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U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
(Mark One)
[ X ] ANNUAL REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934 [Fee Required]
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For the fiscal year ended December 31, 1995
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934 [No Fee Required]
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For the transition period from to
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Commission file number 2-40019
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SOUTHLAND NATIONAL INSURANCE CORPORATION
(Name of small business issuer in its charter)
Alabama 63-0572745
(State of other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1812 University Boulevard
Tuscaloosa, Alabama 35401
(Address of principal executive offices) (Zip Code)
Issuer's telephone number: (205) 345-7410
Securities registered under Section 12(b) of the Exchange Act:
<TABLE>
<CAPTION>
Title of each class Name of each exchange on which registered
<S> <C>
None None
---- ----
</TABLE>
Securities registered under Section 12(g) of the Exchange Act:
Common Stock
-----------------------------
(Title of class)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 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 X No
----- -----
Check if there is no disclosure of delinquent filers in response to
Item 405 of Regulation S-B is not contained in this form, and no disclosure
will be contained, to the best of registrant's knowledge, in definitive proxy
or information statements incorporated by reference in Part III of this Form
10-KSB or any amendment to this Form 10-KSB. [ X ]
State issuer's revenues for its most recent fiscal year: $9,350,195
As of March 20, 1996, the Registrant had issued and outstanding
250,453 shares of Common Stock, par value $6.00 per share, and as of March 20,
1996 the aggregate market value of the voting stock held by non-affiliates was
approximately $4,132,475.
<PAGE> 2
PART I
Item 1. Description of Business
(a) Business Development: History. Southland National Insurance
Corporation, an Alabama corporation ("the Company"), was originally
incorporated in January 1969 as The New Southland National Insurance Company, a
legal reserve life insurance company authorized to sell life, accident and
health insurance pursuant to the terms of a Dividend Trust and Stock
Procurement Agreement (the "Dividend Trust and Stock Procurement Agreement")
between Lecil Gray, as trustee, and the policyholders of Southland National
Insurance Company ("Old Southland"), as trustors. The Dividend Trust and Stock
Procurement Agreement provided for the assignment of policyholders dividends on
Founders Policies issued by Old Southland to a dividend trust and stock
procurement fund. The New Southland National Insurance Company entered into a
reinsurance agreement with Old Southland, a mutual aid company, covering all of
the Founders Policies. Subsequently, the Company offered conversion of the
original term Founders Policies to participating whole life insurance policies
and, when the Trust was dissolved and policyholders of the original term
Founders Policies converted to the permanent Founders (whole life) Policies,
the amount of dividends accumulated were exchangeable for an equivalent amount
of stock at a specified amount per share.
In 1988, the Company changed its name from The New Southland National
Insurance Company to the current name of Southland National Insurance
Corporation. Southern Insurance Management Association, Inc. ("SIMA"), a
wholly-owned subsidiary of the Company, operates primarily as a third party
administrator and is a licensed insurance agent, acting as a general agent with
respect to policies of insurance issued by the Company or as a broker with
respect to policies of insurance that the Company is unable to issue. In 1991,
the Company formed another wholly-owned subsidiary, Southland National Funeral
Group, Incorporated, to service and act as a trustee with respect to the
funding of pre-need funeral arrangements in the State of Tennessee. In 1993,
the Company acquired Peoples Insurance Company, an Alabama mutual aid
association. The Company also provides certain administrative and claim
administration services to third parties.
(b) Business of Issuer. The Company is principally engaged in the
life insurance business, offering for sale a variety of life insurance
products. Prior to 1983, and from 1985 through 1988, the Company was also
engaged in the accident and health insurance business.
The Company is licensed to transact business as an insurance company
in the states of Alabama, Florida, Georgia, Louisiana, Mississippi, and
Tennessee, with license applications pending in Arkansas and North Carolina.
The Company has marketed its insurance through various general agents since
1974. General agencies have been established by the Company at various
locations in the six states in which the Company is licensed to transact
business as an insurance company. The Company's arrangements with its agents
provide for the payment of commissions to such agents on terms which are
customary in the insurance business. The agents through whom the Company offers
its products also are free to sell insurance on behalf of other insurance
companies.
Since 1990, practically all of the Company's total premium revenues
consisted of life insurance premiums. In 1988, the Company began to market a
"pre-need" burial policy through funeral homes. In 1992, the Company began
expanding into the "seniors" market by providing whole life insurance policies
designed for individuals over the age of 50. In the last quarter of 1994 the
Company introduced an increasing benefit whole life policy to be used in these
same markets. All of these products emphasize smaller insurance amounts and are
designed to meet specific insurance needs of the Company's customers. Due to
policyholders' withdrawal and surrender of interest-sensitive products in favor
of competing
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products with higher credited interest rates, along with the Company's new
emphasis on smaller insurance policies, the Company has experienced a gradual
decline in life insurance in-force since 1987. In 1993, 1994 and 1995 the
Company's life insurance in-force, excluding group life, decreased by
approximately $6,975,000, $2,308,000 and $4,906,000, respectively, while the
number of policies in-force actually increased for the same time periods. Due
to various factors, including profitability, reinsurance costs, and lack of
potential growth, the Company terminated it's group life insurance contracts
effective February 1996.
The following tabulation reflects certain information respecting the
Company's life insurance in-force, prior to adjustment for coinsurance ceded to
third party reinsurers, as of December 31 for each of the years indicated:
<TABLE>
<CAPTION>
1995 1994 1993 1992 1991
---- ---- ---- ---- ----
Life Insurance In-Force (In Thousands)
----------------------- --------------
<S> <C> <C> <C> <C> <C>
Whole Life and endowment $ 233,244 $ 234,579 $ 227,792 $ 225,217 $ 230,027
Term 9,009 12,580 21,675 31,225 36,244
--------- --------- --------- --------- ---------
Total Ordinary Life $ 242,253 $ 247,159 $ 249,467 $ 256,442 $ 266,271
========= ========= ========= ========= =========
Group Life $ 60,047 $ 55,773 $ 75,045 $ 78,443 $ 62,104
========= ========= ========= ========= =========
</TABLE>
As is customary with insurance companies, from time to time the
Company enters into reinsurance agreements with other insurance companies
pursuant to which the Company cedes portions of the life insurance that it
writes. Under the terms of the Company's coinsurance agreements, the Company
retains a maximum risk of $25,000 for each insured life under policies covered
by the agreements and cedes all risk in excess of $25,000 to such reinsurers,
provided that the minimum amount that can be ceded to such reinsurers is
limited to $5,000. In 1993, the Company signed an agreement with Swiss Re
America (formerly North American Reinsurance Company) to coinsure its group
life insurance policies, in an amount up to $41,667 which essentially keeps the
Company's net risk retention at $25,000. The liability of the reinsurers
commences simultaneously and continues concurrently with the liability of the
Company with respect to all ceded amounts, and the premiums collected. Certain
policy benefits (such as cash surrender values), death benefits and dividends,
and certain annualized expenses are shared by the Company and the ceding
reinsurers in proportion to the amount of insurance retained by each party. In
addition, the ceding reinsurers are required to maintain a proportionate
reserve with respect to future policy benefits reinsured by such reinsurers. As
of December 31, 1995 and 1994, of the Company's total life insurance in-force
of approximately $302,300,000 and $302,932,000 respectively, the Company had
ceded life insurance in the amount of $135,890,000 and $114,164,000,
respectively, to reinsurers.
Depending on the age of the applicant, the Company generally requires
medical examinations or paramedical examinations of applicants for its life
insurance in excess of certain prescribed amounts for basic coverage and for
applicants over 50 years of age. With respect to the pre-need market where
policy amounts are usually under $5,000, medical examinations are usually not
required regardless of age.
The Company maintains an agreement with the Public Education Health
Insurance Board ("PEHIP") to provide claim administration services. The
agreement between the Company and the PEHIP Board was
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renewed in 1995 for a period of three years. PEHIP provides hospitalization
and other insurance to teachers, educators, and similar persons in the State of
Alabama. Claim administration service fee revenues realized by the Company
pursuant to the contract for 1995, 1994 and 1993 were $1,730,856, $1,719,571
and $1,685,522, respectively. Revenues increased in 1994 and 1995 because of
an additional number of insureds covered under the contract.
The Company also is engaged in the insurance agency and brokerage
business through SIMA, a wholly-owned subsidiary of the Company. SIMA primarily
operates as a third party administrator, providing claims administration
services for self insured and fully insured health plans. SIMA also acts as a
general agent for the Company and as a broker for other insurance companies
with respect to policies not issued by the Company. SIMA's claims
administration operations generated approximately 94% of SIMA revenues for 1995
and 1994.
For additional information regarding the amount and percentage of the
Company's life insurance, and claim administration businesses (including
insurance agency and brokerage), see Note 12 to the Consolidated Financial
Statements of the Company and its subsidiaries, which appear elsewhere herein.
The insurance industry is highly competitive. There are a large number
of insurance companies operating in the United States, a number of which
transact business in the same states as the Company. Some of these insurance
companies are mutual insurers, which return a portion of the premium to the
insured, and may enjoy a competitive advantage over stock insurers, such as the
Company. In addition, many of the insurers with which the Company competes have
much greater resources than the Company, offer more diverse coverage than the
Company, and may not be subject to the same degree of risk as the Company.
Life insurance companies are subject to regulation and supervision by
the states in which they operate. During recent years, increased scrutiny has
been placed upon the insurance industry by state regulators and the National
Association of Insurance Commissioners ("NAIC") who have become involved in
re-examining existing laws and regulations related to the insurance industry.
The focus of most legislative and regulatory proposals has been on insurance
company investment policy and solvency issues. In some instances these reviews
have resulted in new laws or in new interpretations of existing laws. Changes
in statutory accounting rules regarding reinsurance, securities reserves, and
risk-based capital have an effect on all insurance companies. It is not
possible to predict the impact of changes in state and federal legislation and
regulation on the Company's operations.
In 1993, the NAIC adopted guidelines regarding minimum risk-based
capital requirements for all insurance companies that set forth specified
levels of statutory capital depending on the types and quality of investments
held, the types of insurance products offered by the insurer and the type of
liabilities maintained by such insurance company. These requirements are
intended to allow insurance regulators to identify inadequately capitalized
insurance companies based upon the inherent risks in the insurers operations or
business mix. Depending on the ratio of the insurers' surplus to its risk-based
capital, the insurer could be subject to various regulatory actions ranging
from increased scrutiny to conservatorship. Not all states in which the Company
operates have enacted regulations adopting the risk-based capital standards set
forth in the NAIC guidelines. As of December 31, 1994 and 1995, the Company's
risk- based capital ratio exceeded all minimum requirements as set forth in the
NAIC guidelines.
As of the date of this Annual Report on Form 10-KSB, the Company does
not hold any material patents, licenses, franchises or concessions, and such
items are not a factor in its business. In addition,
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the nature of the Company's business is such that there are no raw materials
that are material to the Company's business.
The Company's insurance business is not seasonal in any material way,
and due to the nature of the Company's business, the Company does not have
backlogs of orders.
Management believes that the Company maintains, principally through
its investment policies and the amount of funds on deposit with various lending
institutions, sufficient liquidity to pay policy claims and to respond to
requests for the cash surrender value of insurance policies. In the past, the
Company has not experienced liquidity problems and, in management's opinion,
the policies followed by the Company should prevent such liquidity problems
from occurring in the future.
During the last three fiscal years, the Company has not conducted any
material research activities relating to the development of new products or
services or to the improvement of existing products or services.
During 1995 and 1994, except for revenues derived from the PEHIP
contract, no one customer or affiliated group of customers of the Company was
responsible for ten percent or more of the Company's consolidated revenues.
The nature of the Company's business is such that no material amounts
are expended by the Company with respect to compliance with federal, state and
local environmental laws.
Exclusive of agents engaged by the Company, the Company and its
subsidiaries employed 52 persons as of December 31, 1995, six of whom were
employed in an executive capacity and six who were part-time employees. The
Company believes its relationship with its employees is good.
Item 2. Description of Property.
(a) The Company's executive offices are located in a facility owned
and occupied by it since 1988, in Tuscaloosa, Alabama. The facility contains
approximately 18,000 square feet and the Company believes that its home office
facility is in good condition and is adequate for its purposes for the
foreseeable future.
(b) The Company's primary investment strategy is to attempt to
maintain a portfolio of high quality, diversified investments while maximizing
income and total return with minimal credit risk. The Company is not active,
nor does it anticipate becoming active in real estate or mortgage loan
investing. The Company does hold, however, certain mortgage loans on
single-family residential property. These mortgage loans are secured by a first
lien mortgage on the underlying real properties, which properties are located
primarily in Alabama. These mortgage loans were purchased by the Company in
1982 and are serviced by two local banking mortgage companies.
In addition, approximately 15% of the Company's fixed maturity
investments are in the form of mortgage-backed securities ("MBS"). The
financial performance of a MBS is dependent upon the cash flow generated by an
underlying pool of mortgages. Approximately 38% of the Company's total
investments in MBS are "pass-through" MBS issued by three federal
organizations, the Government National Mortgage Association ("Ginnie Mae"), the
Federal Home Loan Mortgage Association ("Freddie Mac"), and the Federal
National Mortgage Association ("Fannie Mae"). Such pass-through MBS are
generally rated AAA (superior) by commercial rating agencies. The remaining 62%
of the Company's
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investments in MBS (or about 9% of the Company's fixed Maturity investments)
are in collateralized mortgage obligations ("CMOs"). CMOs are securities backed
by a pool of pass-through securities and/or mortgages, and, unlike MBS issued
by Ginnie Mae, Freddie Mac and Fannie Mae, are structured so there are several
classes (or tranches) of securities or mortgages with varying stated
maturities. The principal and interest payments generated by underlying
securities or mortgages are used to retire the tranches and pay interest to the
holders of the CMO in accordance with a preset schedule. Anticipated cash flow
for each tranche is derived by assuming a prepayment rate for the underlying
mortgage collateral. Individual MBS generally yield higher rates of return than
comparable treasury bonds because the amount and timing of their cash flows are
sensitive to interest rate changes. Most MBS have little or no risk of default
but do have other risks. If interest rates fall, MBS holders may get paid off
faster than originally anticipated. This is known as pre-payment risk. If
interest rates rise, MBS holders may get paid off slower than originally
anticipated, thus a rate is earned below what the current market rate is for
similar investments. This is known as extension risk. The Company has not
invested in CMO tranches structured as "interest only," "principal only," or
"residual tranches." In addition, certain insurance regulations have been
adopted which restrict a company's use of these derivative type of investments.
Overall, management believes that the Company has maintained an approach to
investing which has enabled it to provide a quality investment portfolio
without sacrificing overall yield. In addition, the Company employs the
expertise of outside investment managers which manage approximately 30% of the
Company's fixed maturity investments.
Approximately 2.5% of the Company's total invested assets are
considered to be less than investment grade (class 3 or below, or a Standard &
Poor's rating of BB+ or below). The Company is limited by state insurance
regulations which restrict, among other things, overall investments by the
Company in common stock issued by other companies (as a percentage of the
Company's assets) as well as the amount of common stock that can be acquired in
any specific institution.
For additional information regarding the amounts and classifications
of the Company's invested assets, see Note 3 to the Consolidated Financial
Statements of the Company and its subsidiaries, which appear elsewhere herein.
Item 3. Legal Proceedings.
A number of civil jury verdicts have been returned against life and
health insurers in the jurisdictions in which the Company does business. Some
of the lawsuits have resulted in the award of substantial judgments against the
insurer, including material amounts of punitive damages. The Company, like
other life and health insurers, is from time to time involved in such
litigation. Although the outcome of any such litigation cannot be predicted
with certainty, the Company believes that such litigation will not have a
material adverse effect on the financial position, results of operations, or
cash flows of the Company.
Item 4. Submission of Matters to a Vote of Security Holders.
During the quarter ended December 31, 1995, no matter was submitted to
a vote of security holders of the Company.
5
<PAGE> 7
PART II
Item 5. Market for Common Equity and Related Shareholder Matters.
(a) Market Information. The common stock of the Company, par value
$6.00 per share (the "Common Stock"), is traded in the over-the-counter market,
principally in Birmingham, Alabama. The high and low bids on the Company's
Common Stock for each quarter during the last two fiscal years are set forth
below:
<TABLE>
<CAPTION>
1995 High Bid Low Bid
-------- -------
<S> <C> <C>
First Quarter $13.50 $12.50
Second Quarter 15.50 12.50
Third Quarter 16.00 13.50
Fourth Quarter 16.00 15.50
<CAPTION>
1994 High Bid Low Bid
-------- -------
<S> <C> <C>
First Quarter $10.50 $10.50
Second Quarter 11.00 10.50
Third Quarter 13.50 11.00
Fourth Quarter 13.50 12.50
</TABLE>
The adjusted quotations of the Company's Common Stock, as set forth
above, were derived from the actual quotations of the Company's Common Stock
during the periods in question, which were furnished by the National Quotation
Bureau, Inc. The quotations reflect inter-dealer prices, do not include retail
mark-up, mark-down or commissions, and may not represent actual transactions.
(b) Shareholders. As Of March 15, 1996, there were 5,146
shareholders of record of the Company, and the Company had 250,453 shares of
Common Stock issued and outstanding.
(c) Dividends. Under the Alabama Business Corporation Act, the
Company is permitted to pay cash dividends respecting its Common Stock only out
of retained earnings of the Company. Alabama insurance statutes contain
additional limitations on the payment of dividends. For example, Alabama's
insurance law, which requires certain accounting practices which differ in many
respects from those governing the preparation of financial statements under
generally accepted accounting practices, permits cash dividends to be paid only
out of the Company's available statutory surplus funds, which are derived from
realized net profits from the Company's business. For more information
concerning the distinctions between financial accounting practices and those
required by applicable insurance law and regulation, see Note 2 and 10 to the
Consolidated Financial Statements of the Company, included elsewhere in this
report.
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On March 4, 1994, the Board of Directors declared a cash dividend to
be paid on the Company's Common Stock at the rate of $.16 per share. The
declared cash dividend was paid on April 15, 1994 to those shareholders of
record as of the close of business on March 31, 1994. This was the first cash
dividend to be paid with respect to the Company's Common Stock. On February
24, 1995, the Board of Directors declared a cash dividend to be paid on the
Company's Common Stock at the rate of $.09 per share. The declared cash
dividend was paid on April 17, 1995 to those shareholders of record as of the
close of business on March 31, 1995. This was the second consecutive cash
dividend to be paid with respect to the Company's Common Stock. No assurance
is given, however, that any dividends will be paid by the Company in the
future.
Item 6. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
1995 compared to 1994
1995 net income of $932,587 as compared to 1994 net income of
$712,271, an increase of 31%. This increase was primarily the result of
realized investment gains of $74,376 during 1995, compared to realized
investment losses of $171,758, largely from investments in equity securities,
during 1994. Certain policy reserve adjustments of $177,409 were reflected in
the fourth quarter which created a slight loss in the last quarter.
Total revenues for 1995 equaled $9,350,195 compared to revenues in
1994 of $7,307,905, an increase of 28%. This increase is primarily
attributable to increases in premium, investment income, and realized gains.
Increased premium in the pre-need market attributed to a 38% increase
in premium revenues as compared to 1994. The other lines of business of the
Company, ordinary life and other interest sensitive products, have shown a
slight decrease in premium revenue due to lack of marketing and emphasis by
management. The Company is not active in the interest sensitive market due to
interest rate competition and other factors. The recent emphasis on smaller
policies which match a specific policyholder need has increased the number of
policies being administered by approximately 10% during 1995, although the
total amount of life insurance in force has decreased slightly compared with
that of 1994. Management is making a concentrated effort to expand the
pre-need and seniors market share of the Company, including expansion into
additional states. Applications to do business in Arkansas and North Carolina
are now pending with the insurance departments of those states.
Due to various factors, including profitability, reinsurance costs,
and lack of potential growth, the Company terminated its group life insurance
contracts effective February 1996. Management believes that the lost revenue
generated by this line of business, approximately 4% of the Company's premium
revenues in 1995 will be offset by additional revenues in other lines of
business during 1996.
Total benefit payments paid by the Company increased approximately 19%
(from $1,531,029 in 1995 compared to $1,283,699 in 1994) due to increased death
benefits in the Company's older lines of business, universal and ordinary life.
Total operating expenses (commissions, general, taxes and fees)
increased 10%, from $2,964,248 in 1995 compared to $2,684,405 in 1994. This
increase was due primarily to increased premium volume and the operating costs
related thereto, as well as an increase in the total number of policies
serviced by
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the Company. Management believes that immediate future increases in production
can be processed by personnel currently employed.
Net investment income increased 28%, from $1,668,016 in 1995 compared
to $1,298,902 in 1994. This increase was due to additional funds, generated
from increased sales, being invested. Cash and invested assets, on a cost
basis, increased 20% from $22,747,251 in 1994 to $27,241,903 in 1995, before
any adjustment to market value as described in Note 3 of the Notes to
Consolidated Financial Statements of the Company and subsidiaries, which
appear elsewhere herein.
The Company's life insurance operations have generally been
generators, rather than users of cash. Cash flow is generated by insurance
premiums, investment income, and investment maturities. Uses of funds are
primarily purchases of investments, policy benefit payments and operating
expenses. Cash flow from operations increased significantly during 1995, and
adequately funded the Company's current operating needs.
The Company has approximately 2% of invested assets which are
considered to be less than investment grade (NAIC class 3 or below, or a
Standard & Poor's rating of BB+ or below.) The Company's investment strategy is
to attempt to maintain a portfolio of high quality, diversified investments
while maximizing income and total return with minimal credit risk.
Claim administration revenues related to the Company's agreement with
PEHIP increased 1% in 1995 to $1,730,856, as compared with $1,719,571 in 1994.
Claim administration revenues will be reduced in 1996 compared with prior years
due to a reduced fee for services rendered upon renewal of the contract. The
contract was renewed in 1995 for a period of three years. Management believes
that the Company will be able to offset some of this fee reduction by reducing
operating expenses over time by increased efficiency through technology in its
claim processing operations. Any such reduction, if ultimately realized, will
not be immediate, rather it will be done over a period of time as new
techniques and procedures are implemented.
Revenues related to claim administration services provided by SIMA, a
wholly owned subsidiary of the Company, increased 2% in 1995 to $709,266 from
$693,530 in 1994. Operating expenses for SIMA increased 5%, from $615,177 in
1994 to $647,516 in 1995, due primarily to increased marketing activities
related to obtaining and keeping market share.
The insurance industry is highly competitive. Many of the insurers
with which the Company competes have much greater resources than the Company,
offer more diverse coverage than the Company, and may not be subject to the
same degree of risk as the Company. One area that restricts somewhat the
ability of the Company to have rapid growth in its insurance operations is its
ability to obtain additional capital to support the growth. Larger insurance
companies have greater capital resources and greater access to capital markets
than the Company. This requires the Company to carefully monitor and support
its growth primarily through positive earnings.
Life insurance companies are subject to regulation and supervision by
the states in which they operate. Changes in regulation and in statutory
accounting rules regarding investments, assets valuation reserves, and risk
based capital reserve requirements have an effect on all insurance companies.
It is not possible to predict the impact of changes in state and possible
federal legislation on the Company's operations. Not all states in which the
Company operates have enacted regulations adopting the risk based capital
standards set forth in the NAIC guidelines. The risk based capital standards
allow insurance regulators to identify inadequately capitalized insurance
companies based upon the inherent risks in the
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<PAGE> 10
insurers operations, business mix, or investment portfolio. Depending on
results of certain calculations, the insurer could be subject to various
regulatory actions ranging from increased scrutiny to conservatorship. As of
December 31, 1995 and 1994, the Company's risk based capital ratio exceeds all
minimum requirements as set forth in the NAIC guidelines.
Inflation generally increases a policyholder's need for insurance to
provide the same relative benefits and protection originally purchased. The
Company's assets are primarily monetary, due to its large bond portfolio.
During periods of inflation, interest rates generally rise, thereby generating
a higher return on new investments, although the bond portfolio is adversely
affected by a decline in purchasing power with lower market values. The current
rate of inflation will not significantly affect the Company's operation. Due to
its business mix of few interest sensitive products, and because the Company
believes that its operations generate sufficient cash to fund current
operations, Management believes that a period of rising interest rates would
generally have a positive impact on Company operations.
1994 compared to 1993
For 1994 net income of $712,217 after federal income taxes and
realized gains/losses as compared with net income in 1993 of $1,116,420. The
$404,203 decrease in net income experienced in 1994 is primarily the result of
realized investment losses, largely from investments in equity securities,
during 1994 of $171,758, compared to realized investment gains, primarily from
the early call of fixed maturity investments at a premium due to falling
interest rates, during 1993 of $192,667. The $364,425 change between years is
the result of a steady rise in interest rates and overall investment market
conditions which can fluctuate from period to period.
Total revenues for 1994 remained relatively stable at $7,307,905, as
compared to total revenues of $7,291,682 for 1993. In 1994, a general increase
in revenues from the Company's lines of business were offset by certain
investment losses. Pre-need premium revenues rebounded from the decrease in
1993 compared to 1992, to an increase of 14% in 1994 as compared to 1993.
Emphasis on smaller policies which match a specific policyholder need has
increased the number of policies being administered by approximately 8% during
1994, although the total amount of life insurance in force remained relatively
level with that of 1993. Management has emphasized customer service to build a
base of renewal premium. Renewal premium increased approximately 8% over 1993
and accounted for approximately 55% of the total premium volume in 1994.
A majority of the interest sensitive policies which the Company issued
prior to 1993 have few if any withdrawal charges. Because of this option, the
interest rate which the Company credits to policyholders is lower than most of
its competitors which have surrender charges. Credited interest rate
competition and other factors make it more difficult for the Company to compete
or expand in these markets. Total benefit payments increased approximately 17%
primarily due to increased death benefits and withdrawals in the universal life
line of business. Universal life total benefits increased approximately 50%
over the levels of 1993 due to increased deaths along with increased
withdrawals due to the credited interest rate as discussed earlier. Death
benefits in the pre-need line of business increased 11% over 1993. This is
expected as pre-need is now the largest segment of new and renewal business.
Total operating expenses (commission, general, taxes and fees)
increased 2.5% to $2,684,405 in 1994, as compared to $2,618,486 in 1993. This
increase was due primarily to an increase in the number of policies serviced by
the Company, and the corresponding increase in the operating costs related
thereto, partially offset by the reduced operating costs of SIMA.
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<PAGE> 11
Net investment income increased 11% to $1,298,902 in 1994, from
$1,167,067 in 1993. This increase was partly due to the Company's reduction of
equity securities held as investments, along with additional funds being
invested. Cash and invested assets increased 10% to $22,747,251 in 1994,
before any adjustment to market value for fixed maturity investments as
described in note 3 of the Notes to the Consolidated Financial Statements of
the Company and its subsidiaries, which appear elsewhere herein.
Revenues related to claim administration services provided by SIMA, a
wholly-owned subsidiary of the Company, increased slightly, from $691,590 in
1993 to $693,530 in 1994. Operating expenses for SIMA decreased approximately
7%, from $662,244 in 1993, to $615,177 in 1994. These lower operating expenses
were the result of the resignation of an officer of SIMA, which resignation
reduced compensation expenses for SIMA during the year.
Claim administration revenues related to the Company's agreement with
PEHIP increased 2% in 1994 to $1,719,571, as compared with $1,685,522 in 1993.
This increase is the result of the number of additional insureds covered under
the contract.
The Company's life insurance operations have generally been generators
rather than users of cash. Cash flow is generated from life insurance premiums
and deposits, investment income and investment maturities. Primary uses of
funds are purchases of assets for investment, the payment of policy benefits,
commissions to agents, and operating expenses. Cash flow from operations
decreased slightly during 1994. Management believes, however, that current cash
flow from operations is more than adequate to fund current operating needs.
The Financial Accounting Standards Board (FASB) has issued new
accounting standards which affect the accompanying financial statements as
described below.
On January 1, 1994, the Company adopted the provisions of Statement of
Financial Accounting Standards No. 115, Accounting for Certain Investments in
Debt and Equity Securities (SFAS No. 115). In accordance with the provisions of
SFAS No. 115, prior period financial statements were not restated to reflect
the change in accounting principle. For the purposes of adopting SFAS No. 115,
the Company is required to classify all of its investments in debt and equity
securities as either held-to maturity, trading, or available-for-sale
securities. Debt securities which the Company has the positive intent and
ability to hold to maturity are classified as held-to-maturity securities and
reported at amortized cost. Debt and equity securities that are bought and held
principally for the purpose of selling them in the near term are classified as
trading securities and reported at fair value, with unrealized gains and losses
included in earnings. Debt and equity securities not classified as either
held-to-maturity or trading securities are classified as available-for-sale
securities and reported at fair value with unrealized gains and losses excluded
from earnings and reported, net of deferred income taxes, as a separate
component of stockholders' equity. At December 31, 1994, the Company had
designated a portion of its debt investments as being held-to-maturity and the
remaining portion of its debt and all of its equity securities as being
available-for-sale. The adoption of SFAS No. 115 at January 1, 1994 resulted in
a $175,230 increase in stockholders' equity, net of deferred income taxes of
$35,890.
In November 1995, FASB issued A Guide to Implementation of Statement
115 on Accounting for Certain Investments in Debt and Equity Securities (Guide
to Statement 115). In accordance with the special reclassification assessment
provisions contained in the Guide to Statement 115, the Company has elected to
reclassify the portion of its portfolio that was previously classified as
held-to-maturity to available-for-sale as of December 31, 1995. The Company
reclassified securities with an amortized cost of $6,907,796
10
<PAGE> 12
and a market value of $7,328,567 to available-for-sale. This reclassification
resulted in no effect on net income and a $349,240 increase in shareholders'
equity, net of deferred income taxes of $71,531.
In 1995, the Company adopted SFAS No. 107, Disclosures about Fair
Value of Financial Instruments, which requires entities to disclose the fair
value of financial instruments. Also, in 1995, the Company adopted new
disclosure requirements required by Statement of Position 94-6 of the
Accounting Standards Division of the American Institute of Certified Public
Accountants concerning disclosures related to estimates used by the Company in
the preparation of its financial statements. The adoption of these accounting
standards had no effect on the Company's financial statements.
During 1995, the Company adopted SFAS No. 114, Accounting by Creditors
for Impairment of a Loan, and SFAS No. 118, Accounting by Creditors for
Impairment of a Loan-Income Recognition and Disclosures. The Company's mortgage
loans are collateralized by real estate; therefore, any assessment of
impairment has been based upon the estimated fair value of the collateral.
Based on the Company's evaluation of its mortgage loan portfolio, the Company
does not expect any material losses on its mortgage loans and, therefore, no
allowance for losses is required under SFAS No. 114 at December 31, 1995.
In 1995, the Financial Accounting Standards Board issued SFAS No. 121,
Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets
to be Disposed of. The Company anticipates that the impact of adopting this
accounting standard during 1996 will not be material to its financial condition.
Item 7. Financial Statements.
The financial statements and other information required by Item 310(a)
of Regulation S-B are set forth on the pages beginning with F-1 hereof and are
incorporated herein by reference.
Item 8. Changes In and Disagreements With Accountants on Accounting and
Financial Disclosure.
During the two most recent fiscal years of the Company, there has been
no disagreement between the Company and its independent certified public
accountants respecting any matter of accounting principles or practice, any
matter of financial statement disclosure or any matters of auditing scope or
procedure.
Effective September 8, 1995 the Company engaged the firm of Coopers &
Lybrand, L.L.P., to serve as the Company's independent auditor. Jamison, Money,
Farmer & Co., P.C., served as independent auditors for the calendar year 1994
and through September 8, 1995. The change of auditors was approved by
resolution of the Board of Directors of the Company on September 8, 1995.
The report of Jamison, Money, Farmer & Co., P.C. on the financial
statements of the Company for the past two years did not contain an adverse
opinion or disclaimer of opinion, nor was it modified as to uncertainty, audit
scope, or accounting principals.
The Company believes there were no disagreements with Jamison, Money,
Farmer & Co., P.C. within the meaning of instruction 4 of Item 304 of
Regulation S-B on any matter of accounting principles or practice, financial
statement disclosures, or auditing scope or procedure in connection with the
audits of the Company's consolidated financial statements for the calendar
years 1994 and 1993 which if not resolved to their satisfaction would have
caused Jamison, Money, Farmer & Co., P.C., to issue an adverse
11
<PAGE> 13
opinion, disclaimer of opinion, a qualified opinion or a modified opinion as to
uncertainty, audit scope or accounting practices.
This matter was previously reported by the Company in its Current
Report on Form 8-K filed with the Securities and Exchange Commission on
September 12, 1995.
12
<PAGE> 14
PART III
Item 9. Directors, Executive Officers, Promoters and Control Persons of the
Company; Compliance With Section 16(a) of the Exchange Act.
The following tabulation sets forth certain information respecting the
directors and principal executive officers of the Company as of the date
hereof:
<TABLE>
<CAPTION>
Business Experience
Director Office with During Past Five
Name Age Since the Company (5) Years
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Donal S. Dunbar 67 1972 Director Retired, past President, Alabama Warehouse Co., Inc.
(Class I) (a storage company) Troy, AL.
Eddie H. Gilmore** 69 1969** Director Chairman, Ti-Brook, Inc (a Manufacturing business)
(Class I) Green Pond, AL.
Frank H. Hawthorne, Sr.* 72 1969 Director Partner, Hawthorne & Hawthorne, LLC, Attorneys,
(Class II) Montgomery, AL.
Harold V. Hughston, Jr. 42 1981 Director Partner, Hughston, Hughston & Hughston, Attorneys,
(Class III) Tuscumbia, AL.
Ronald J. Koch 38 ---- Secretary & Secretary and Treasurer
Treasurer of the Company.
James W. LaMoreaux 49 1993 Director President, P.E. LaMoreaux & Assoc., Inc.
(Class II) (consulting business), Tuscaloosa, AL.
William H. Lanford* 60 1976 CEO, President and Chief Executive Officer and
Director President of the Company.
(Class III)
Richard S. Manley* 63 1969 Vice Chairman of the Partner, Manley, Traeger & Perry,
Board and Director Attorneys, Demopolis, AL.
(Class II)
Jo A. Mansfield 62 ---- Vice-President Vice-President of the Company.
Claude H. Moore 72 1972 Director Retired, past Interim Associate
(Class I) Director, Alabama Agriculture
Experiment station, Auburn AL.
</TABLE>
13
<PAGE> 15
<TABLE>
<S> <C> <C> <C> <C>
Dennis E. Painter 53 1994 Vice-President Vice-President of the Company.
and Director
(Class III)
Sandra H. Ray 50 1989 Director President, Hall-Ray Realty, Inc.,
(Class I) Tuscaloosa, AL.
Clarence F. Rhea 74 1969 Director Partner, Rhea, Boyd & Rhea,
(Class III) Attorneys Gadsden, Al.
Robert H. Rust 63 ---- Vice-President Vice-President of the Company.
Ferd F. Weil, Sr. 85 1969 Director Consultant, Central Bank of the
(Class II) South and Retired, past President,
Weil Fur Corp. (retailer),
Birmingham, AL.
Jerre R. White* 66 1977 Medical Director Physician, Tuscaloosa, AL.
(Class III)
Ernest G. Williams* 80 1984 Chairman of the Retired, past President and Chief
Board and Director Executive Officer, Affiliated Paper
(Class II) Co., Inc., Tuscaloosa, AL. (paper
supply business).
</TABLE>
- ------------------
* Member of Executive Committee of the Board of Directors.
** Mr. Gilmore served as Director from 1969 to 1980 when he resigned; Mr.
Gilmore was reelected a member of the Board of Directors of the Company
during 1981.
No person listed in the above table has any family relationship with
any other person listed in such table.
Certain officers listed in the above table hold officer positions with
certain subsidiaries of the Company. Mr. Lanford is the President of Southern
Insurance Management Association, Southland National Funeral Group, Inc., and
Peoples Insurance Company, all of which are subsidiaries of the Company. Mr
Koch is Treasurer of Southern Insurance Management Association, Secretary of
Southland National Funeral Group, Inc. and Peoples Insurance Company. Mr.
Painter is Vice-President of Southland National Funeral Group, Inc. and Peoples
Insurance Company, as well as a Director of Southern Insurance Management
Association.
No person listed in the preceding table is a director of another
issuer which (i) has a class of equity securities registered pursuant to
Section 12 of the Securities Exchange Act of 1934 or is subject to Section
15(d) of the Securities Act of 1933, as amended (the "Exchange Act"), or (ii)
is a registered investment company under the Investment Company Act of 1940,
except that Mr. Ferd F. Weil, Sr. is a director of Southern Security Life
Insurance Company, Altamont Springs, Florida, which corporation is subject to
the Securities Exchange Act of 1934.
At each annual meeting of stockholders of the Company, a certain class
of Directors is elected for a term of office to expire at the third succeeding
annual meeting of shareholders of the Company after their election and upon the
election and qualification of their successors. The table above states the
class of each director. Class II directors are scheduled for election at the
annual meeting of shareholders of
14
<PAGE> 16
the Company to be held on May 31, 1996. Class III directors' terms will expire
in 1997, the terms of Class I directors will expire in 1998, and upon their
re-election in 1996, Class II directors' terms will expire in 1999. The term
of all officers of the Company will expire at the Annual Directors' Meeting to
be held in conjunction with the Annual Stockholders' Meeting. It is
contemplated that all of the persons named in the preceding table will be
reelected at such meetings to serve in the capacities described.
None of the officers or directors listed above have been convicted of
any crime during the past ten (10) years.
The Company's executive officers, directors and 10% stockholders are
exempted from the requirement to file reports of ownership and changes in
ownership with the Securities and Exchange Commission. Pursuant to section
27-27-53 of the Alabama Insurance Code, however, such officers, directors and
10% stockholders are required to make such filings with the Alabama
Commissioner of Insurance. The Company is not aware of any filings applicable
to its officers, directors and 10% stockholders which were not filed within a
timely manner during 1995.
15
<PAGE> 17
Item 10. Executive Compensation.
Amount of Compensation. The following table sets forth certain
information respecting the compensation paid to the chief executive officer and
the other named executive officer of the Company during the year ended December
31, 1995:
<TABLE>
<CAPTION>
Annual
Name and Compensation
Principal Position Year Salary ($)
- ------------------ ---- -----------------
<S> <C> <C>
William H. Lanford 1995 $ 128,911 (1)
Chief Executive Officer 1994 125,212 (1)
President and Director 1993 120,588 (1)
Dennis E. Painter, 1995 108,993 (1) (2)
Vice President Marketing 1994 107,216 (1) (2)
& Agency and Director 1993 108,608 (1) (2)
</TABLE>
- --------------------
(1) Includes fringe benefits reported as taxable wages on Form W-2. Fringe
benefits include a company automobile, term life insurance, and group
life insurance coverage, aggregating $5,174, $5,752, and $3,503 for Mr.
Lanford and $1,849, $2,357, and $2,620 for Mr. Painter in 1995, 1994 and
1993, respectively. The Company has a defined contribution profit-sharing
plan (the "401(k) Plan") that covers all employees of the Company
generally. 1995, 1994 and 1993 includes amounts that were contributed
under the 401(k) Plan by the Company aggregating $625, $522 and $297 for
Mr. Lanford and $569, $471 and $275 for Mr. Painter, respectively.
(2) Includes renewal commissions on policies written prior to the time Mr.
Painter became an officer of the Company.
Options, Warrants or Rights. The Company does not have a stock option
plan in effect.
Compensation of Directors. Directors who are not officers or salaried
employees of the Company are paid $350 for attendance at each meeting of the
Board of Directors of the Company. Members of the Executive Committee are paid
$250 for attendance at each meeting of the Executive Committee. In 1995, there
were three meetings of the Board of Directors and nine meetings of the
Executive Committee. For their attendance at these meetings, the directors of
the Company were paid an aggregate of $18,700 during 1995.
Employment Contracts and Termination of Employment and Change-in-Control
Arrangements. The Company does not have any employment contracts or
compensation plan or agreements with any executive officer of the Company.
16
<PAGE> 18
Item 11. Security Ownership of Certain Beneficial Owners and Management.
(a) Security Ownership of Certain Beneficial Owners. To the knowledge
of the Company, no person owned beneficially more than five percent (5%) of the
Company's outstanding Common Stock as of March 15, 1996.
(b) Security Ownership of Management. The following table reflects the
number of shares of Common Stock of the Company beneficially owned as of March
15, 1996 by the named executive officers of the Company, each director and
nominee for director of the Company and by all officers and directors of the
Company as a group:
<TABLE>
<CAPTION>
Name and Address of Amount and Nature of Percent of
Beneficial Owner Title of Class(1) Beneficial Ownership Class
----------------- ----------------- -------------------- -----
<S> <C> <C>
Donal S. Dunbar 2,900 1.16
Troy, Alabama
Eddie H. Gilmore 4,786 1.91
Green Pond, Alabama
Frank H. Hawthorne, Sr. 7,601 3.03
Montgomery, Alabama
Harold V. Hughston, Jr. 1,224 .49
Tuscumbia, Alabama
James W. LaMoreaux 5,666 2.26
Tuscaloosa, Alabama
William H. Lanford 8,788 3.51
Tuscaloosa, Alabama
Richard S. Manley 2,069 .83
Demopolis, Alabama
Claude H. Moore 3,822 1.53
Auburn, Alabama
Dennis E. Painter 1,127 .45
Tuscaloosa, Alabama
Sandra H. Ray 9,741 3.89
Tuscaloosa, Alabama
Clarence F. Rhea 6,344 2.53
Gadsden, Alabama
Ferd F. Weil, Sr. 7,007 2.80
Birmingham, Alabama
Jerre R. White 6,308 2.52
Tuscaloosa, Alabama
</TABLE>
17
<PAGE> 19
<TABLE>
<S> <C> <C>
Ernest G. Williams
Tuscaloosa, Alabama 5,231 2.09
All directors and executive 72,650 29.01
officers as a group (17
Persons)
</TABLE>
- -------------------
(1) The only class of outstanding capital of the Company is Common Stock, par
value of $6.00 per share.
(c) Changes in Control. No change in control of the Company has occurred
since the close of the last fiscal year and there are no arrangements known to
the Company pursuant to which any such change in control may occur in the
future. The Company has received certain inquiries as to the possibility of a
change in ownership. The Board of Directors has determined that such a
negotiated change in control of the Company would not be in the best interests
of its policyholders or shareholders at this time.
Item 12. Certain Relationships and Related Transactions.
The Company is not aware of any transaction during the last two years, or
proposed transaction, to which the Company was or is to be a party, in which
persons identified in Item 404 of Regulation S-B under the Exchange Act has or
is to have any interest.
18
<PAGE> 20
Item 13. Exhibits.
(a) The consolidated financial statements which are filed as a part of
this report are listed in the accompanying Index to Consolidated Financial
Statements, and are set forth at the pages shown in such index. The Company has
filed no current reports on Form 8-K during the last quarter of the period
covered by this report.
19
<PAGE> 21
(b) The following exhibits are being filed as exhibits to this report or
are incorporated herein by reference, as indicated below.
<TABLE>
<CAPTION>
Item Description of Exhibit
- ---- ----------------------
<S> <C> <C> <C>
* 3(a) - Articles of Incorporation of the Company, filed as an exhibit to
the Company's Annual Report on Form 10-K, for the year ended December 31, 1991.
* 3(b) - Bylaws of the Company, filed as an exhibit to the Company's
Annual Report on Form 10-K, for the year ended December 31, 1991.
* 3(c) - Articles of Amendment to the Articles of Incorporation of the
Company, dated as of July 27, 1991, filed as an exhibit to the Company's Annual Report
on Form 10-KSB for the year ended December 31, 1992.
* 3(d) - Articles of Amendment to the Articles of Incorporation of the
Company dated as of May 27, 1994, files as an exhibit to the Company's Annual Report
on Form 10-KSB for the year ended December 31, 1994.
* 10(a) - Peoples Insurance Company Acquisition Letter Agreement
dated November 23, 1993, filed as an exhibit to the Company's Annual Report on Form
10-KSB for the year ended December 31, 1993.
10(b) - Administrative Services Contract dated October 1, 1995, between the Public Education Employees
Health Insurance Board and the Company.
* 21 - List of Subsidiaries of the Company, filed as an exhibit to the Company's Annual Report on Form
10-KSB for the year ended December 31, 1993.
27 - Financial Data Schedule (for SEC use only)
</TABLE>
- ------------------
* Incorporated herein by reference.
20
<PAGE> 22
SIGNATURES
In accordance with Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized.
SOUTHLAND NATIONAL INSURANCE
By: /s/ William H. Lanford
-------------------------------
William H. Lanford
President and Principal Executive Officer
Date: March 28, 1996
In accordance with Section 13 or 15(d) of the Securities Exchange Act
of 1934, this report has been signed below by the following persons on behalf
of the registrant in the capacities and on the dates indicated:
By: /s/ Ronald J. Koch Date: March 28, 1996
----------------------------------
Ronald J. Koch, Treasurer and
Principal Financial Officer
/s/ Donal S. Dunbar Date: March 28, 1996
----------------------------------
Donal S. Dunbar, Director
/s/ Eddie H. Gilmore Date: March 28, 1996
----------------------------------
Eddie H. Gilmore, Director
/s/ Frank H. Hawthorne, Sr. Date: March 28, 1996
----------------------------------
Frank H. Hawthorne, Sr., Director
/s/ Harold V. Hughston, Jr. Date: March 28, 1996
----------------------------------
Harold V. Hughston, Jr., Director
21
<PAGE> 23
/s/ James W. Lamoreaux Date: March 28, 1996
----------------------------------
James W. LaMoreaux, Director
/s/ William H. Lanford Date: March 28, 1996
----------------------------------
William H. Lanford, Director,
President and Principal Executive
Officer
/s/ Richard S. Manley Date: March 28, 1996
----------------------------------
Richard S. Manley, Director
/s/ Claude H. Moore Date: March 28, 1996
----------------------------------
Claude H. Moore, Director
/s/ Dennis E. Painter Date: March 28, 1996
----------------------------------
Dennis E. Painter, Director
/s/ Sandra H. Ray Date: March 28, 1996
----------------------------------
Sandra H. Ray, Director
/s/ Clarence F. Rhea Date: March 28, 1996
----------------------------------
Clarence F. Rhea, Director
/s/ Ferd F. Weil Date: March 28, 1996
----------------------------------
Ferd F. Weil, Sr., Director
/s/ Jerre R. White Date: March 28, 1996
----------------------------------
Jerre R. White, Director
Date: March 28, 1996
----------------------------------
Ernest G. Williams, Director
22
<PAGE> 24
INDEPENDENT AUDITOR'S REPORT
We have audited the accompanying consolidated balance sheet of Southland
National Insurance Corporation and subsidiaries (the Company) as of December
31, 1995, and the related consolidated statements of operations, stockholders'
equity and cash flows for the period ended December 31, 1995. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
Southland National Insurance Corporation and subsidiaries at December 31, 1995,
and the consolidated results of their operations and cash flows for the period
ended December 31, 1995 in conformity with generally accepted accounting
principles.
As discussed in Note 1 to the consolidated financial statements, the Company
changed its method of accounting for certain investments in debt and equity
securities in 1994.
/s/ Coopers & Lybrand, L.L.P.
Birmingham, Alabama
February 9, 1996
1
<PAGE> 25
March 7, 1995
The Board of Directors
Southland National Insurance
Corporation and Subsidiaries
Tuscaloosa, Alabama
INDEPENDENT AUDITOR'S REPORT
We have audited the accompanying consolidated balance sheet of
Southland National Insurance Corporation and Subsidiaries as of December 31,
1994, and the related consolidated statements of operations, stockholders'
equity and cash flows for the period ended December 31, 1994. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to
above present fairly, in all material respects, the consolidated financial
position of Southland National Insurance Corporation and Subsidiaries at
December 31, 1994, and the consolidated results of their operations and cash
flows for the period ended December 31, 1994, in conformity with generally
accepted accounting principles.
As explained in Note 1 to the consolidated financial statements, the
Company instituted certain accounting changes of 1994.
/s/ Jamison, Money, Farmer & Co., P.C.
Certified Public Accounts
Tuscaloosa, Alabama
2
<PAGE> 26
SOUTHLAND NATIONAL INSURANCE CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31, 1995 and 1994
<TABLE>
<CAPTION>
1995 1994
ASSETS
<S> <C> <C>
Investments (Notes 1 and 3)
Securities available-for-sale, at fair value:
Fixed maturities (amortized cost: 1995 - $20,879,649; 1994 - $11,704,691) $21,704,485 $10,905,261
Equity securities (cost: 1995 - $3,501,948; 1994 - $3,992,223) 3,991,788 3,792,104
Fixed maturity securities held-to-maturity, at amortized cost (fair value:
1994 - $4,332,753) 4,481,733
Mortgage loans on real estate 370,056 479,539
Policy loans 226,739 217,588
Student loans 198,392 320,448
Short-term investments 969,696 435,153
Restricted short-term investments 225,257 125,000
----------- -----------
Total investments 27,686,413 20,756,826
Cash 870,166 990,876
Accrued investment income 358,503 309,464
Income tax receivable 101,358
Uncollected premiums 26,549 15,716
Accounts receivable due from reinsurer 227,243 200,298
Accounts receivable and agents' balances (net of allowance for
uncollectible amounts of $50,000 at December 31, 1995 and 1994) 104,690 129,856
Deferred policy acquisition costs 2,588,049 2,618,627
Deferred income taxes (Note 4) 228,548
Property and equipment, net 584,032 643,430
Other 66,042
----------- -----------
Total assets $32,511,687 $25,994,999
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Policy liabilities and accruals:
Future policy benefits:
Life insurance $22,842,221 $19,426,050
Accident and health 3,124 3,177
Accrued claims payable 300,197 204,665
Unearned premiums 20,694 22,560
----------- -----------
Total policy liabilities and accruals 23,166,236 19,656,452
Annuity deposits 475,224 436,487
Other policyholders' funds (Note 5) 104,526 105,802
Income tax payable 17,580
Deferred income taxes (Note 4) 112,456
Other liabilities 284,353 275,799
----------- -----------
Total liabilities 24,160,375 20,474,540
----------- -----------
Commitments and contingencies (Notes 4 and 13)
Stockholders' equity (Notes 1, 9, and 10):
Common stock, $6 par value, 1,250,000 shares authorized, 250,453
shares issued and outstanding in 1995 and 1994 1,502,718 1,502,718
Capital in excess of par value 269,331 269,331
Net unrealized gains (losses) on investments, net of deferred income taxes
of $223,495 and ($169,923) at December 31, 1995 and 1994, respectively 1,091,181 (829,626)
Retained earnings 5,488,082 4,578,036
----------- -----------
Stockholders' equity 8,351,312 5,520,459
----------- -----------
Total liabilities and stockholders' equity $32,511,687 $25,994,999
=========== ===========
</TABLE>
See notes to consolidated financial statements.
3
<PAGE> 27
SOUTHLAND NATIONAL INSURANCE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
for the years ended December 31, 1995 and 1994
<TABLE>
<CAPTION>
1995 1994
<S> <C> <C>
Revenues:
Traditional life and other insurance premiums (Note 1) $4,233,308 $2,864,007
Universal life and investment product charges 900,886 868,536
Net investment income (Note 3) 1,668,016 1,298,902
Other income:
Realized gains (losses) on investments (Note 3) 74,376 (171,758)
Claims administration fees (Note 11) 2,440,122 2,413,101
Miscellaneous income 33,487 35,117
---------- ----------
Total revenues 9,350,195 7,307,905
---------- ----------
Benefits, losses, and expenses:
Death and other benefits 1,531,029 1,283,699
Increase in future policy benefits 3,311,176 2,131,105
---------- ----------
4,842,205 3,414,804
---------- ----------
Underwriting, acquisition, and insurance expenses:
Amortization of deferred policy acquisition costs 408,200 338,336
Commissions 618,694 520,184
Salaries 1,067,132 1,145,021
Other operating expenses 1,278,422 1,019,200
---------- ----------
3,372,448 3,022,741
---------- ----------
Income before income tax 1,135,542 870,360
---------- ----------
Income tax expense (benefit) (Note 4):
Current 255,369 178,757
Deferred (52,414) (20,614)
---------- ----------
202,955 158,143
---------- ----------
Net income $ 932,587 $ 712,217
========== ==========
Net income per share $ 3.72 $ 2.84
========== ==========
Dividends paid per share $ .09 $ .16
========== ==========
</TABLE>
See notes to consolidated financial statements.
4
<PAGE> 28
SOUTHLAND NATIONAL INSURANCE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
for the years ended December 31, 1995 and 1994
<TABLE>
<CAPTION>
UNREALIZED
COMMON STOCK CAPITAL IN INVESTMENT
------------------- EXCESS OF GAINS OR RETAINED
SHARES AMOUNT PAR VALUE (LOSSES) EARNINGS TOTAL
------ ------ --------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1993 250,453 $1,001,812 $770,237 $ 207,188 $3,905,891 $ 5,885,128
Change in par value 500,906 (500,906) 0
Cash dividends ($.16 per share) (40,072) (40,072)
Cumulative effect of change in
accounting principle, net of
deferred income taxes of
$35,890 (Note 1) 175,230 175,230
Decrease in unrealized invest-
ment gains, net of deferred
income taxes of $248,250 (1,212,044) (1,212,044)
Net income 712,217 712,217
------- ---------- -------- ----------- ---------- -----------
Balance, December 31, 1994 250,453 1,502,718 269,331 (829,626) 4,578,036 5,520,459
Cash dividends ($.09 per share) (22,541) (22,541)
Reclassification of held-to-
maturity investments to
available-for-sale, net of
deferred income taxes of
$71,531 (Note 1) 349,240 349,240
Increase in unrealized invest-
ment gains, net of deferred
income taxes of $321,887 1,571,567 1,571,567
Net income 932,587 932,587
------- ---------- -------- ----------- ---------- -----------
Balance, December 31, 1995 250,453 $1,502,718 $269,331 $ 1,091,181 $5,488,082 $ 8,351,312
======= ========== ======== =========== ========== ===========
</TABLE>
See notes to consolidated financial statements.
5
<PAGE> 29
SOUTHLAND NATIONAL INSURANCE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
for the years ended December 31, 1995 and 1994
<TABLE>
<CAPTION>
1995 1994
<S> <C> <C>
Cash flows from operating activities:
Net income $ 932,587 $ 712,217
Adjustments to reconcile net income to net cash provided by
operating activities:
Increase in policy liabilities and accruals 2,491,434 1,903,114
Increase (decrease) in policyholders' funds and other liabilities 131,127 (223,080)
Provision for depreciation 94,326 112,506
Amortization of deferred policy acquisition costs 408,200 338,336
(Increase) decrease in accrued investment income, accounts receivable,
agents' balances, and reinsurance recoverable (201) (189,306)
Provision for deferred income tax (52,414) (20,614)
Acquisition costs deferred (377,622) (945,913)
Net realized (gains) losses on investments (74,376) 171,758
Other (16,187)
----------- -----------
Net cash provided by operating activities 3,536,874 1,859,018
----------- -----------
Cash flows from investing activities:
Securities available-for-sale:
Purchases - fixed maturities (8,573,097) (9,211,880)
Sales - fixed maturities 6,436,922 6,438,825
Maturities - fixed maturities 648,657
Purchases - equities (1,388,682) (1,405,777)
Sales - equities 1,909,345 2,569,127
Securities held-to-maturity:
Purchases (2,890,896) (2,717,539)
Maturities 393,807 247,385
Purchases of other investments (3,747,041) (2,147,807)
Sales or repayments of other investments 3,434,886 3,385,594
Purchase of property and equipment and other assets (34,714) (49,296)
Purchase of restricted short-term investments (225,257) (25,000)
Sales of restricted short-term investments 125,000
----------- -----------
Net cash used in investing activities (4,559,727) (2,267,711)
----------- -----------
Cash flows from financing activities:
Cash dividends paid to stockholders (22,541) (40,072)
Payments on capital lease obligation (10,967)
Receipts for universal life and investment products 1,714,132 2,024,770
Withdrawals on universal life and investment products (789,448) (1,168,917)
----------- -----------
Net cash provided by financing activities 902,143 804,814
----------- -----------
Increase (decrease) in cash (120,710) 396,121
Cash, beginning of year 990,876 594,755
----------- -----------
Cash, end of year $ 870,166 $ 990,876
=========== ===========
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest $ 0 $ 707
=========== ===========
Income taxes $ 102,443 $ 429,618
=========== ===========
</TABLE>
See notes to consolidated financial statements.
6
<PAGE> 30
SOUTHLAND NATIONAL INSURANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ACCOUNTING POLICIES AND BASIS OF CONSOLIDATED FINANCIAL STATEMENT
PRESENTATION
DESCRIPTION OF BUSINESS - Southland National Insurance Corporation (the
Company) was formed in 1969 and is engaged primarily in the life insurance
business. Southland National Insurance Corporation is licensed to transact
business as an insurer in the states of Alabama, Florida, Georgia,
Louisiana, Mississippi, and Tennessee and primarily markets its principal
insurance products, pre-need burial policies, through independent agents.
The operating results of companies in the insurance industry have
historically been subject to significant fluctuations due to competition,
changes in interest rates, investment performance, maintenance of insurance
ratings, and other factors.
BASIS OF PRESENTATION - The accompanying consolidated financial statements
of Southland National Insurance Corporation and subsidiaries are prepared on
the basis of generally accepted accounting principles (GAAP). Such
accounting principles differ from statutory reporting practices used by
insurance companies in reporting to state regulatory authorities (see Note
2).
USE OF ESTIMATES - The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the dates
of the financial statements and the reported amounts of revenues and
expenses during the reporting periods. Actual results could differ from
those estimates. A change in estimated reserves of $177,409 was reflected in
the Company's fourth quarter results.
PRINCIPLES OF CONSOLIDATION - The consolidated financial statements include
the accounts of Southland National Insurance Corporation and its wholly
owned subsidiaries. All material intercompany transactions have been
eliminated.
CASH - The Company includes cash on hand and demand deposits reduced by the
amount of outstanding checks as cash. All highly liquid debt instruments
purchased with an original maturity of three months or less are considered
cash equivalents.
The Company had cash deposits in excess of insured amounts by the FDIC
totaling $1,099,128 and $1,270,953 at December 31, 1995 and 1994,
respectively.
RECENTLY ISSUED ACCOUNTING STANDARDS - The Financial Accounting Standards
Board (FASB) has issued new accounting standards which affect the
accompanying financial statements as described below.
7
<PAGE> 31
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
On January 1, 1994, the Company adopted the provisions of Statement of
Financial Accounting Standards No. 115, Accounting for Certain Investments
in Debt and Equity Securities (SFAS No. 115). In accordance with the
provisions of SFAS No. 115, prior period financial statements were not
restated to reflect the change in accounting principle. For the purposes of
adopting SFAS No. 115, the Company is required to classify all of its
investments in debt and equity securities as either held-to-maturity,
trading, or available-for-sale securities. Debt securities which the Company
has the positive intent and ability to hold to maturity are classified as
held-to-maturity securities and reported at amortized cost. Debt and equity
securities that are bought and held principally for the purpose of selling
them in the near term are classified as trading securities and reported at
fair value, with unrealized gains and losses included in earnings. Debt and
equity securities not classified as either held-to-maturity or trading
securities are classified as available-for-sale securities and reported at
fair value with unrealized gains and losses excluded from earnings and
reported, net of deferred income taxes, as a separate component of
stockholders' equity. At December 31, 1994, the Company had designated a
portion of its debt investments as being held-to-maturity and the remaining
portion of its debt and all of its equity securities as being
available-for-sale. The adoption of SFAS No. 115 at January 1, 1994 resulted
in a $175,230 increase in stockholders' equity, net of deferred income taxes
of $35,890.
In November 1995, FASB issued A Guide to Implementation of Statement 115 on
Accounting for Certain Investments in Debt and Equity Securities (Guide to
Statement 115). In accordance with the special reclassification assessment
provisions contained in the Guide to Statement 115, the Company has elected
to reclassify the portion of its portfolio that was previously classified as
held-to-maturity to available-for-sale as of December 31, 1995. The Company
reclassed securities with an amortized cost of $6,907,796 and a market value
of $7,328,567 to available-for-sale. This reclassification resulted in no
effect on net income and a $349,240 increase in shareholders' equity, net of
deferred income taxes of $71,531.
In 1995, the Company adopted SFAS No. 107, Disclosures about Fair Value of
Financial Instruments, which requires entities to disclose the fair value of
financial instruments. Also, in 1995, the Company adopted new disclosure
requirements required by Statement of Position 94-6 of the Accounting
Standards Division of the American Institute of Certified Public Accountants
concerning disclosures related to estimates used by the Company in the
preparation of its financial statements. The adoption of these accounting
standards had no effect on the Company's financial statements.
During 1995, the Company adopted SFAS No. 114, Accounting by Creditors for
Impairment of a Loan, and SFAS No. 118, Accounting by Creditors for
Impairment of a Loan-Income Recognition and Disclosures. The Company's
mortgage loans are collateralized by real estate; therefore, any assessment
of impairment has been based upon the estimated fair value of the
collateral. Based on the Company's evaluation of its mortgage loan
portfolio, the Company does not expect any material losses on its mortgage
loans and, therefore, no allowance for losses is required under SFAS No. 114
at December 31, 1995.
8
<PAGE> 32
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
In 1995, the Financial Accounting Standards Board issued SFAS No. 121,
Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets
to be Disposed of. The Company anticipates that the impact of adopting this
accounting standard during 1996 will not be material to its financial
condition.
CLAIMS ADMINISTRATION FEES - Claims administration fees are recognized as
earned over the related contract period.
TRADITIONAL LIFE AND HEALTH INSURANCE PRODUCTS - Premiums are reported as
earned when due. Benefits and expenses are associated with earned premiums
so as to result in recognition of profits over the life of the contracts.
This is accomplished by means of the provision for liabilities for future
policy benefits and the amortization of policy acquisition costs in
proportion to the recognition of premiums estimated to be earned. Premium
revenue is stated net of premiums on insurance ceded to other companies.
UNIVERSAL LIFE AND INVESTMENT PRODUCTS - Universal life and investment
products include universal life insurance, deferred annuities, and annuities
without life contingencies. Revenues for universal life and investment
products consist of policy fees that have been assessed against policy
account balances for the costs of insurance, policy administration, and
surrenders. That is, universal life and investment product deposits are not
considered revenues in accordance with generally accepted accounting
principles. Benefit reserves for universal life and investment products
represent policy account balances before applicable surrender charges plus
certain deferred policy initiation fees that are recognized in income over
the term of the policies. Policy benefits and claims that are charged to
expense include benefit claims incurred in the period in excess of related
policy account balances and interest credited to policy account balances.
Interest credit rates for universal life and investment products ranged from
5.25% to 8% in 1995.
DEFERRED POLICY ACQUISITION COSTS - Certain expenses relating to policy
issuance and underwriting of policies, all of which generally vary with and
are primarily related to the production of new business, are being
capitalized as deferred charges. The policy acquisition costs are being
amortized over the estimated life of the contract for traditional life
insurance products. Acquisition costs for universal life and annuities are
being amortized over the lives of the policies in relation to the present
value of estimated gross profits from surrender charges and investment,
mortality and expense margins. Acquisition costs are amortized based on
estimates of mortality, persistency, expenses, interest rates, and various
other factors. The Company periodically updates these estimates and the
related amortization based on actual experience. During 1995 and 1994,
policy acquisition costs of $377,622 and $945,913, respectively, were
deferred. Amortization charged to income amounted to $408,200 and $338,336,
respectively, for 1995 and 1994.
INVESTMENTS - In accordance with SFAS No. 115, the Company has classified
its investments as available-for-sale in 1995; and available-for-sale and
held-to-maturity in 1994. Investments
9
<PAGE> 33
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
are reported on the following bases less allowance for uncollectible amounts
on investments, if applicable:
Fixed maturities (bonds and redeemable preferred stocks) - 1995: at
current market value; 1994: available-for-sale at current market value,
held-to-maturity at amortized cost.
Equity securities (common and nonredeemable preferred stocks) - at current
market value.
Mortgage loans on real estate - at unpaid balances.
Policy loans - at unpaid balances.
Student loans - at unpaid balances.
Short-term investments - at cost, which approximates current market value.
Realized gains and losses on sales of investments are computed using the
specific identification method and are included in net income. Temporary
changes in market values of available-for-sale securities are reflected as
unrealized gains or losses directly in shareholders' equity (net of deferred
income tax) and accordingly have no effect on net income.
PROPERTY AND EQUIPMENT - Property and equipment are reported at cost. The
Company uses both accelerated and straight-line methods of depreciation
based upon the estimated useful lives of the assets. Major repairs or
improvements are capitalized and depreciated over the estimated useful lives
of the assets. The cost and related accumulated depreciation of property and
equipment sold or retired are removed from the accounts, and resulting gains
or losses are included in income. Property and equipment consisted of the
following at December 31:
<TABLE>
<CAPTION>
1995 1994
<S> <C> <C>
Land $ 71,500 $ 71,500
Building 772,113 772,113
Furniture and equipment 1,128,812 1,132,842
---------- ----------
1,972,425 1,976,455
Accumulated depreciation 1,388,393 1,333,025
---------- ----------
$ 584,032 $ 643,430
========== ==========
</TABLE>
FUTURE POLICY BENEFITS - Liabilities for future policy benefits on
traditional life and health insurance products have been computed primarily
using the net level premium method based upon estimated future investment
yields, mortality and withdrawals. Reserve investment yield assumptions are
graded and range from 4% to 8.5%. Benefit reserves for universal life
policies represent policy account balances before applicable surrender
charges plus certain deferred policy initiation fees that are recognized in
income over the term of the policies. Policy benefits and claims that are
charged to expense include benefit claims incurred in the period in excess
of related policy account balances and interest credited to policy account
balances.
CLAIMS - The accrued liability includes estimated unpaid claims reported to
the Company and provisions for estimated incurred, but unreported, claims.
The provision for estimated incurred,
10
<PAGE> 34
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
but unreported, claims is an estimate based on historical experience and
projected claims. Actual experience will differ from this estimate, however,
this difference is not expected to be material to the financial statements.
Policy claims are charged to expense in the period that the claims are
incurred.
Activity in the liability for unpaid claims is summarized as follows:
<TABLE>
<CAPTION>
1995 1994
<S> <C> <C>
Balance, beginning of year $ 221,265 $ 224,284
Less reinsurance 25,373 8,800
---------- ----------
Net balance, beginning of year 195,892 215,484
---------- ----------
Incurred related to:
Current year 1,265,717 1,145,180
Prior year 41,832 53,259
---------- ----------
Total incurred 1,307,549 1,198,439
---------- ----------
Paid related to:
Current year 1,167,877 1,122,216
Prior year 61,367 95,815
---------- ----------
Total paid 1,229,244 1,218,031
---------- ----------
Net balance, end of year 274,197 195,892
Plus reinsurance 106,000 25,373
---------- ----------
Balance, end of year $ 380,197 $ 221,265
========== ==========
</TABLE>
DEFERRED INCOME TAXES - The Company accounts for income taxes using the
asset and liability method, under which deferred income tax amounts are
determined based on the differences between the financial and tax bases of
assets and liabilities as of the balance sheet date multiplied by the tax
rate estimated to be in effect at the time the differences reverse. Such
differences are principally related to the deferral of policy acquisition
costs and the provisions for future policy benefits and expenses.
INCOME PER SHARE - Earnings per share were computed on the basis of the
weighted average number of common shares outstanding during the year which
was 250,453 for 1995 and 1994.
RECLASSIFICATIONS - Certain amounts in the 1994 financial statements and
accompanying notes have been reclassified to be consistent with 1995. These
reclassifications had no effect on previously reported net income or
stockholders' equity.
2. RECONCILIATION WITH STATUTORY REPORTING PRACTICES
Financial statements prepared in conformity with GAAP differ in some
respects from the statutory accounting practices prescribed or permitted by
insurance regulatory authorities. The most significant differences are: (a)
acquisition costs of obtaining new business are deferred and amortized over
the approximate life of the policies rather than charged to operations as
incurred; (b) benefit liabilities are computed using a net level method and
are based on realistic
11
<PAGE> 35
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
estimates of expected mortality, interest and withdrawals as adjusted to
provide for possible unfavorable deviation from such assumptions; (c)
deferred income taxes are provided for temporary differences between
financial and taxable earnings; (d) the Asset Valuation Reserve and Interest
Maintenance Reserve are restored to stockholders' equity; (e) furniture and
equipment, agents' debit balances, and prepaid expenses are reported as
assets rather than being charged directly to surplus (referred to as
nonadmitted items); (f) certain items of interest income, principally
accrual of mortgage and bond discounts are amortized differently; and (g)
bonds are stated at market instead of amortized cost.
The reconciliations of net income and stockholders' equity prepared in
conformity with statutory reporting practices to that reported in the
accompanying consolidated financial statements are as follows:
<TABLE>
<CAPTION>
1995
--------------------------
STOCKHOLDERS' NET
EQUITY INCOME
------------ --------
<S> <C> <C>
Amounts shown in statutory statement in conformity with statutory
reporting practices $5,162,277 $599,726
Asset valuation reserve 536,018
Interest maintenance reserve 179,260 43,331
Non-admitted assets 189,226
Deferred policy acquisition costs 2,588,049 (30,578)
Allowance for uncollectible accounts (50,000)
Adjustment to due and deferred premiums (37,809) (12,291)
Adjustment to life reserves (916,714) 205,528
Deferred income taxes (112,456) 52,414
Accrued income taxes (5,713)
Net unrealized gains and losses on investments, net of
deferred tax 684,614
Consolidation of subsidiaries and other adjustments, net 128,847 80,170
---------- --------
Amounts shown in consolidated financial statements in
conformity with generally accepted accounting principles $8,351,312 $932,587
========== ========
</TABLE>
<TABLE>
<CAPTION>
1994
---------------------------
STOCKHOLDERS' NET
EQUITY INCOME
----------- ----------
<S> <C> <C>
Amounts shown in statutory statement in conformity with statutory
reporting practices $ 4,212,215 $474,310
Asset valuation reserve 474,981
Interest maintenance reserve 135,929 (48,622)
Non-admitted assets 218,947
Cumulative effect of change in accounting principle (175,230)
Deferred policy acquisition costs 2,618,627 39,923
Allowance for uncollectible accounts (50,000)
Adjustment to due and deferred premiums (25,518) (1,030)
Adjustment to life reserves (1,252,732) 134,867
Deferred income taxes 58,625 20,614
Accrued income taxes 5,713 8,657
Net unrealized gains and losses on investments, net of
deferred tax (701,861)
Consolidation of subsidiaries and other adjustments, net 763 83,498
----------- --------
Amounts shown in consolidated financial statements in
conformity with generally accepted accounting principles $ 5,520,459 $712,217
=========== ========
</TABLE>
12
<PAGE> 36
NOTES TO CONSOLIDATED FINANICAL STATEMENTS, CONTINUED
3. INVESTMENTS
The amortized cost and estimated market values of the Company's investments at
December 31 are as follows:
<TABLE>
<CAPTION>
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
--------- ---------- ---------- ------
<S> <C> <C> <C> <C>
Available-for-sale securities at
December 31, 1995:
Fixed maturity securities:
Corporate bonds $ 9,924,289 $ 472,530 $ (24,263) $10,372,556
U.S. Government bonds 4,774,146 112,811 (1,337) 4,885,620
State and municipal bonds 728,160 30,755 (677) 758,238
Public utility bonds 2,311,433 141,368 (3,309) 2,449,492
Mortgage-backed bonds 3,141,621 117,314 (20,356) 3,238,579
----------- ---------- ----------- -----------
20,879,649 874,778 (49,942) 21,704,485
Equity securities:
Common stock 549,039 479,001 (53,931) 974,109
Preferred stock 2,952,909 96,661 (31,891) 3,017,679
----------- ---------- ----------- -----------
$24,381,597 $1,450,440 $ (135,764) $25,696,273
=========== ========== =========== ===========
</TABLE>
<TABLE>
<CAPTION>
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
--------- ---------- ---------- -----------
<S> <C> <C> <C> <C>
Available-for-sale securities at
December 31, 1994:
Fixed maturity securities:
Corporate bonds $ 3,530,765 $ 16,254 $ (238,155) $ 3,308,864
U.S. Government bonds 3,970,065 475 (156,488) 3,814,052
State and municipal bonds 430,240 (43,253) 386,987
Public utility bonds 1,443,336 2,574 (121,255) 1,324,655
Mortgage-backed bonds 2,330,285 4,450 (264,032) 2,070,703
----------- ---------- ----------- -----------
11,704,691 23,753 (823,183) 10,905,261
Equity securities:
Common stock 1,168,262 202,264 (154,800) 1,215,726
Preferred stock 2,823,961 21,555 (269,138) 2,576,378
----------- ---------- ----------- -----------
$15,696,914 $ 247,572 $(1,247,121) $14,697,365
=========== ========== =========== ===========
Held-to-maturity securities at
December 31, 1994:
Fixed maturity securities:
Corporate bonds $ 2,907,220 $ 30,683 (152,615) $ 2,785,288
U.S. Government bonds 49,541 959 50,500
State and municipal bonds 144,857 (12,722) 132,135
Public utility bonds 719,920 11,684 (39,441) 692,163
Mortgage-backed bonds 660,195 32,849 (20,377) 672,667
----------- ---------- ----------- -----------
$ 4,481,733 $ 76,175 $ (225,155) $ 4,332,753
=========== ========== =========== ===========
</TABLE>
13
<PAGE> 37
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
The Company's realized gains and losses on investments are as follows:
<TABLE>
<CAPTION>
1995 1994
<S> <C> <C>
Securities available-for-sale:
Fixed maturity securities:
Gross realized gains $ 85,667 $ 27,473
Gross realized losses (38,770) (84,645)
Equity securities:
Gross realized gains 73,036 121,178
Gross realized losses (45,771) (238,466)
Securities held-to-maturity:
Gross realized gains 2,710
Gross realized losses (8)
Other 214
-------- ---------
Net realized gains (losses) $ 74,376 $(171,758)
======== =========
</TABLE>
The change in the Company's unrealized appreciation (depreciation) on
fixed-maturity securities was $1,773,246 and $(1,280,993) in 1995 and 1994,
respectively; the corresponding amounts for equity securities were $689,459
and $(505,474). The Company's fixed maturity securities and equity
securities are recorded at market value in accordance with SFAS No. 115, as
previously discussed. The recorded market values will fluctuate with changes
in interest rates and other external factors that are beyond the Company's
control.
At December 31, 1995 and 1994, the Company had short-term investments and
investments in fixed-maturity securities with a carrying amount of $280,257
and $497,709, respectively, which were on deposit with state insurance
departments to satisfy regulatory requirements.
The amortized cost and estimated fair value of the Company's investments in
fixed maturity securities at December 31, 1995, by expected maturity, are
shown below. Actual maturities may differ for some securities because
borrowers may have the right to call or prepay obligations.
<TABLE>
<CAPTION>
AMORTIZED
MATURITY: COST FAIR VALUE
----------- -----------
<S> <C> <C>
Due in one year or less $ 1,055,169 $ 1,063,735
Due after one year through five years 3,611,223 3,693,903
Due after five years through ten years 8,234,086 8,545,163
Due after ten years 4,837,550 5,163,105
----------- -----------
17,738,028 18,465,906
Mortgage-backed securities 3,141,621 3,238,579
----------- -----------
Total $20,879,649 $21,704,485
=========== ===========
</TABLE>
14
<PAGE> 38
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
Income from investments by type of investment is shown below for the years
ended December 31:
<TABLE>
<CAPTION>
1995 1994
<S> <C> <C>
Interest from fixed maturities $1,363,800 $1,009,954
Dividends from equity securities 313,955 307,949
Interest from mortgage loans 42,854 58,935
Interest from short-term investments 70,801 43,361
Other investment income 39,565 35,871
---------- ----------
Total investment income 1,830,975 1,456,070
Less: investment expense 162,959 157,168
---------- ----------
Net investment income $1,668,016 $1,298,902
========== ==========
</TABLE>
4. FEDERAL INCOME TAXES
The Company's effective income tax rate varied from the federal income tax
rate as follows:
<TABLE>
<CAPTION>
1995 1994
<S> <C> <C>
Statutory federal income tax rate applied to pretax income 34% 34%
Dividends received deduction (2.0) (2.3)
Small life insurance company deduction (22.7) (23.5)
Alternative minimum tax credit 4.8 3.8
State taxes and other adjustments 3.8 6.2
----- -----
17.9% 18.2%
===== =====
</TABLE>
Details of the deferred tax provision (benefit) consist of:
<TABLE>
<CAPTION>
1995 1994
<S> <C> <C>
Deferred acquisition costs $ (56,976) $ 170,144
Benefit and other reserve charges (51,400) (211,338)
Other 3,548 (37)
AMT credit carryforward (54,157) (32,683)
Change in valuation allowance 106,571 53,300
--------- ---------
Total $ (52,414) $ (20,614)
========= =========
</TABLE>
15
<PAGE> 39
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
The significant components of net deferred tax assets and liabilities are
summarized as follows:
<TABLE>
<CAPTION>
1995 1994
<S> <C> <C>
Deferred income tax assets:
Policy and policyholder reserves $ 801,912 $ 750,512
Unrealized loss on investments 339,846
Alternative minimum tax credit 195,845 141,688
Other 424
Valuation allowance (83,388) (370,237)
---------- ---------
914,369 862,233
---------- ---------
Deferred income tax liabilities:
Deferred policy acquisition costs 571,366 628,342
Unrealized gain on investments 446,990
Other 8,469 5,343
---------- ---------
1,026,825 633,685
---------- ---------
Net deferred income tax assets (liabilities) $ (112,456) $ 228,548
========== =========
</TABLE>
The Company is currently taxed under the tax law's definition of a "small
life insurance company", and as a result, it reasonably expects to be
subject to the alternative minimum tax (AMT) system in the foreseeable
future. As of December 31, 1995, the Company had generated $195,845 of AMT
credit carryforwards, which do not expire.
Deferred tax assets are to be reduced by a valuation allowance if it is more
likely than not that some portion or all of the deferred tax assets will not
be realized. As of December 31, 1994, the Company had established a
valuation allowance primarily for a portion of the AMT credit carryforwards,
unrealized losses arising from SFAS No. 115, and other deferred tax assets
that it determined would not be realizable primarily due to the effects of
the Company's small life insurance company tax deduction. As of December 31,
1995, the reduction of the valuation allowance resulted from the recording
of unrealized gains arising from SFAS No. 115 in conjunction with the
mechanics of the AMT system.
The Company has accumulated $275,698 in policyholders' surplus through 1983
on which federal income taxes have not been paid as allowed under the
Internal Revenue Code. The Code provides that if the Company should take
certain specific actions, the tax will become due and payable.
Changes in the federal income tax laws adopted and effective for 1984 froze
the policyholders' surplus at the balance in the account at December 31,
1983. Distributions or transfers from the policyholders' surplus account
will result in taxable income as under the prior tax laws. Deferred income
taxes have not been provided on amounts designated as Policyholders'
Surplus. The Company does not anticipate involuntarily paying income tax on
amounts in the Policyholders' Surplus accounts.
16
<PAGE> 40
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
5. DIVIDENDS TO POLICYHOLDERS
The Board of Directors is authorized to determine, at its discretion, an
amount, if any, to be set aside for the payment of dividends on the
Company's Founders' participating policies. Dividends paid in 1995 and
1994 amounted to $6,427 and $8,911, respectively. At December 31, 1995
and 1994, Founders' business constitutes approximately 25% and 24%,
respectively, of the number of policies in force, 4% of the life
insurance in force for 1995 and 1994, and 4% of life premiums received
each year of 1995 and 1994, based on total insurance in force and life
premiums revenue, including coinsurance ceded.
6. PENSION PLAN
The Company sponsors a 401(k) plan that became effective January 1, 1993,
that covers all employees over the age of 21 and who have been employed
for at least 90 days. Generally, employees may defer up to 15% of their
gross salary into the plan. The employer may make a matching
discretionary contribution for the employees. The discretionary
contribution will be limited to 5% of the first 6% of salary deferred
until April 1, 1994, at which time the discretionary contribution was
increased to 10% of the first 6% of salary deferred. The Company
contributed $3,587 and $3,845 into the plan for the years ended December
31, 1995, 1994, respectively.
7. LEASES
The Company leases certain automobiles and office machinery under
operating leases. The future minimum rental payments due under the
operating leases are as shown below:
<TABLE>
<CAPTION>
1996 1997 THEREAFTER
<S> <C> <C>
$47,291 $12,967 $-0-
</TABLE>
Amounts charged to expense under all operating leases were $46,246 and
$39,505 for 1995 and 1994, respectively.
8. REINSURANCE
The Company reinsures certain parts of its risks with primarily two
insurers under coinsurance agreements. One of the reinsurers is rated A
(Excellent) by A.M. Best Company, Inc. and the other reinsurer was given
a Financial Performance Rating of 6 (Above Average) by A.M. Best Company,
Inc. Coinsurance agreements are accounted for by passing a portion of the
risk to the reinsurer. Generally, the reinsurer receives a proportionate
part of the premiums less commissions and is liable for a corresponding
part of all benefit payments. The Company presently retains a maximum of
$25,000 on any one insured life.
17
<PAGE> 41
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
The Company has reinsured approximately $135,890,000 and $114,164,000 in
face amount of life insurance risks with three insurers representing
$504,764 and $513,987 of premium ceded for 1995 and 1994, respectively.
In 1995 and 1994, policy and claim reserves relating to insurance ceded
of $193,998 and $185,161, respectively, are included in reinsurance
receivables. Should any of the reinsurers be unable to meet its
obligation at the time of the claim, obligation to pay such claim would
remain with the Company. At December 31, 1995 and 1994, the Company had
paid $26,000 and $8,773, respectively, of ceded benefits which are
recoverable from reinsurers.
9. CAPITAL REQUIREMENTS
The Company does business in six states that have minimum capital
requirements from $100,000 to $1,500,000 and surplus requirements from
$600,000 to $1,500,000. On May 27, 1994, the stockholders approved an
increase in the par value of its common stock from $4 to $6 per share.
This increased capital from $1,001,812 to $1,502,718.
The National Association of Insurance Commissioners (NAIC) has developed
risk-based capital requirements that require insurance companies to
calculate and report information under a risk-based capital formula.
These requirements are intended to allow insurance regulators to identify
inadequately capitalized insurance companies based upon the types and
mixtures or risks inherent in the insurer's operations. The formula
includes components for asset risk, liability risk, interest rate
exposure and other factors. The Company was adequately capitalized under
the formula at December 31, 1995 and 1994.
10. SHAREHOLDER DIVIDEND RESTRICTION
The Company is restricted in the amount of dividends it may pay out by
the insurance regulations of the state of Alabama. Dividends may be paid
without the approval of the Alabama Insurance Commissioner up to an
amount equal to the greater of 10% of statutory surplus as regards
policyholders as of the preceding December 31 or the Company's net
statutory gain from operations for the preceding year reduced by
dividends paid within the preceding fiscal year. In 1996, the Company
could pay dividends up to a maximum of $365,956 without the approval of
the Alabama Insurance Commissioner.
11. THIRD PARTY ADMINISTRATION CONTRACT
The Company entered into an administrative services contract with the
Public Education Employees' Health Insurance Board, effective October 1,
1992, to administer its self-insured insurance program for indemnity,
vision, dental and cancer insurance at a set fee based on a per insured
basis, which is to be paid to the Administrator monthly. This contract
was renewed in 1995 for a period of three years.
18
<PAGE> 42
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
The Company received $1,730,856 and $1,719,571 in 1995 and 1994,
respectively, in fees under the contract, which amounted to 19% and 24%,
respectively, of total revenues.
At December 31, 1995 and 1994, the Company was holding cash, related to
payments of future contract benefits under this administrative services
contract, of $1,209,672 and $915,855, respectively, that was not recorded
in the financial statements.
12. INDUSTRY SEGMENT INFORMATION
The Company operates in the life, accident and health insurance industry
and as a third party administrator. In previous years, the Company
disclosed the following business segments: underwriting life, accident
and health insurance, operating a third party administrator and insurance
broker, and administering claims for a third party for a fee. Due to a
decline in the significance of operating as an insurance broker, this
business segment has been consolidated into the third party
administration segment and the 1994 results have been appropriately
restated. The following table sets forth revenues and income before
income tax of the Company's business segments for the years ended
December 31, 1995 and 1994. Assets are not readily identifiable by
business segments. The primary components of revenues are premiums, net
investment income, claims administration fees, and realized investment
gains and losses. Premiums and claims administration fees are attributed
directly to each business segment. Net investment income and realized
investment gains and losses are allocated based on premium revenue.
There are no intersegment transactions.
<TABLE>
<CAPTION>
1995 1994
<S> <C> <C>
TOTAL REVENUES
Life $6,862,167 $4,809,404
Accident and health 1,752 10,008
Third party administrator 2,486,276 2,488,493
---------- ----------
$9,350,195 $7,307,905
========== ==========
INCOME BEFORE INCOME TAX
AND EXTRAORDINARY ITEM
Life $ 332,392 $ (3,144)
Accident and health 232 8,380
Third party administrator 802,918 865,124
---------- ----------
$1,135,542 $ 870,360
========== ==========
</TABLE>
13. CONTINGENCIES
Under insurance guaranty fund laws, in most states, insurance companies
doing business therein can be assessed up to prescribed limits for
policyholder losses incurred by insolvent companies. The Company does not
believe such assessments will be materially different from amounts
already provided for in the financial statements. Most of these laws do
provide, however, that an assessment may be excused or deferred if it
would threaten an insurer's own financial strength.
19
<PAGE> 43
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
A number of civil jury verdicts have been returned against life and
health insurers in the jurisdictions in which the Company does business.
Some of the lawsuits have resulted in the award of substantial judgments
against the insurer, including material amounts of punitive damages. The
Company, like other life and health insurers, from time to time is
involved in such litigation. Although the outcome of any such litigation
cannot be predicted with certainty, the Company believes that such
litigation will not have a material adverse effect on the financial
position, results of operations, or cash flows of the Company.
14. FAIR VALUE OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used to estimate the fair
value of each class of financial instruments for which it is practicable
to estimate that value:
MORTGAGE LOANS ON REAL ESTATE - The fair value of mortgage loans is
estimated by discounting the future cash flows using the current rate at
which similar loans would be made to borrowers with similar credit
ratings and for the same remaining maturities.
STUDENT LOANS - The fair value of student loans is estimated using the
next available discounted sales price from Sallie Mae.
POLICY LOANS - It is not practicable to determine the market value of
policy loans since there is no stated maturity, and policy loans are
often repaid by reduction to policy benefits. Policy loan interest rates
generally range from 6% to 8%.
ANNUITIES - The fair value of annuities is estimated to be the surrender
value, which approximates market value.
The carrying amounts and estimated market values of the Company's
financial instruments at December 31, 1995 are as follows:
<TABLE>
<CAPTION>
ESTIMATED
CARRYING MARKET
AMOUNTS VALUES
----------- -----------
<S> <C> <C>
Financial assets:
Investments:
Fixed maturities $21,704,485 $21,704,485
Equity securities 3,991,788 3,991,788
Mortgage loans on real estate 370,056 424,742
Student loans 198,342 199,880
Policy loans 226,739 226,739
Short-term investments 969,696 969,696
Cash 1,095,423 1,095,423
----------- -----------
$28,556,529 $28,612,753
=========== ===========
Financial liabilities:
Annuities $ 475,224 $ 475,224
----------- -----------
$ 475,224 $ 475,224
=========== ===========
</TABLE>
20
<PAGE> 1
EXHIBIT 10(b)
ADMINISTRATIVE SERVICES CONTRACT
THIS AGREEMENT dated the 1st day of October, 1995, is by and between
the Public Education Employees Health Insurance Board ("Board") and Southland
National Insurance Corporation ("Administrator").
W-I-T-N-E-S-S-E-T-H
THAT, WHEREAS, pursuant to Act No. 83-455 of the 1983 Regular Session
of the Legislature of Alabama ("Act"), the Board was empowered to become
self-insured and to employ an Administrator for the furnishing of
administrative services;
WHEREAS, The Board was empowered to award an Administrative Services
Contract on a competitive basis; WHEREAS, the administrative services
desires by the Board were let for bid and the Administrator made the
successful bid for such contract; and
WHEREAS, the Board and the Administrator wish to formalize the Board's
acceptance of the bid of the Administrator by this writing.
NOW THEREFORE, THE PREMISES CONSIDERED, and for and in the further
consideration of the mutual covenants of the parties as hereinafter contained,
the receipt and sufficiency of which is acknowledged, the parties agree as
follows:
1. ADMINISTRATIVE SERVICES. The Administrator agrees to
provide administrative services only for the Board under the Board's
self-funded hospital indemnity program, dental program, cancer program, and
vision program. The services to be provided by the Administrator shall include
all such services as are usually provided by the Claim Department of an
Accident and Health Insurance Company. Such services shall include, but shall
not be limited to:
a. The review and processing of claims submitted
directly to the Administrator by the plan
participant or his assignee in accordance
with the Act;
b. The payment of claims with funds provided to
the Administrator by the Board.
c. The maintenance of a toll free telephone
number for plan participants to use in
connection with claims and general
information;
d. Acceptance of collect telephone calls from
plan participants for questions or
information in connection with claims and
general information;
e. The provision of an answering device for
after hours use, holiday use, and weekend use
under the toll free telephone number which
said
<PAGE> 2
answering device will be equipped with a
recorded message with specific instructions
to the plan participant calling, and which
said recorded message shall use the name
Public Education Employees Health Insurance
Program (PEEHIP); and
f. Notification of plan participant of payment
of Plan benefits to an assignee.
2. DOCUMENTS. The Administrator will provide advice to
PEEHIP in connection with the drafting of any documents requested.
Additionally, the Administrator will furnish to PEEHIP and the participant, the
participant I.D. card, plan documents, a summary plan description, or other
printed material required by PEEHIP within sixty (60) days after PEEHIP's
approval of said documents.
3. BUSINESS RECORDS AND REPORTS. The Administrator will
maintain the following records:
a. A daily register of all drafts issued by the
Administrator under the Plan and all drafts
clearing the account which is to be funded by
the Board and maintained by the Administrator
for the payment of claims;
b. A monthly check register and bank
reconciliation statement;
c. Claim files for each claim submitted; and
d. Such other records as were described in the
bid for this Administrative Services Contract
submitted by the Administrator and accepted
by the Board.
The Administrator will furnish to the Board, at a minimum, the
following reports:
a. A quarterly utilization report;
b. A monthly claim report;
c. A monthly update for aggregate attachment points;
d. A monthly statement of the Administrator's fee;
e. Periodic reports of member eligibility and status;
f. Periodic summarized claim's history for the purposes
of Board budgeting and forecasting;
g. A full annual accounting of funds received and claims
paid or other use of such funds provided to the
Administrator by the Board not later than ninety (90)
days from the end of each policy year;
<PAGE> 3
h. Such other records as were contained in the bid for
the administrative services contract submitted by the
Administrator and accepted by the Board; and
i. Any such other reports (management, claim, or
administrative) as shall be reasonably requested by
the Board.
All business records relating to participants, claims, and
administrative documents in connection therewith shall be maintained on a
computer or in hard copy as reasonably requested by the Board.
Upon termination of this Agreement, the Administrator will, upon the
written request of the Board, turn over to the Board all claim and
administrative files and records.
4. CLAIM PAYMENT. Payment of claims submitted by Plan participants
and approved for payment by the Administrator shall be paid with funds provided
to the Administrator by the Board. Claims shall be paid or denied in
accordance with the terms and conditions of the Plan documents as finally
approved by the Board. The Administrator may seek clarification from the Board
regarding Plan Benefit provisions, but the responsibility for interpretation of
such provisions in claims administered remains with the Administrator.
In the event of the denial of any claim by the Administrator, the
Administrator will follow the review procedure provided in the Act. The
Administrator agrees to undertake the defense of any legal action filed against
the Board or Administrator based upon non-payment or declination of benefits.
In the event a Judgment is entered ordering payment of benefits under the Plan,
the Board agrees to pay such benefits. In the event a Judgment is entered
ordering payment in excess of Plan Benefits, the Administrator agrees to pay
such excess.
5. MISCELLANEOUS. In addition to the toll free number furnished for
the Plan participants, the Administrator will make available two (2) home
telephone numbers for two (2) officers of the Administrator to specific
personnel of PEEHIP for emergency purposes.
6. FEES. For the services rendered under the contract, the Board
shall pay to the Administrator a monthly fee equal to the sum of the total
number of employees enrolled in the respective plans multiplied by the
respective employee monthly charge per plan. The formula may also be stated as
follows:
* The aggregate fees shall not exceed 6.642% of claims paid during the
fiscal year. Any adjustment required by this provision will be credited in
October of the next fiscal year. (Not to exceed maximum amount of total
projected annual cost of $1,543,500.)
<TABLE>
<CAPTION>
Employee Monthly Projected Annual
- --------------------------------------------------------------------------------------------------
Coverage Charge Per Plan Cost
-------- --------------- ----
<S> <C> <C> <C>
Hospital Indemnity Plan $ .75 x number of enrolled
employees = $
----------------
Dental Plan $ 1.60 x number of enrolled
</TABLE>
<PAGE> 4
<TABLE>
<S> <C> <C> <C>
employees = $
----------------
Cancer Plan $ .50 x number of enrolled
employees = $
-----------------
Vision Plan $ 1.10 x number of enrolled
employees = $
-----------------
TOTAL
MONTHLY
FEE = $
---------------------------
</TABLE>
The number of enrolled employees of each Plan shall be submitted by the Board
to the Administrator no later than the first (1ST) Tuesday of each month.
Payment shall be made to the Administrator not later than the tenth (10TH) day
of each calendar month during the term of this Agreement.
7. AUDIT. The Board, or its designee, shall be allowed to conduct an
annual audit of the claims and administrative records of the Administrator.
The Administrator agrees to make its records and personnel available as shall
be reasonably necessary for the auditing agent to perform such audit during
business hours of the Administrator.
8. DUTIES OF THE BOARD.
The Board shall conduct the initial and any subsequent enrollment
periods. The Board shall furnish to the Administrator a list of all
applications, cancellations and changes in status of eligible participants.
Such data shall be provided to the Administrator by the Board on magnetic tape
media in a format to be determined by the Board and approved by the
Administrator. Any updates for all such data shall not be later than monthly.
The Administrator shall have the right to rely and act upon all such
information furnished until notified by the Board that the data is incorrect.
The Board shall provide all funds to the Administrator necessary for
the payment of claims to plan participants and their assignees. Administrator
fees shall be paid promptly upon the request of the Administrator.
The Board shall provide all information and written material to the
plan participants and their assignees. Administrator fees shall be paid
promptly upon the request of the Administrator.
9. TERM. The term of this contract shall begin on the 1ST day of
October 1995 and shall terminate on the 30TH day of September, 1998.
<PAGE> 5
IN WITNESS WHEREOF, the parties have executed this Agreement on the
date set opposite their respective signatures.
SOUTHLAND NATIONAL INSURANCE
CORPORATION
Date: 11/1/95 By: /s/ Robert H. Rust
- ----------------------- ---------------------------------------
As Its: Vice President
-----------------------------------
PUBLIC EDUCATION EMPLOYEES
HEALTH INSURANCE BOARD
Date: 11/1/95 By: /s/ William Walsh
- ----------------------- ---------------------------------------
As Its: Deputy
-----------------------------------
<TABLE> <S> <C>
<ARTICLE> 7
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF SOUTHLAND NATIONAL INSURANCE CORPORATION FORM
10-KSB FOR THE YEAR ENDED DECEMBER 31, 1995, AND IS QUALIFIED IN ITS ENTIRETY
BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> DEC-31-1995
<DEBT-HELD-FOR-SALE> 21,704,485
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 3,991,788
<MORTGAGE> 370,056
<REAL-ESTATE> 0
<TOTAL-INVEST> 27,686,413
<CASH> 870,166
<RECOVER-REINSURE> 26,000
<DEFERRED-ACQUISITION> 2,588,049
<TOTAL-ASSETS> 32,511,687
<POLICY-LOSSES> 23,145,542
<UNEARNED-PREMIUMS> 20,694
<POLICY-OTHER> 475,224
<POLICY-HOLDER-FUNDS> 104,526
<NOTES-PAYABLE> 0
0
0
<COMMON> 1,502,718
<OTHER-SE> 6,848,594
<TOTAL-LIABILITY-AND-EQUITY> 32,511,687
5,134,194
<INVESTMENT-INCOME> 1,668,016
<INVESTMENT-GAINS> 74,376
<OTHER-INCOME> 2,473,609
<BENEFITS> 4,842,205
<UNDERWRITING-AMORTIZATION> 408,200
<UNDERWRITING-OTHER> 2,964,248
<INCOME-PRETAX> 1,135,542
<INCOME-TAX> 202,955
<INCOME-CONTINUING> 932,587
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 932,587
<EPS-PRIMARY> 3.72
<EPS-DILUTED> 3.72
<RESERVE-OPEN> 0
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 0
<PAYMENTS-PRIOR> 0
<RESERVE-CLOSE> 0
<CUMULATIVE-DEFICIENCY> 0
</TABLE>
