000 and December 31, 1999.............4-5
Statements of Cash Flows - Six months ended June 30,
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
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<TABLE>
<CAPTION>
SOUTHERN SECURITY LIFE INSURANCE COMPANY
Statements of Income
(Unaudited)
Six Months Ended June 30, Three Months Ended June 30,
2000 1999 2000 1999
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Revenues:
Net insurance revenues $3,385,908 $3,176,270 $1,657,854 $1,425,230
Net investment income 1,970,261 2,123,638 990,946 1,219,081
Other -- 721,904 -- 721,904
---------- ---------- ---------- ----------
5,356,169 6,021,812 2,648,800 3,366,215
---------- ---------- ---------- ----------
Benefits, claims and expenses:
Benefits and claims 2,210,136 2,768,889 1,032,888 1,508,995
Amortization of deferred policy
acquisition costs 1,373,955 1,474,406 724,748 645,738
Operating expenses 1,638,589 1,524,057 817,693 874,471
---------- ---------- ---------- ----------
5,222,680 5,767,352 2,575,329 3,029,204
---------- ---------- ---------- ----------
Income before income taxes 133,489 254,460 73,471 337,011
Income tax expense 26,097 98,476 14,997 106,124
---------- ---------- ---------- ----------
Net income $ 107,392 $ 155,984 $ 58,474 $ 230,887
========== ========== ========== ==========
Basic and diluted net income
(loss) per share of common stock $0.06 $0.08 $0.03 $0.12
===== ===== ===== =====
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
June 30, 2000 December 31,
(Unaudited) 1999
Assets:
-------
Investments:
Fixed maturities held-to-maturity $ 5,479,208 $ 3,978,871
Securities available-for-sale,
at fair value:
Fixed maturities 22,521,551 23,951,111
Equity securities 371,746 378,440
Mortgage loans 2,310,664 1,497,688
Policy and student loans 8,395,744 8,458,972
Short-term investments 10,180,666 8,595,093
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49,259,579 46,860,175
Cash and cash equivalents 288,766 4,080,484
Accrued investment income 584,460 582,908
Deferred policy acquisition costs 12,717,895 12,874,219
Policyholders' account balances on
deposit with reinsurer 7,747,099 7,806,866
Reinsurance receivable 459,877 373,459
Receivables:
Agent balances 1,231,553 1,215,756
Other 426,875 193,506
Refundable income taxes 34,951 34,951
Property and equipment, net, at cost 2,472,924 2,435,565
Investment in affiliate at cost 1,566,173 751,052
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Total assets $76,790,152 $77,208,941
=========== ===========
See accompanying notes to financial statements.
4
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SOUTHERN SECURITY LIFE INSURANCE COMPANY
BALANCE SHEETS (Continued)
June 30, 2000 December 31,
(Unaudited) 1999
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Liabilities and Shareholders' Equity:
Liabilities:
Policy liabilities and accruals $ 1,764,228 $ 1,648,976
Future policy benefits:
Policyholders' account balances 49,884,282 50,377,101
Unearned revenue 4,939,090 5,323,954
Other policy claims and benefits
payable 974,783 540,407
Other policyholders' funds, dividend
and endowment accumulations 72,542 69,789
Funds held related to reinsurance treaties 1,471,630 1,475,512
Note payable to related party 1,000,000 1,000,000
Due to affiliated companies 317,930 195,785
General expenses accrued 81,933 137,884
Unearned investment income 330,146 324,750
Other liabilities 13,995 63,753
Income taxes 289,733 413,710
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Total liabilities 61,140,292 61,571,621
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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 (571,435) (476,583)
Retained earnings 10,301,787 10,194,395
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Total shareholders' equity 15,649,860 15,637,320
Commitments and contingencies -- --
------------ -----------
Total liabilities and
shareholders' equity $ 76,790,152 $ 77,208,941
============ ============
See accompanying notes to financial statements.
5
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SOUTHERN SECURITY LIFE INSURANCE COMPANY
STATEMENTS OF CASH FLOWS
(Unaudited)
Six Months Ended June 30,
2000 1999
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Net cash provided by operating activities $ 390,151 $ 158,461
Cash flows (used in) provided by
investing activities:
Purchase of investments
held-to-maturity (2,606,749) --
Purchase of investments equity
securities (815,121) (339,830)
Proceeds from maturity of
held-to-maturity securities 1,105,557 82,961
Proceeds from maturity of available
for-sale securities 1,214,748 1,171,236
Purchase of mortgage loans (825,000) --
Mortgage loan repayments 12,024 --
Net change in short-term investments (1,585,573) 2,316,288
Net change in policy and student loans (66,897) 171,682
Acquisition of property and equipment (88,488) --
---------- ----------
Net cash (used in) provided by
investing activities (3,655,499) 3,402,337
----------- ----------
Cash flow used in financing activities:
Receipts from universal life and
certain annuity policies credited
to policyholder account balances 3,036,706 3,283,542
Return of policyholder balances
on universal life and certain
annuity policies (3,495,993) (3,816,719)
----------- -----------
Net cash used in financing activities (459,287) (533,177)
----------- -----------
(Decrease) increase in cash and
cash equivalents (3,724,635) 3,027,621
Cash and cash equivalents at beginning
of period 4,013,401 682,389
----------- -----------
Cash and cash equivalents at
end of period $ 288,766 $ 3,710,010
=========== ===========
See accompanying notes to financial statements.
6
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SOUTHERN SECURITY LIFE INSURANCE COMPANY
Notes to Condensed Financial Statements
June 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 six months ended June 30, 2000 and 1999, total comprehensive income
(loss) was $12,540 and $(531,745), respectively.
For the three months ended June 30, 2000 and 1999, total comprehensive income
(loss) was $20,677 and $(201,923) 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 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
Six Months ended June 30, 2000 Compared to Six Months Ended June 30, 1999
Total revenues decreased by $665,000 or 11.0%, to $5,356,000 for the six months
ended June 30, 2000, from $6,022,000 for the six months ended June 30, 1999.
Contributing to this reduction in revenues was a $153,000 decrease in net
investment income and a $722,000 decrease in other revenue.
Net insurance revenues increased by $210,000, or 6.6%, to $3,386,000 for the six
months ended June 30, 2000, from $3,176,000 for the six months ended June 30,
1999. This increase was primarily the result of an increase in assumed group
business.
Net investment income decreased by $153,000, or 7.2%, to $1,970,000 for the six
months ended June 30, 2000, from $2,124,000 for the six months ended June 30,
1999. This decrease was primarily due to a reduction of policy loan interest
income.
Other revenues decreased by $722,000, or 100.0%, to $-0- for the six months
ended June 30, 2000, from $722,000 for the six months ended June 30, 1999. This
amount was 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.
Benefits and claims decreased by $559,000, or 20.2%, to $2,210,000 for the six
months ended June 30, 2000, from $2,769,000 for the comparable period in 1999.
This decrease was primarily due to a reduction in universal life policyholder
account balances.
The amortization of deferred policy acquisition costs decreased by $100,000, or
6.8%, to $1,374,000, for the six months ended June 30, 2000, from $1,474,000 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 increased by $115,000, or 7.5%, to $1,639,000 for the six
months ended June 30, 2000, from $1,524,000 for the same period in 1999. This
increase was primarily the result of additional agency development and office
building costs.
Second Quarter of 2000 Compared to Second Quarter of 1999
Total revenues decreased by $717,000, or 21.3%, to $2,649,000 for the three
months ended June 30, 2000, from $3,366,000 for the three months ended June 30,
1999. Contributing to this decrease was a $228,000 decrease in net investment
income and a $722,000 decrease in other revenue.
Net insurance revenues decreased by $233,000 or 16.3%, to $1,658,000 for the
three months ended June 30, 2000, from $1,425,000 for the three months ended
June 30, 1999. This increase was primarily the result of an increase in assumed
group business.
Net investment income decreased by $228,000, or 18.7%, to $991,000 for the three
months ended June 30, 2000, from $1,219,000 for the three months ended June 30,
1999. This decrease was due to a reduction in policy loan interest income.
Other revenues decreased by $722,000, or 100.0%, to $-0- for the six months
ended June 30, 2000, from $722,000 for the six months ended June 30, 1999. This
amount was 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
Benefits and claims decreased by $476,000 or 31.6% to $1,033,000 for the three
months ended June 30, 2000, from $1,509,000 for the comparable period in 1999.
This decrease was primarily due to a reduction in universal life policyholder
account balances.
The amortization of deferred policy acquisition costs increased by $79,000, or
12.2%, to $725,000 for the three months ended June 30, 2000, from $646,000 for
the comparable period in 1999. This increase was in line with actuarial
assumptions.
Operating expenses decreased by $57,000, or 6.5% to $818,000 for the three
months ended June 30, 2000, from $875,000 for the same period in 1999. This
decrease was primarily the result of lower agency development costs.
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
$28,001,000 as of June 30, 2000, as compared to $27,930,000 as of December 31,
1999. This represents 56.5% and 54.8% of the total investments as of June 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 June 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 June 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 June 30, 2000, $8,934,000 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
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 before the District Court of Appeal of Florida, Fifth Circuit,
Daytona Beach, Florida for reversal of the summary judgment. The
appellate court affirmed the summary judgment.
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
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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: August 21, 2000 By: George R. Quist,
Chairman of the Board,
President and Chief Executive
Officer (Principal Executive
Officer)
DATED: August 21, 2000 By: Scott M. Quist
First Vice President, General
Counsel, Treasurer and Director
(Principal Financial and Accounting
Officer)
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