Back to GetFilings.com
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1999, or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Transition Period from to
Commission File Number 2-35669
Southern Security Life Insurance Company
----------------------------------------
(Exact name of registrant as specified in its Charter)
FLORIDA 59-1231733
- ---------------------------------- -------------
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification Number)
755 Rinehart Road, Lake Mary, Florida 32746
------------------------------------- -----
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (407) 321-7113
---------------
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange
Title of each Class on which registered
- ------------------- --------------------
None None
Securities registered pursuant to Section 12(g) of the Act:
Name of each exchange
Title of each Class on which registered
- ------------------- --------------------
None None
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to the filing
requirements for the past 90 days. X Yes No
------- -----
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Company's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The aggregate market value of the voting stock held by non-affiliates of the
Registrant as of March 27, 2000 was approximately $9,420,696.
As of March 27, 2000, registrant had issued and outstanding 1,907,989 shares of
Common Stock.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the definitive Proxy Statement for the Registrant's 2000 Annual
Meeting of Stockholders' are incorporated by reference into Part III hereof.
PART I
Item 1. Business.
- -----------------
Southern Security Life Insurance Company ("the Company") is a legal reserve life
insurance company authorized to transact business in the states of Alabama,
Florida, Georgia, Hawaii, Indiana, Illinois, Kentucky, Louisiana, Michigan,
Missouri, Oklahoma, South Carolina, Tennessee and Texas. It was incorporated
under Florida law in 1966 and was licensed and commenced business in 1969. The
Company obtained authorization in the states of Indiana and Oklahoma in 1996 and
will continue the process of seeking authorization to transact business in
additional states during 2000. During 1999 approximately 40% of the premium
income of the Company was from business in force in Florida, its state of
domicile. The Company's only industry segment is the ordinary life, accident and
health and annuity business.
Effective December 17, 1998, Security National Financial Corporation ("SNFC"),
an SEC registrant, acquired 100% of the assets of Consolidare Enterprises, Inc.
("Consolidare") which owned 57.4% of the outstanding shares of the Company.
During March 1999, SNFC changed Consolidare's name to SSLIC Holding Company,
Inc.
The Company at present writes universal life policies with various companion
riders as well as a traditional life product. In the past it has written various
forms of ordinary life insurance policies and annuity contracts. The Company's
accident and health insurance business has never been a significant portion of
the Company's business. It does not presently write industrial life or group
life insurance other than through its participation as a reinsurer in the
Servicemen's Group Life Insurance Program ("SGLI"). In 1996, the Company
introduced a new whole life product designed to appeal to the final expense
market.
The Company introduced its first universal life product in 1986 and currently
has two principal universal life products in force. These universal life
products offer flexibility to the client as well as tax advantages, both
currently and upon the death of the insured. These products allow the Company to
better compete in the current market environment. In excess of 8% and 23% of the
life policies written by the Company in 1999 and 1998, respectively, were
universal life products.
During 1996, the Company introduced a new series of products designed for the
seniors market. This new series targets the needs of senior citizens especially
as they plan for their final expenses. These new policies are traditional
endowment type policies. Because they are written to a senior market they are
designed to accommodate adverse health conditions. Because of the size of the
policies they are usually issued with only limited underwriting. The coverage
size of the policy is roughly equivalent to the insured's anticipated funeral
costs. This new series represented 84 % of the life policies written in 1999.
New field sales representatives are being actively recruited to market the
product.
The Company is continuing to support its traditional universal life marketing as
well. The Company established a lead generation program which has been coupled
with a recruiting program for new sales agents to help rebuild the market. This
has helped to increase opportunities to expand sales of its universal life
products which are designed to provide an insurance program as well as a savings
vehicle through the cash values of the policy.
The following table provides information (on a statutory basis) concerning the
amount and percentage of premium income resulting from the principal lines of
insurance written by the Company during the periods indicated:
1999 1998 1997
==== ==== ====
Per- Per- Per-
Amount centage Amount centage Amount centage
------- ------- ------- ------ ------- -------
Life
Insurance-
Ordinary (1)(2) $8,103,864 92% $7,602,811 91% $8,386,972 94%
Individual
Annuities (1) 46,348 1% 90,289 1% 70,809 1%
Life
Insurance-
Group (SGLI) 438,124 5% 460,029 6% 476,455 5%
Other -
Accident &
Health 205,872 2% 158,882 2% 11,323 0%
---------- ----- ---------- ------ ---------- ----
$8,794,208 100% $8,312,011 100% $8,945,559 100%
========== ===== ========== ====== ========== =====
2
(1) A portion of each of the deposit term policies previously sold by the
Company represents ordinary life insurance and the balance represents
an individual annuity.
(2) The 1999, 1998, and 1997 premium income for life insurance-ordinary
are net of reductions of $1,236,735, $1,329,814, and $1,517,988,
respectively, in ceded premium paid to all reinsurers, including Mega
Life.
The following table gives information on a generally accepted accounting
principles basis concerning operating ratios of the Company for the periods
indicated:
1999 1998 1997
---- ---- ----
Total Net Insurance
Revenues $ 6,901,546 $ 7,228,227 $ 7,643,650
Benefit Costs Paid or
Provided:
Amount $ 4,453,564 $ 4,346,820 $ 4,431,474
Ratio to Net Insurance
Revenue 64.5% 60.1% 58.0%
Amortization of Deferred Policy
Acquisition Expenses:
Amount $ 3,029,223 $ 3,484,689 $ 3,542,617
Ratio to Net Insurance
Revenue 43.9% 48.2% 46.3%
General Insurance Expenses:
Amount $ 3,261,134 $ 4,134,686 $ 3,472,255
Ratio to Net Insurance
Revenue 47.3% 57.2% 45.4%
Income (Loss) Before Income
Taxes:
Amount $ 782,126 $ (625,640) $ 249,410
Ratio to Net Insurance
Revenue 11.3% (8.7%) 3.3%
Ratio to Total Revenue and
Investment Income 6.8% (5.5%) 2.1%
Ratio to Equity 5.0% (4.0%) 1.5%
3
The following table provides information about the Company concerning changes in
life insurance in force during the periods indicated (exclusive of acciden- tal
death benefits):
1999 1998 1997
---- ---- ----
(In thousands except lapse ratios)
Total life insurance in force at beginning of period:
Ordinary Whole Life &
Endowment-Participating $ 532 $ 381 $ 441
Ordinary Whole Life &
Endowment-Non-Participating 913,683 1,019,179 1,157,624
Term 4,799 6,478 7,884
Reinsurance Assumed 548,515 532,772 537,701
----------- ----------- -----------
Total $ 1,467,529 $ 1,558,810 $ 1,703,650
Additions (including re-
insurance assumed):
Ordinary Whole Life &
Endowment-Participating $ -- $ -- $ --
Ordinary Whole Life &
Endowment-Non-Participating 66,591 68,935 82,390
Term -- -- --
Reinsurance Assumed 22,402 21,617 19,021
----------- ----------- -----------
Total $ 88,993 $ 90,552 $ 101,411
Terminations:
Death 2,172 $ 1,605 $ 2,010
Lapse and Expiry 31,418 48,034 57,435
Surrender 67,515 132,184 186,654
Other -- 10 152
----------- ----------- -----------
Total $ 101,105 $ 181,833 $ 246,251
Life Insurance in force at end of period:
Ordinary Whole Life &
Endowment-Participating $ 238 $ 532 $ 381
Ordinary Whole Life &
Endowment-Non-Participating 892,962 913,683 1,019,179
Term 3,646 4,799 6,478
Reinsurance Assumed 558,571 548,515 532,772
----------- ----------- -----------
Total $ 1,455,417 $ 1,467,529 $ 1,558,810
----------- ----------- -----------
Reinsurance Ceded (250,691) (297,913) (337,901)
----------- ----------- -----------
Total after Reinsurance Ceded $ 1,204,726 $ 1,169,616 $ 1,220,909
=========== =========== ===========
Lapse Ratio (Reflecting termina-
tion by surrender and lapse;
ordinary life insurance only): 9.1% 17.4% 20.0%
The Company invests and reinvests portions of its funds in securities which are
permitted investments under the laws of the State of Florida, and part of its
revenue is derived from this source. Generally, securities comprising permitted
investments include obligations of Federal, state and local governments;
corporate bonds and preferred and common stocks; real estate mortgages and
certain leases. The following table summarizes certain information regarding the
Company's investment activities:
Average Gross Net
Fiscal Investment Investment Investment Net
Year Assets (1) Income(2) Income (3) Yield (4)
- ----- ---------- ---------- ---------- ---------
1999 $50,221,950 $ 3,924,271 $ 3,909,373 7.78%
1998 $52,227,057 $ 3,599,547 $ 3,587,147 6.87%
1997 $51,094,803 $ 3,568,158 $ 3,545,311 6.94%
(1) Computed by summing the beginning and ending investment balances and
dividing by 2.
(2) Excludes investment gains and losses.
(3) Net of investment expense and before income taxes.
(4) Computed on an annualized basis. Represents ratio of net
investment income to average invested assets.
4
The Company continues its activities as a qualified lender under the Federal
Family Educational Loan Program. Through this program the Company makes various
types of student and parent loans available. All student loans made by the
Company are guaranteed by the Federal Government. As it has in the past, the
Company sells these student loans on a periodic basis to the Student Loan
Marketing Association ("SLMA") thereby keeping these funds liquid.
The Company presently sells its policies on a general agency basis through a
field force consisting of approximately 937 agents. All such agents are licensed
as agents of, and sell for, the Company and are independent contractors who are
paid exclusively on a commission basis for sales of the Company's policies. Some
of the Company's agents are part-time insurance agents. Most of the Company's
agents are associated with Insuradyne Corporation, a wholly-owned subsidiary of
Security National Financial Corporation. See "Certain Relationships and Related
Transactions" in item 13, Part III of this Report.
Effective January 1, 1999, the Company entered into an Administrative Services
Agreement with its ultimate parent Security National Financial Corporation
(Security National). Under the terms of the Administrative Services Agreement,
all of the Company's employees became employees of Security National.
Administrative functions previously performed by the Company are now being
furnished to the Company under this Agreement. The Company will pay to Security
National $250,000 per month or $3 million per year for the Administrative
services.
Section 624.408 of the Florida Statutes requires a stock life insurance company
to maintain minimum surplus on a statutory basis at the greater of $1,500,000 or
four percent (4%) of total liabilities. The Company's required statutory minimum
surplus calculated in accordance with this section is approximately $1,886,000.
If the capital and surplus of the Company computed on such basis should fall
below that amount, then the Company's license to transact insurance business in
the State of Florida, the Company's most significant market, could be revoked
unless the deficiency is promptly corrected. As of December 31, 1999, the
Company had statutory capital and surplus of $8,976,516, well in excess of the
required minimum.
The Risk-Based Capital for Life and/or Health Insurers Model Act (the "Model
Act") was adopted by the National Association of Insurance Commissioners (NAIC)
in 1992. The main purpose of the Model Act is to provide a tool for insurance
regulators to evaluate the capital resources of insurers as related to the
specific risks which they have incurred and is used to determine whether there
is a need for possible corrective action. The Model Act or similar regulations
may have been or may be enacted by the various states.
The Model Act provides for four different levels of regulatory action, each of
which may be triggered if an insurer's Total Adjusted Capital is less than a
corresponding "level" of Risk-Based Capital ("RBC").
The "Company Action Level" is triggered if an insurer's Total Adjusted
Capital is less than 200% of its "Authorized Control Level RBC" (as
defined in the Model Act), or less than 250% of its Authorized Control
Level RBC and the insurer has a negative trend ("the Company Action
Level"). At the Company Action Level, the insurer must submit a
comprehensive plan to the regulatory authority of its state of domicile
which discusses proposed corrective actions to improve its capital
position.
The "Regulatory Action Level" is triggered if an insurer's Total
Adjusted Capital is less than 150% of its Authorized Control Level RBC.
At the Regulatory Action Level, the regulatory authority will perform a
special examination of the insurer and issue an order specifying
corrective actions that must be followed.
The "Authorized Control Level" is triggered if an insurer's Total
Adjusted Capital is less than 100% of its Authorized Control Level RBC,
and at that level the regulatory authority is authorized (although not
mandated) to take regulatory control of the insurer.
The "Mandatory Control Level" is triggered if an insurer's Total
Adjusted Capital is less than 70% of its Authorized Control level RBC,
and at that level the regulatory authority must take regulatory control
of the insurer. Regulatory control may lead to rehabilitation or
liquidation of an insurer.
5
Based on calculations using the NAIC formula as of December 31, 1999, the
Company was well in excess of all four of the control levels listed.
The industry in which the Company is engaged is highly competitive. There are in
excess of 850 life insurance companies licensed in Florida, where a substantial
amount of the Company's premium income is produced, and there are comparable
numbers of insurance companies licensed in Alabama, Georgia, Hawaii, Indiana,
Illinois, Kentucky, Louisiana, Michigan, Missouri, Oklahoma, South Carolina,
Tennessee and Texas. Many of the Company's competitors have been in business for
longer periods of time, have substantially greater financial resources, larger
sales organizations, and have broader diversification of risks. A large number
of the Company's competitors engage in business in many states and advertise
nationally while the Company conducts its business on a regional basis. The
Company is not a significant factor in the life insurance business in any state
where the Company does business.
The states of Alabama, Florida, Georgia, Hawaii, Illinois, Indiana, Kentucky,
Louisiana, Michigan, Missouri, Oklahoma, South Carolina, Tennessee and Texas
require that insurers secure and retain a license or a certificate of authority
based on compliance with established standards of solvency and demonstration of
managerial competence. The Company, like other life insurers, is subject to
extensive regulation and supervision by state insurance regulatory authorities.
Such regulation relates generally to such matters as minimum capitalization, the
nature of and limitations on investments, the licensing of insurers and their
agents, deposits of securities for the benefit and protection of policyholders,
the approval of policy forms and premium rates, periodic examination of the
affairs of insurance companies, the requirement of filing annual reports on a
specified form and the provision for various reserves and accounting standards.
The Company reinsures or places a portion of its insured risks with other
insurers. Reinsurance reduces the amount of risk retained on any particular
policy and, correspondingly, reduces the risk of loss to the Company, thus
giving it greater financial stability. Reinsurance also enables the Company to
write more policies and policies in larger amounts than it would otherwise
consider prudent. On the other hand, reinsurance potentially reduces earnings,
since a portion of the premiums received must be paid to the insurers assuming
the reinsured portion of the risk.
The Company currently cedes its new reinsurance to Businessmen's Assurance
Company ("BMA") and the Reinsurance Company of Hannover, both of which are
unaffiliated reinsurers. Under the terms of the reinsurance agreements, the
Company cedes all risks in excess of the Company's current retention limits.
The Company currently retains a maximum of $75,000 on any one life and lesser
amounts on substandard risks.
Reinsurance for policy amounts in excess of the Company's retention limits is
ceded on a renewable term basis, under which the amount reinsured normally
decreases annually by the amount of increase in the policy reserve. In addition,
the Company has coinsurance agreements with several insurers, under which
premiums are shared based upon the share of the risk assumed.
The Company remains directly liable to policyholders for the full amount of all
insurance directly written by it, even though all or a portion of the risk is
reinsured. Reinsurers, however, are obligated to reimburse the Company for the
reinsured portion of any claims paid. Consequently, if any reinsurer becomes
insolvent or is otherwise unable to make such reimbursement, the Company would
suffer an unexpected loss. The Company has no reason to believe that any of its
reinsurers will be unable to perform their obligations under existing
reinsurance agreements.
On December 31, 1992, the Company entered into a Coinsurance Reinsurance
Agreement with United Group Insurance Company ("UGIC"), now Mega Life. In this
agreement, UGIC agreed to indemnify and the Company agreed to transfer risk to
UGIC in the amount of 18% of all universal life premium paying polices which
were in force on December 31, 1992. Mega Life is an A rated company with A.M.
Best and is an authorized reinsurer in the State of Florida.
As a result of the 1992 agreement, the Company will continue to pay reinsurance
premiums to Mega Life while receiving ceding commissions. As a part of the
coinsurance agreement, Mega Life agreed to share in the expenses of death
claims, surrenders, commissions, taxes and the funding of policy loans.
6
The Company does not assume any reinsurance at the present time other than its
minor participation in Servicemembers' Group Life Insurance and other small
blocks of business.
For reporting to state regulatory authorities the Company is required to
establish policy benefit and other reserves which are calculated in accordance
with statutory requirements and standards of actuarial practice and established
at amounts which, with additions from premiums to be received and assumed
interest on policy reserves compounded annually, are believed to be sufficient
to meet policy obligations as they mature. Life reserves for the Company are
based upon the Commissioner's 1958 and 1980 Standard Ordinary Table of
Mortality, with interest on policies computed at 3, 3-1/2, 4 or 4-1/2%. Annuity
reserves are based on the 1937 Standard Annuity Table, with interest on policies
computed at 3-1/2 or 4%. Reserves on the annuity portion of the Company's
deposit term policies are computed on the accumulation method. Reserves for
universal life policies, which comprise most of the Company's insurance in
force, have been valued by the California Method which was approved by the
Florida Department of Insurance. Reserves under this method are the linear
average of the policy account value and the policy cash surrender value (account
value less the surrender charge).
In 1994, the Florida Department of Insurance issued a new regulation that
required all companies who are not already using the CRVM method to phase into
that method over a period of five years. As required, the Company has filed with
the Department its plan to comply with the new regulation and implemented the
plan beginning January 1, 1995. This has resolved then pending discussions with
the Florida Insurance Department on the Company's reserving methods. The CRVM
reserving method applies only to the Company's statutory financial statements.
The 1999, 1998 and 1997 (decrease)/increase in the statutory reserve due to the
implementation of this regulation was approximately $-0-, $(66,820) and $52,400,
respectively.
In preparing financial statements in accordance with generally accepted
accounting principles, the cost of insurance, expense charges and surrender
charges on universal life products are recognized as revenue. For "Annuity
Contracts" with flexible terms, amounts received from policyholders are not
recognized as revenue but are recorded as deposits in a manner similar to
interest-bearing instruments. Accumulations on these universal life and annuity
contracts are held as "Policyholders' Account Balances." For all other policies
(primarily whole-life) premiums are recorded as revenue and reserves are
calculated using the net level premium method. Accumulation values for these
types of policies are held as benefit reserves. See "Future Policy Benefits" in
Note 1 of the Notes to Financial Statements included in this report.
The Company maintains its own policy files, prepares its own policy forms (with
the assistance of its consulting actuaries), selects risks, calculates premiums,
prepares premium notices, preauthorized checks and commission statements, and
maintains all of its accounting records.
The Company is not affected by Federal, state or local provisions relating to
discharge of materials into the environment. The Company has not spent a
material amount of money during the last three fiscal years on research and
development activities. The business of the Company is not seasonal in nature
and is not dependent on the sources and availability of raw materials. The
business of the Company is not dependent upon a single customer or a few
customers, and no material portion of the Company's business is subject to
renegotiation of profits or termination at the election of the Government.
Item 2. Properties.
- -------------------
The Company's corporate headquarters is located in a two story office building
in Lake Mary, Florida, which is owned by the Company. The Company occupies the
entire second floor of the building. The remaining rentable space is fully
leased as of December 31, 1999.
Item 3. Legal Proceedings.
- --------------------------
The Company has been named as a party in an action brought in the Circuit Court,
Eighteenth Judicial District, Seminole County, Florida. The action was commenced
in December 1998 with an amended complaint filed in April 1999. On three
7
occasions in the past, the Company has been involved in litigation with the
plaintiff, William Thomas. In the pending action, Thomas asserts a claim for
malicious prosecution and a claim for abuse of process purportedly arising out
of a prior action involving him and the Company. In each of the claims, Thomas
seeks compensatory damages of $1.0 million plus costs of the action. Thomas has
undertaken formal discovery. The Company filed a motion for summary judgment on
the claims. On December 28, 1999, the court granted summary judgment in favor of
the Company thereby dismissing Thomas' claims with prejudice. Thomas filed a
notice of appeal and a memorandum in support of his appeal before the District
Court of Appeal of Florida, Fifth Circuit, Daytona Beach, Florida for reversal
of the summary judgment. The Company will file a memorandum in opposition to the
appeal and in support of the summary judgment. Whatever the outcome of the
appeal, the Company intends to vigorously defend the action. Should the summary
judgment be reversed on appeal, the Company will likely engage in formal
discovery.
An action was brought against the Company in July 1999 by Dorothy Ruth Campbell
in the Circuit Court of Escambia County, Alabama. The action arises out of a
denial of coverage for a policy with coverage for $10,000. The claims are for
breach of contract, bad faith and fraudulent misrepresentation. In the action,
Campbell seeks compensatory and punitive damages plus interest. The Company has
filed its response to the complaint and intends to vigorously defend the matter.
An action was brought against the Company in late 1999 by Larry Boyd in the
Circuit Court of Jefferson County, Alabama. The action involves the alleged
purchase by Boyd and his deceased sons. The allegations in the complaint include
an alleged representation by the Company through its sales agent that when
Boyd's sons, the insureds, reached college they would receive monthly payments
for college. Boyd further contends that he lost the value of his deposits on the
college fund policies, lost interest, does not have the college funds promised
to him, and suffered mental anguish and emotional distress. The claims are based
on fraud and misrepresentation and negligence by the Company in hiring, training
and supervising the sales agent. Boyd seeks compensatory and punitive damages,
plus costs. The complaint was responded to and discovery is in progress. The
Company intents to vigorously defend the action.
The Company is not a party to any other legal proceedings outside the ordinary
course the Company's business or to any other legal proceedings which, if
adversely determined, would have a material adverse effect on the Company or its
business.
Item 4. Submission of Matters to a Vote of Security Holders.
- ------------------------------------------------------------
During the fourth quarter of the Company's fiscal year, no matter was submitted
to a vote of security holders.
PART II
Item 5. Market for the Company's Common Stock and Related Stockholder Matters.
- ------------------------------------------------------------------------------
(a) Principal Market and Stock Price. The principal market on which the
Company's common stock is traded is the over-the-counter market. Trading
information with respect to the Company's shares is available through the
National Association of Securities Dealers Automated Quotation (NASDAQ) System
under the symbol SSLI.
The table below presents the high and low market prices for the Company's common
stock during the calendar quarters indicated, as quoted in the NASDAQ system.
The quotations represent prices between dealers in securities and do not include
retail markups, markdowns or commissions and do not necessarily represent actual
transactions.
QUARTER ENDED
- ----------------------------------------------------------------------------
1999 1998
- ----------------------------------------------------------------------------
Mar.31 Jun.30 Sep.30 Dec.31 Mar.31 Jun.30 Sep.30 Dec.31
------ ------ ------ ------ ------ ------ ------ ------
Common
Shares:
High 3 13/16 4 7/32 4 3/4 4 30/32 7 1/4 7 5/8 4 1/8 4 1/4
Low 3 3/4 4 7/32 4 3/4 4 30/32 6 7/8 6 5/8 3 1/2 3 3/4
8
(b) Approximate Number of Holders of Common Stock. There were 1,336 holders of
record of the Company's Common Stock at December 31, 1999.
(c) Dividends. The Company has paid no cash dividends to stockholders during
the past two years, and it is not anticipated that any cash dividends will
be paid at any time in the foreseeable future. The payment of dividends by
the Company is subject to the regulation of the State of Florida Department
of Insurance. Under such regulation an insurance company may pay dividends,
without prior approval of the State of Florida Department of Insurance,
equal to or less than the greater of (a) 10% of its accumulated capital
gains (losses) and accumulated operating income (losses) (i.e. unassigned
surplus) or (b) certain net operating profits (losses) and realized capital
gains (losses) of the Company, as defined in the applicable insurance
statutes. In no case can such dividends be paid if the Company will have
less than 115% of the minimum required statutory surplus as to
policyholders after the dividend is paid. The maximum amount which the
Company could pay as a dividend during 2000 pursuant to such regulation is
approximately $149,000.
9
Item 6. Selected Financial Data.
- --------------------------------
The following table presents selected financial data (on a GAAP basis)
concerning the Company and its financial results during the periods indicated.
YEARS ENDED DECEMBER 31,
------------------------
1999 1998 1997 1996 1995
------ ------ ------ ------ -----
Revenues:
Life insurance
premiums and
policy charges $ 6,901,546 $ 7,228,227 $ 7,643,650 $ 7,915,027 $ 8,158,938
Net investment
income 3,909,373 3,587,147 3,545,311 3,318,627 2,998,875
Realized Gain
(loss) on
investments -- 525,181 506,795 869,502 60,237
Other revenue, net 715,128 -- -- -- --
--------------- --------------- --------------- --------------- ---------------
Total Revenue 11,526,047 11,340,555 11,695,756 12,103,156 11,218,050
Benefits, Losses
& Expenses:
Insurance living
benefits 2,614,754 2,483,197 2,459,638 2,420,021 2,636,851
Insurance death
benefits 1,917,134 1,529,294 1,847,375 1,398,541 1,424,245
Increase (decrease)
in policy
reserves (78,324) 334,329 124,461 (5,201) (12,971)
Amortization of
deferred policy
acquisition
costs 3,029,223 3,484,689 3,542,617 3,364,738 3,069,742
Commissions and
general
expenses 3,261,134 4,134,686 3,472,255 3,336,552 2,825,280
--------------- --------------- --------------- --------------- ---------------
Total expenses 10,743,921 11,966,195 11,446,346 10,514,651 9,943,147
Income (loss)
before income
taxes 782,126 (625,640) 249,410 1,588,505 1,274,903
Income tax expense
(benefit) 150,168 (241 907 54,200 196,000 160,000
--------------- --------------- --------------- --------------- ---------------
NET INCOME (LOSS) $ 631,958 $ (383,733) $ 195,210 $ 1,392,505 $ 1,114,903
=============== =============== =============== =============== ===============
Weighted average
number of
shares
outstanding 1,907,989 1,907,989 1,907,989 1,907,989 1,907,989
--------------- --------------- --------------- --------------- ---------------
Basic income (loss)
per common share $ .33 $ (.20) $ .10 $ .73 $ .58
--------------- --------------- --------------- --------------- ---------------
Diluted income (loss)
per common share $ .33 $ (.20) $ .10 $ .73 $ .58
--------------- --------------- --------------- --------------- ---------------
Shareholders'
Equity $ 15,637,320 $ 15,912,106 $ 16,132,018 $ 15,661,588 $ 14,826,610
=============== =============== =============== =============== ===============
Shareholders'
equity per
common
share $ 8.20 $ 8.34 $ 8.45 $ 8.20 $ 7.77
=============== =============== =============== =============== ===============
Assets $ 77,208,941 $ 81,205,193 $ 82,142,465 $ 81,809,360 $ 81,872,350
--------------- --------------- --------------- --------------- ---------------
Life Insurance:
Insurance in
force $ 1,455,417,000 $ 1,467,529,000 $ 1,558,810,000 $ 1,703,650,000 $ 1,805,756,000
--------------- --------------- --------------- --------------- ---------------
Individual
insurance
issued during
current
year $ 66,591,000 $ 68,935,000 $ 82,390,000 $ 121,646,000 $ 124,222,000
--------------- --------------- --------------- --------------- ---------------
Long term
obligation $ 1,000,000 $ 1,000,000 $ 1,000,000 $ 1,000,000 $ 1,000,000
--------------- --------------- --------------- --------------- ---------------
Dividends
declared per
common share $ 0.00 $ 0.00 $ 0.00 $ 0.00 $ 0.00
=============== =============== =============== =============== ===============
10
Item 7. Management's discussion and analysis of financial condition and results
of operation.
Overview.
- --------
This analysis of the results of operations and financial condition of Southern
Security Life should be read in conjunction with the Selected Financial Data and
Financial Statements and Notes to the Financial Statements included in this
report.
In recent years, the Company has primarily issued two types of insurance
products: universal life and final expense products. Universal life provides
insurance coverage with flexible premiums, within limits, which allow
policyholders to accumulate cash values. The accumulated cash values are
credited with tax-deferred interest, as adjusted by the Company on a periodic
basis. Deducted from the cash accumulations are administrative charges and
mortality costs. Should a policy surrender in its early years, the Company
assesses a surrender fee against the cash value accumulations based on a graded
formula.
Final expense products are traditional endowment type insurance policies written
for the senior market. Because the products are written to a senior market they
are designed to accommodate adverse health conditions. Because of the size of
the policies, the products are usually issued with only limited underwriting.
The coverage size of the policy is roughly equivalent to the insured's
anticipated funeral costs.
An additional source of income to the Company is investment income. The Company
invests those funds deposited by policyholders of universal life and annuity
products in debt and equity securities in order to earn interest and dividend
income, a portion of which is credited back to the policyholders. Interest rates
and maturities of the Company's investment portfolio play an important part in
determining the interest rates credited to policyholders.
Product profitability is affected by several different factors, such as
mortality experience (actual versus expected), interest rate spreads (excess
interest earned over interest credited to policyholders) and controlling policy
acquisition costs and other costs of operation. The results of any one reporting
period may be significantly affected by the level of death claims or other
policyholder benefits incurred due to the Company's relatively small size.
Results of Operations
1999 Compared to 1998
Total revenues increased by $186,000, or 1.6%, to $11,526,000 for fiscal year
1999 from $11,340,000 for fiscal year 1998. Contributing to this increase in
total revenues was a $322,000 increase in net investment income and a $715,000
increase in other revenue.
Net insurance revenues decreased by $326,000, or 4.5%, to $6,902,000 for fiscal
year 1999, from $7,228,000 for fiscal year 1998. This decrease was primarily the
result of a change in the sales mix of the Company's insurance products. Since
March 1998, the sales of the Company's funeral plan products have been greater
than the universal life products. The universal life products were for greater
face amounts than the funeral plan products. Consequently, the insurance
revenues from final expense products were less than those from universal life
products.
Net investment income increased by $322,000, or 9.0%, to $3,909,000 for fiscal
year 1999 from $3,587,000 for fiscal year 1998. The increase was primarily due
to a rental income being paid to the Company from Security National Financial
Corporation, the Company's ultimate parent under the terms of the Administrative
Services Agreement entered into by the Company on January 1, 1999. See Note 11
to the Notes to Financial Statements included in this report. In addition the
Company was able to increase its yield by investing in mortgage loans.
Realized gains on investments decreased from $525,000 in fiscal year 1998 to no
gains in fiscal year 1999. The gains in 1998 were the result of the Company
trading its available-for-sale securities. The Company did not engage in the
trading of any of its available-for-sale securities in 1999.
11
Other revenue totaled $715,000 for fiscal year 1999, as compared to no other
revenue for the same period in 1998. This amount was the result of a settlement
from insurance claims filed for the recovery of the costs to litigate a case
against a former officer of the Company.
Benefits and claims increased by $107,000, or 2.5%, to $4,454,000 for fiscal
year 1999, from $4,347,000 for the comparable period in 1998. The increase was
primarily due to additional death claims.
The amortization of deferred policy acquisition costs decreased by $456,000, or
13.1%, to $3,029,000, for fiscal year 1999, from $3,485,000 for the comparable
period in 1998. The decrease in amortization expenses was primarily due to the
reduction in net insurance revenues.
Operating expenses decreased by $874,000, or 21.1% to $3,261,000 for fiscal year
1999 from $4,135,000 for the same period in 1998. This reduction was primarily
due to the lump sum payment to the Company's former President in December 1998
in connection with the acquisition of Company's parent company.
1998 Compared to 1997
Total revenues decreased by $356,000, or 3.0%, to $11,340,000 for fiscal year
1998, from $11,696,000 for fiscal year 1997. Contributing to this decrease in
total revenue was a $416,000 decrease in net insurance revenue.
Net insurance revenues decreased $416,000, or 5.4%, to $7,228,000 for fiscal
year 1998, from $7,644,000 for fiscal year 1997. This decrease was primarily the
result of a change in the sales mix of the Company's insurance products. Since
March 1998, the sales of the Company's funeral plan products have been greater
than the universal life products. The universal life products were for greater
face amounts than the funeral plan products. Consequently, the insurance
revenues from final expense products were less than those from universal life
products.
Net investment income increased by $42,000, or 1.2%, to $3,587,000 for fiscal
year 1998, from $3,545,000 for fiscal year 1997. This increase was primarily the
result of increased yields of the Company's investments.
Realized gains on investments increased by $18,000 or 3.6% to $525,000 for
fiscal year 1998, from $507,000 for fiscal year 1997. These gains are the result
of trading the Company's available-for-sale securities.
Benefits and claims decreased by $85,000, or 1.9%, to $4,347,000 for fiscal year
1998, from $4,432,000 for the comparable period in 1997. The decrease was a
result of lower policyholder benefits for universal life products.
The amortization of deferred policy acquisition costs decreased by $58,000, or
1.6%, to $3,485,000, for fiscal year 1998, from $3,543,000 for the comparable
period in 1997. The decrease in amortization expenses was primarily due to the
change in net insurance revenues.
Operating expenses increased by $663,000, or 19.1%, to $4,135,000 for fiscal
year 1998, from $3,472,000 for the same period in 1997. This increase was
primarily due to the lump sum payment to the Company's former President in
December 1998 in connection with the acquisition of the Company's parent
company.
Liquidity and Capital Resources.
- -------------------------------
The Company attempts to match the duration of invested assets with its
policyholder liabilities. The Company may sell investments other than those
held- to-maturity in the portfolio to help in this timing; however, to date,
that has not been necessary. The Company purchases short-term investments on a
temporary basis to meet the expectations of short-term requirements of the
Company's products. The Company's investment philosophy is intended to provide a
rate of return which will persist during the expected duration of policyholder
liabilities regardless of future interest rate movements.
The Company's investment policy is to invest predominantly in fixed maturity
securities, mortgage loans, and warehouse mortgage loans on a short-term basis
before selling the loans to investors in accordance with the requirements and
laws governing life insurance companies. Bonds owned by the Company amounted to
12
$27,930,000 as of December 31, 1999 as compared to $33,436,000 as of December
31, 1998. This represents 59.8% and 62.4% of the total investments as of
December 31, 1999 and December 31, 1998, respectively. Generally, all bonds
owned by the Company are rated by the National Association of Insurance
Commissioners. Under this rating system, there are nine categories used for
rating bonds. At December 31, 1999, and at December 31, 1998, the Company did
not have investments in bonds in rating categories three through nine, which are
considered non-investment grade.
If market conditions were to cause interest rates to change, the market value of
the fixed income portfolio (approximately $29.434 million) could change by the
following amounts based on the respective basis point swing (the change in
market values were calculated using a modeling technique):
(in millions of dollars) -200bps -100bps +100bps +200bps
- ------------------------ ------- ------- ------- -------
Change in Market Value $2.328 $1.120 $(1.042) $(2.011)
The Company has no other financial instruments which would be materially
susceptible to market risk.
The Company's insurance operations have historically provided adequate positive
cash flow enabling the Company to continue to meet operational needs as well as
increase its investment-grade securities to provide ample protection for
policyholders.
The Company has classified certain of its fixed income securities as available
for sale, with the remainder classified as held to maturity. However, in
accordance with Company policy, any such securities purchased in the future will
be classified as held to maturity. Business conditions, however, may develop in
the future which may indicate a need for a higher level of liquidity in the
investment portfolio. In that event the Company believes it could sell short-
term investment grade securities before liquidating higher-yielding longer term
securities.
The Company is subject to risk based capital guidelines established by statutory
regulators requiring minimum capital levels based on the perceived risk of
assets, liabilities, disintermediation, and business risk. At December 31, 1999
and December 31, 1998, the Company exceeded the regulatory criteria.
Lapse rates measure the amount of insurance terminated during a particular
period. The Company's lapse rate for life insurance in 1999 was 9.1% as compared
to a rate of 17.4% for 1998.
Effective December 17, 1998, the Company entered into an Administrative Services
Agreement with Security National Financial Corporation ("SNFC"). Under the terms
of the agreement, SNFC has agreed to provide the Company with certain defined
administrative and financial services, including accounting services, financial
reports and statements, actuarial, policyholder services, underwriting, data
processing, legal, building management, marketing advisory services and
investment services. In consideration for the services to be provided by SNFC,
the Company shall pay SNFC an administrative services fee of $250,000 per month,
provided, however, that such fee shall be reduced to zero for so long as the
capital and surplus of the Company is less than or equal to $6,000,000, unless
the Company and SNFC otherwise agree in writing and such agreement is approved
by the Florida Department of Insurance.
The administrative services fee may be increased, beginning on January 1, 2001,
to reflect increases in the Consumer Price Index, over the index amount as of
January 1, 2000. The Administrative Services Agreement shall remain in effect
for an initial term expiring on December 16, 2003. The term of the agreement may
be automatically extended for additional one-year terms unless either the
Company or SNFC shall deliver a written notice on or before September 30, of any
year stating to the other its desire not to extend the term of the agreement.
However, in no event can the agreement be terminated prior to December 16, 2003.
It is anticipated that the Company will realize a reduced level of general and
administrative costs in the future as a result of the Administrative Services
Agreement.
13
Student loans are a service the Company has historically made available to the
public as well as an investment. While the Company anticipates the seasonal
demand for student loan funds and the subsequent sale of such loans to the
Student Loan Marketing Association (SLMA), there are times when additional funds
are required to meet demand for student loans until such time as the sale
thereof to SLMA can be completed. In 1997 the Company renewed its $5,000,000
line of credit with SLMA until 2007 in order to meet these seasonal borrowing
requirements. The Company made no draws against this line of credit throughout
the seasonal period for 1998 or 1997. The Company anticipates borrowings to be
made through this line of credit with SLMA if student loan borrowings are
required for the 1999 seasonal period. SLMA offers a more competitive rate of
interest on such borrowings than the Company has been able to obtain through
banks.
The Company began a new association with USA Group, CAP Program in 1996, for the
purpose of making more student loan funds available without increased costs to
the Company. This association aided in eliminating borrowings for 1998 and 1997.
The Company has fully leased all available rental space in its principal office
building and does not anticipate further capital expenditures to the rental
space.
The Private Securities Litigation Reform Act of 1995 (the "Act") provides a
"safe harbor" for forward-looking statements to encourage companies to provide
prospective information about their businesses without fear of litigation so
long as those statements are identified as forward-looking and are accompanied
by meaningful cautionary statements identifying important factors that could
cause actual results to differ materially from those projected in such
statements. The company desires to take advantage of the "safe harbor"
provisions of the Act.
This Annual Report of Form 10-K contains forward-looking statements, together
with related data and projections, about the Company's projected financial
results and its future plans and strategies. However, actual results and needs
of the Company may vary materially from forward-looking statements and
projections made from time to time by the Company on the basis of management's
then-current expectations. The business in which the Company is engaged involves
changing and competitive markets, which may involve a high degree of risk, and
there can be no assurance that forward-looking statements and projections will
prove accurate.
Factors that may cause the Company's actual results to differ materially from
those contemplated or projected, forecast, estimated or budgeted in such forward
looking statements include among others, the following possibilities: (i)
heightened competition, including the intensification of price competition, the
entry of new competitors, and the introduction of new products by new and
existing competitors; (ii) adverse state and federal legislation or regulation,
including decreases in rates, limitations on premium levels, increases in
minimum capital and reserve requirements, benefit mandates and tax treatment of
insurance products; (iii) fluctuations in interest rates causing a reduction of
investment income or increase in interest expense and in the market value of
interest rate sensitive investment; (iv) failure to obtain new customer, retain
existing customers or reductions in policies in force by existing customers; (v)
higher service, administrative, or general expense due to the need for
additional advertising, marketing, administrative or management information
systems expenditures; (vi) loss or retirement of key executives or employees;
(vii) increases in medical costs; (viii) changes in the Company's liquidity due
to changes in asset and liability matching; (ix) restrictions on insurance
underwriting based on genetic testing and other criteria; (x) adverse changes in
the ratings obtained by independent rating agencies; (xi) failure to maintain
adequate reinsurance; (xii) possible claims relating to sales practices for
insurance products and claim denials and (xiii) adverse trends in morality and
morbidity.
In June 1998, the Financial Accounting Standards Board (the "FASB") issued
Statement No. 133, Accounting for Derivative Instruments and Hedging Activities
("SFAS 133"), which the Company is required to adopt January 1, 2000. SFAS 133
will require the Company to include all derivatives in the statement of
financial position at fair value. Changes in derivative fair values will either
be recognized in earnings as offsets to the changes in fair value of related
14
hedged assets, liabilities and firm commitments or, for forecasted transactions,
deferred and recorded as a component of equity until the hedged transactions
occur and are recognized in earnings. The ineffective portion of a hedging
derivative's change in fair value will be immediately recognized in earnings.
The impact of SFAS 133 on the Company's financial statements will depend on a
variety of factors, including future interpretive guidance from the FASB, the
future level of forecasted and actual foreign currency transactions, the extent
of the Company's hedging activities, the types of hedging instruments used and
the effectiveness of such instruments. However, the Company does not believe the
effect of adopting SFAS 133 will be material to its financial position.
15
Item 8. Financial Statements and Supplementary Data.
The following financial statements of Southern Security Life Insurance Company
are included in Part II, Item 8:
Page Number
Independent Auditors' Report............................................16
Balance Sheets-December 31, 1999 & 1998.................................17
Statements of Operations - years ended
December 31, 1999, 1998 and 1997........................................19
Statements of Shareholders' Equity-years
ended December 31, 1999, 1998 and 1997..................................20
Statements of Cash Flows - years ended
December 31, 1999, 1998 and 1997........................................21
Notes to Financial Statements...........................................23
16
Report of Independent Auditors
Board of Directors & Shareholders
Southern Security Life Insurance Company:
We have audited the accompanying balance sheet of Southern Security Life
Insurance Company as of December 31, 1999 and the related statements of
operations, shareholders' equity, and cash flow for the year then ended. In
connection with our audit of the financial statements, we have also audited the
amounts included in the financial statement schedules as listed in the
accompanying index under Item 14(a). These financial statements and financial
statement schedules are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements and
financial statement schedules 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 1999 financial statements referred to above present fairly,
in all material respects, the financial position of Southern Security Life
Insurance Company as of December 31, 1999, and the results of its operations and
its cash flows for the year ended in conformity with generally accepted
accounting principles. Also in our opinion, the related financial statement
schedules, when considered in relation to the basic financial statements taken
as a whole, present fairly, in all material respects, the information set forth
therein.
Tanner + Co.
Salt Lake City, Utah
March 30, 2000
17
SOUTHERN SECURITY LIFE INSURANCE COMPANY
Balance Sheets
December 31, 1999 and 1998
Assets 1999 1998
- ------ ---- ----
Investments (note 3):
Fixed maturities held-to-maturity
(fair value, $3,985,336 and
$5,064,541 at December 31,
1999 and 1998, respectively) $ 3,978,871 $ 4,956,910
Securities available-for-sale,
at fair value:
Fixed maturities (cost of
$24,789,267 at December 31,
1999 and $27,671,425 at
December 31, 1998) 23,951,111 28,479,161
Equity securities
(cost, $225,980 and
$210,370 at December 31,
1999 and 1998, respectively) 378,440 250,232
Mortgage loans 1,497,688 --
Policy and student loans 8,458,972 8,462,438
Short-term investments (note 11) 8,595,093 11,434,983
----------- -----------
46,860,175 53,583,724
Cash and cash equivalents 4,080,484 682,389
Accrued investment income 582,908 564,118
Deferred policy acquisition costs
(note 4) 12,874,219 13,583,956
Policyholders' account balances on
deposit with reinsurer (note 7) 7,806,866 8,518,571
Reinsurance receivable (note 7) 373,459 306,258
Receivables:
Agent balances 1,215,756 994,493
Other 193,506 351,478
Refundable income taxes 34,951 34,951
Property and equipment, net,
at cost (note 5) 2,435,565 2,585,255
Investment in affiliate at cost 751,052 --
----------- -----------
$77,208,941 $81,205,193
=========== ===========
See accompanying notes to financial statements.
18
SOUTHERN SECURITY LIFE INSURANCE COMPANY
Balance Sheets (continued)
December 31, 1999 and 1998
Liabilities and Shareholders' Equity 1999 1998
- ------------------------------------ ---- ----
Liabilities:
Policy liabilities and accruals
(notes 6 and 7): $ 1,648,976 $ 1,727,300
Future policy benefits:
Policyholders' account balances 50,377,101 52,520,300
Unearned revenue 5,323,954 6,023,399
Other policy claims and benefits
payable 540,407 540,789
Other policyholders' funds, dividend
and endowment accumulations 69,789 64,738
Funds held related to reinsurance
treaties (note 7) 1,475,512 1,419,357
Note payable to related party
(note 9) 1,000,000 1,000,000
Due to affiliated insurance
agency (note 11) 195,785 22,871
General expenses accrued 137,884 747,148
Unearned investment income 324,750 340,622
Other liabilities 63,753 90,489
Income taxes (note 10) 413,710 796,074
------------ ------------
61,571,621 65,293,087
------------ ------------
Shareholders' equity (notes 2,3 and 12):
Common stock, $1 par, authorized
3,000,000 shares; issued and out-
standing, 1,907,989 shares 1,907,989 1,907,989
Capital in excess of par 4,011,519 4,011,519
Accumulated other comprehensive
income (loss) (476,583) 430,161
Retained earnings 10,194,395 9,562,437
------------ ------------
15,637,320 15,912,106
Commitments and contingencies
(notes 7 and 14) -- --
------------ ------------
$ 77,208,941 $ 81,205,193
============ ============
19
SOUTHERN SECURITY LIFE INSURANCE COMPANY
Statements of Operations
Years ended December 31, 1999, 1998, and 1997
1999 1998 1997
---- ---- ----
Revenues:
Net insurance revenues $ 6,901,546 $ 7,228,227 $ 7,643,650
Net investment income
(notes 3, 8 and 11) 3,909,373 3,587,147 3,545,311
Realized gain on
investments (note 3) -- 525,181 506,795
Other revenue, net 715,128 -- --
------------ ------------ ------------
11,526,047 11,340,555 11,695,756
------------ ------------ ------------
Benefits, claims and expenses:
Benefits and claims 4,453,564 4,346,820 4,431,474
Amortization of deferred
policy acquisition
costs (note 4) 3,029,223 3,484,689 3,542,617
Operating expenses
(notes 9 and 11) 3,261,134 4,134,686 3,472,255
------------ ------------ ------------
10,743,921 11,966,195 11,446,346
------------ ------------ ------------
Income(Loss) before
income taxes 782,126 (625,640) 249,410
Income tax expense (benefit)
(note 10) 150,168 (241,907) 54,200
------------ ------------ ------------
Net income(loss) $ 631,958 $ (383,733) $ 195,210
============ ============ ============
Basic and diluted net
income (loss) per share
of common stock (note 12) $ .33 $ (.20) $ .10
============ ============ ============
See accompanying notes to financial statements.
20
SOUTHERN SECURITY LIFE INSURANCE COMPANY
Statements of Shareholders' Equity
Years ended December 31, 1999, 1998 and 1997
Accumulated
Capital other
Common Stock in excess comprehensive Retained
Shares Amount of par income earnings Total
--------- ---------- --------- ------ -------- -----
Balances,
December 31, 1996 1,907,989 $ 1,907,989 $ 4,011,519 $ (8,880) $ 9,750,960 $15,661,588
------------ ------------ ------------ ------------ ------------ -----------
Comprehensive Income:
Net income for the year -- -- -- -- 195,210 195,210
Unrealized appreciation
of securities
available for sale -- -- -- 275,220 -- 275,220
------------ ------------ ------------ ------------ ------------ ------------
Total comprehensive income 470,430
------------
Balances,
December 31, 1997 1,907,989 $ 1,907,989 $ 4,011,519 $ 266,340 $ 9,946,170 $ 16,132,018
------------ ------------ ------------ ------------ ------------ ------------
Comprehensive Income
(Loss):
Net loss for
the year -- -- -- -- (383,733) (383,733)
Unrealized appreciation of
securities available
for sale -- -- -- 163,821 -- 163,821
------------ ------------ ------------ ------------ ------------ ------------
Total comprehensive loss (219,912)
------------
Balances,
December 31, 1998 1,907,989 $ 1,907,989 $ 4,011,519 $ 430,161 $ 9,562,437 $ 15,912,106
------------ ------------ ------------ ------------ ------------ ------------
Comprehensive Income (loss):
Net gain for the year -- -- -- -- 631,958 631,958
Unrealized depreciation of
securities available
for sale -- -- -- (906,744) -- (906,744)
------------ ------------ ------------ ------------ ------------ ------------
Total comprehensive loss (274,786)
Balances,
December 31, 1999 1,907,989 $ 1,907,989 $ 4,011,519 $ (476,583) $ 10,194,395 $ 15,637,320
============ ============ ============ ============ ============ ============
See accompanying notes to financial statements.
21
SOUTHERN SECURITY LIFE INSURANCE COMPANY
Statements of Cash Flows
Years ended December 31, 1999, 1998 and 1997
1999 1998 1997
---- ---- ----
Cash flows provided by (used in) operating activities:
Net income (loss) $ 631,958 $ (383,733) $ 195,210
Adjustments to reconcile net
cash provided by (used in)
operating activities:
Depreciation and amortization 286,514 301,970 232,471
Net realized (gains) on investments -- (525,182) (506,795)
Loss on disposal of property,
plant & equipment 15,180 2,956 100
Deferred income taxes 11,009 175,274 198,100
Amortization of deferred
policy acquisition costs 3,029,223 3,484,689 3,542,617
Acquisition costs deferred (2,084,438) (1,911,282) (2,069,778)
Change in assets and liabilities
affecting cash provided by
operations:
Accrued investment income (18,790) 73,342 50,239
Other invested assets -- -- 13,100
Due from affiliated insurance
agency -- -- (2,078)
Accounts receivable (63,291) (344,122) (105,752)
Reinsurance receivable (67,201) 53,430 20,004
Other policy claims and
future benefits payable (78,706) 431,409 557,739
Policyholders' account balances 2,585,204 2,356,804 2,065,521
Funds held under reinsurance 56,155 79,430 146,561
Unearned premiums (840,474) (1,160,706) (1,114,188)
Dividend and endowment
accumulations 5,051 5,052 90
Payable to affiliated
insurance agent 172,914 (45,775) 35,235
Income taxes payable 139,159 -- (70,164)
Other liabilities (651,872) (133,376) (15,373)
------------ ------------ ------------
Net cash provided by operating
activities $ 3,127,595 $ 2,460,180 $ 3,172,859
------------ ------------ ------------
Cash flows from (used in) investing activities:
Purchase of investments:
Purchase of investments
held-to-maturity $ (477,150) $ -- $ --
Purchase of investments
available-for-sale -- (6,180,178) (32,704,906)
Purchase of equity securities (766,662) (610,370) (3,316,249)
Proceeds from maturity of
held-to maturity securities 1,446,315 5,536,006 4,488,354
Proceeds from maturity of
available-for-sale securities 2,739,662 299,281 --
Proceeds from sale of available-
for-sale securities (equity and
fixed maturity) -- 10,675,217 29,049,745
Purchase of mortgage loan (1,500,000) -- --
Repayment of mortgage loans 2,312 -- --
Net change in short-term
investments 2,839,890 (11,334,983) 4,439,106
Net change in policy and
student loans 3,466 (517,057) (629,572)
Net change in other investments -- -- 2,178
Acquisition of property and
equipment (635) (71,356) (35,779)
------------ ------------ ------------
Net cash provided by (used in)
investing activities $ 4,287,198 $ (2,203,440) $ 1,292,877
------------ ------------ ------------
22
SOUTHERN SECURITY LIFE INSURANCE COMPANY
Statements of Cash Flows
Years ended December 31, 1999, 1998 and 1997
1999 1998 1997
---- ---- ----
Cash flows from financing activities:
Receipts from universal life and
certain annuity policies
credited to policyholder
account balances 6,662,558 7,524,375 4,042,137
Return of policyholder account
balances on universal life
and certain annuity policies (10,679,256) (9,547,720) (6,264,935)
------------ ------------ ------------
Net cash used in financing
activities $ (4,016,698) $ (2,023,345) $ (2,222,798)
------------ ------------ ------------
Increase (decrease) in cash and
cash equivalents 3,398,095 (1,766,605) 2,242,938
Cash and cash equivalents at
beginning of year $ 682,389 $ 2,448,994 $ 206,056
------------ ------------ ------------
Cash and cash equivalents at
end of year $ 4,080,484 $ 682,389 $ 2,448,994
============ ============ ============
Supplemental schedule of cash flow
information:
Interest paid during the
year $ 90,000 $ 90,000 $ 90,000
============ ============ ============
Income taxes paid during the
year $ -- $ 45,500 $ 115,000
============ ============ ============
Change in market value adjustments-
investments available-for-sale:
Fixed maturities $ (1,645,893) $ 204,802 $ 425,313
Equity securities 112,598 (111) 39,973
Change in deferred acquisition
costs 235,048 (294,326) (55,084)
Change in premium deposit funds (141,029) 79,440 26,340
Deferred income tax asset
(liability) 532,532 174,016 (163,500)
Other -- -- 2,178
------------ ------------ ------------
Accumulated comprehensive income
Net change in unrealized
appreciation (depreciation) $ (906,744) $ 163,821 $ 275,220
============ ============ ============
See accompanying notes to financial statements.
23
SOUTHERN SECURITY LIFE INSURANCE COMPANY
Notes to Financial Statements
December 31, 1999, 1998 and 1997
1. Nature of business and summary of significant accounting policies:
-----------------------------------------------------------------
(a) Nature of business
------------------
The primary business of Southern Security Life Insurance Company
(the "Company") is the issuance of long duration universal life
insurance contracts. The majority of the Company's business is
conducted in the states of Florida (44%), Georgia (10%) and Texas
(15%). None of the remaining eleven states in which the Company
is licensed to conduct business account for over 10% of the
Company's total business.
Prior to December 17, 1998, certain executive officers and
directors of the Company were shareholders of approximately 60
percent of the shares of SSLIC Holding Company, Inc., (formerly
Consolidare Enterprises, Inc.). SSLIC Holding Company, Inc. owns
61.3% of the Company's voting securities at December 31, 1999.
Effective December 17, 1998, 100% of the common stock of SSLIC
Holding Company, Inc. was acquired by Security National Financial
Corporation ("SNFC"). Accordingly, from December 17, 1998, the
Company is a 61.3% owned, indirect subsidiary of SNFC.
The following is a description of the most significant risks
facing life and health insurers and how the Company mitigates
those risks:
Legal/regulatory risk is the risk that changes in the legal or
regulatory environment in which an insurer operates will create
additional expenses not anticipated by the insurer in pricing its
products. That is, regulatory initiatives designed to reduce
insurer profits, new legal theories or insurance company
insolvencies through guaranty fund assessments may create costs
for the insurer beyond those recorded in the consolidated
financial statements. The Company seeks to mitigate this risk
through geographic marketing of their insurance products.
Credit risk is the risk that issuers of securities owned by the
Company will default or that other parties, including reinsurers,
which owe the Company money, will not pay. The Company attempts
to mitigate this risk by adhering to a conservative investment
strategy, by maintaining sound reinsurance and by providing for
any amounts deemed uncollectible.
Interest rate risk is the risk that interest rates will change
and cause a decrease in the value of an insurer's investments.
This change in rates may cause certain interest-sensitive
products to become uncompetitive, may cause disintermediation, or
may cause the Company to not achieve its target interest margins
between interest earned on invested assets and interest required
to be credited to policyholder account balances. The Company
mitigates this risk by charging fees for nonconformance with
certain policy provisions, by offering products that transfer
this risk to the purchaser, and/or by attempting to match the
maturity schedule of its assets with the expected payouts of its
liabilities. To the extent that liabilities come due more quickly
than assets mature, an insurer would have to sell assets prior to
maturity and potentially recognize a gain or loss.
(b) Basis of financial statements
-----------------------------
The financial statements have been prepared on the basis of
generally accepted accounting principles ("GAAP"), which vary
from reporting practices prescribed or permitted by regulatory
authorities.
The accompanying financial statements have been prepared using
the historic cost basis of accounting and do not reflect any
adjustments related to allocation of the purchase price of the
Company's parent, SSLIC Holding (Formerly Consolidare) by
Security National Financial Corporation at December 17, 1998.
24
SOUTHERN SECURITY LIFE INSURANCE COMPANY
Notes to Financial Statements (continued)
1. Nature of business and summary of significant accounting policies, continued
----------------------------------------------------------------------------
(c) Use of estimates
----------------
In preparing the financial statements, management is required to
make estimates and assumptions that affect the reported amounts
of assets and liabilities. Actual results could differ
significantly from those estimates.
The estimates susceptible to significant change are those used in
determining the liability for future policy benefits and claims,
deferred income taxes and deferred policy acquisition costs.
Although some variability is inherent in these estimates,
management believes that the amounts provided are adequate.
(d) Investments
Investments in all debt securities and those equity securities
with readily determinable market values are classified into one
of three categories: held- to-maturity, trading or
available-for-sale. Classification of investments is based upon
management's current intent. Debt securities which management has
a positive intent and ability to hold until maturity are
classified as securities held-to-maturity and are carried at
amortized cost. Unrealized holding gains and losses on securities
held-to-maturity are not reflected in the financial statements.
Debt and equity securities that are purchased for short-term
resale would be classified as trading securities. Trading
securities would be carried at fair value, with unrealized
holding gains and losses included in earnings; the Company has no
securities classified as trading securities. All other debt and
equity securities not included in the above two categories are
classified as securities available-for-sale. Securities
available-for-sale are carried at fair value, with unrealized
holding gains and losses reported in accumulated other
comprehensive income which is included in stockholders' equity
after adjustment for deferred income taxes and deferred
acquisition costs related to universal life products.
The Company's carrying value for investments in the
held-to-maturity and available-for-sale categories is reduced to
its estimated realizable value if a decline in the market value
is deemed other than temporary. Such reductions in carrying
values are recognized as realized losses and charged to income.
Interest on fixed maturities and short-term investments is
recognized to income as it accrues on the principal amounts
outstanding adjusted for amortization of premiums and discounts
computed by the scientific method which approximates the
effective yield method. Realized gains and losses on disposition
of investments are included in net income. The cost of
investments sold is determined on the specific identification
method. Dividends are recorded as income on the ex-dividend
dates.
Mortgage loans on real estate are reported at the unpaid
principal balances, adjusted for amortization of premium or
accretion of discount, less allowance for possible losses.
Policy loans and student loans are carried at the unpaid
principal balance, less any amounts deemed to be uncollectible.
The Company's policy is that policy loans are not made for
amounts in excess of the cash surrender value of the related
policy. Accordingly, policy loans are fully collateralized by the
related liability for future policy benefits for traditional
insurance policies and by the policyholders' account balance for
interest sensitive policies.
25
SOUTHERN SECURITY LIFE INSURANCE COMPANY
Notes to Financial Statements (continued)
1. Nature of business and summary of significant accounting policies, continued:
----------------------------------------------------------------------------
(e) Cash and cash equivalents
-------------------------
For purposes of the statements of cash flows, the Company
considers all highly liquid debt instruments purchased with an
original maturity of three months or less to be cash equivalents.
(f) Deferred policy acquisition costs
---------------------------------
The costs of acquiring new business, net of the effects of
reinsurance, principally commissions and those home office
expenses that tend to vary with and are primarily related to the
production of new business, have been deferred to the extent
recoverable from future profit margins. Deferred policy
acquisition costs applicable to traditional life policies are
being amortized over the premium-paying period of the related
policies in a manner that will charge each year's operations in
direct proportion to the estimated premium revenue over the life
of the policies. Premium revenue estimates are made using the
same interest, mortality and withdrawal assumptions as are used
for computing liabilities for future policy benefits. Acquisition
costs relating to universal life policies are being amortized in
relation to the incidence of expected gross profits over the life
of the policies. Gross profits for universal life contracts
consist of revenue representing policy charges for the cost of
insurance, administration of the contracts and surrender charges
plus investment income less expenses for interest credited to
policyholder account balances, policy administrative expenses and
expected benefit payments in excess of policy account balances.
Deferred policy acquisition costs are adjusted to reflect the
impact of unrealized gains and losses on fixed maturity
securities available for sale.
The Company has performed tests concerning the recoverability of
deferred acquisition costs. These methods include those typically
used by many companies in the life insurance industry. Further,
the Company conducts a sensitivity analysis of its assumptions
that are used to estimate the future expected gross profits,
which management has used to determine the future recoverability
of the deferred acquisition costs.
(g) Depreciation
------------
Depreciation is being provided on the straight-line method over
the estimated useful lives of the assets.
(h) Investment in affiliate
-----------------------
The Company holds investments in its parent company's common
stock. This reciprocal stockholding is accounted for based on the
treasury stock approach. The value of the investment is recorded
at cost and will be classified as treasury stock upon
consolidation with its parent company.
(i) Future policy benefits
----------------------
The liability for future policy benefits for traditional life
policies has been provided on a net level premium basis based
upon estimated investment yields, withdrawals, mortality and
other assumptions that were appropriate at the time the policies
were issued. Such estimates are based upon industry data and the
Company's past experience as adjusted to provide for possible
adverse deviation from the estimates.
(j) Policyholder account balance
----------------------------
Insurance reserves for universal life policies are determined
following the retrospective deposit method and consist of policy
values that accrue to the benefit of the policyholder, unreduced
by surrender charges.
26
SOUTHERN SECURITY LIFE INSURANCE COMPANY
Notes to Financial Statements (continued)
1. Nature of business and summary of significant accounting policies, continued:
----------------------------------------------------------------------------
(k) Recognition of premium revenue and related costs
------------------------------------------------
Premiums are recognized as revenue as follows:
Universal life policies - premiums received from policyholders
are reported as deposits. Cost of insurance, policy
administration and surrender charges which are charged against
the policyholder account balance during the period, are
recognized as revenue as earned. Amounts assessed against the
policyholder account balance that represent compensation to the
Company for services to be provided in future periods are
reported as unearned revenue and recognized in income using the
same assumptions and factors used to amortize acquisition costs
capitalized.
Annuity contracts with flexible terms - premiums received from
policyholders are reported as deposits.
All other policies - recognized as revenue over the premium
paying period.
(l) Income taxes
------------
Deferred tax assets and liabilities are recognized for the future
tax consequences attributable to differences between the
financial statement carrying amounts of existing assets and
liabilities and their respective tax bases. Deferred tax assets
and liabilities are measured using enacted tax rates expected to
apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. The effect
on deferred tax assets and liabilities of a change in tax rates
is recognized in income in the period that includes the enactment
date.
(m) Earnings per share
------------------
In 1997, the Financial Accounting Standards Board issued
Statement No. 128, Earnings per Share. Statement No. 128 replaced
the calculation of primary and fully diluted earnings per share
with basic and diluted earnings per share. Unlike primary
earnings per share, basic earnings per share excludes any
dilutive effects of options, warrants and convertible securities.
Diluted earnings per share is very similar to the previously
reported fully diluted earnings per share. All earnings per share
amounts for all periods presented are restated to conform to
Statement No. 128 requirements.
(n) Reclassification
----------------
Certain amounts presented in the 1998 and 1997 financial
statements have been reclassified to conform to the 1999
presentation.
(o) Pending accounting change
-------------------------
In June 1998, the Financial Accounting Standards Board (the
"FASB") issued Statement No. 133, Accounting for Derivative
Instruments and Hedging Activities ("SFAS 133"), which the
Company is required to adopt January 1, 2000. SFAS 133 will
require the Company to include all derivatives in the statement
of financial position at fair value. Changes in derivative fair
values will either be recognized in earnings as offsets to the
changes in fair value of related hedged assets, liabilities and
firm commitments or, for forecasted transactions, deferred and
recorded as a component of equity until the hedged transactions
occur and are recognized in earnings. The ineffective portion of
a hedging derivative's change in fair value will be immediately
recognized in earnings. The impact of SFAS 133 on the Company's
financial statements will depend on a variety of factors,
including future interpretive guidance from the FASB, the future
level
27
SOUTHERN SECURITY LIFE INSURANCE COMPANY
Notes to Financial Statements (continued)
1. Nature of business and summary of significant accounting policies, continued:
----------------------------------------------------------------------------
(o) Pending accounting change-continued
-----------------------------------
of forecasted and actual foreign currency transactions, the
extent of the Company's hedging activities, the types of hedging
instruments used and the effectiveness of such instruments.
However, the Company does not believe the effect of adopting SFAS
133 will be material to its financial position.
2. Basis of financial statements
-----------------------------
The more significant generally accepted accounting principles applied in
the preparation of financial statements that differ from life insurance
statutory accounting practices prescribed or permitted by regulatory
authorities (which are primarily designed to demonstrate solvency) are as
follows:
a. Costs of acquiring new business are deferred and amortized, rather
than being charged to operations as incurred.
b. The liability for future policy benefits and expenses is based on
conservative estimates of expected mortality, morbidity, interest,
withdrawals and future maintenance and settlement expenses, rather
than on statutory rates for mortality and interest.
c. The liability for policyholder funds associated with universal life
and certain annuity contracts are based on the provisions of Statement
of Financial Accounting Standards Statement No. 97, rather than on the
statutory rates for mortality and interest.
d. Investments in securities are reported as described in Note 1.(d),
rather than in accordance with valuations established by the National
Association of Insurance Commissioners ("NAIC"). Pursuant to NAIC
valuations, bonds eligible for amortization are reported at amortized
value; other securities are carried at values prescribed by or deemed
acceptable by NAIC.
e. Deferred income taxes, if applicable, are recognized for future tax
consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities and
their respective tax bases.
f. The statutory liabilities for the asset valuation reserve and interest
maintenance reserve have not been provided in the financial
statements.
g. Certain assets, principally receivables from agents and equipment, are
reported as assets rather than being charged directly to surplus.
h. Costs attributable to the public offering of the common shares have
been reclassified from accumulated surplus to capital in excess of
par. i. Realized gains or losses on the sale or maturity of
investments are included in the statement of income and not recorded
net of taxes and amounts transferred to the interest maintenance
reserve as required by statutory accounting practices.
j. Certain proceeds from a note payable (note 9) that are treated as
shareholders' equity for statutory purposes are treated as a liability
under generally accepted accounting principles.
k. Reinsurance assets and liabilities are reported on a gross basis
rather than shown on a net basis as permitted by statutory accounting
practices.
28
SOUTHERN SECURITY LIFE INSURANCE COMPANY
Notes to Financial Statements (continued)
2. Basis of financial statements, continued
----------------------------------------
A reconciliation of net income (loss) for the years ended December 31,
1999, 1998 and 1997 and shareholders' equity as of December 31, 1999 and
1998 between the amounts reported on a statutory basis and the related
amounts presented on the basis of generally accepted accounting principles
is as follows:
Net Income (loss) Shareholders'
Years ended Equity
December 31, December 31,
------------ --------------
1999 1998 1997 1999 1998
---- ---- ---- ---- ----
As reported
on a statutory
basis $ 533,233 $ (486,823) $ 45,398 $ 8,976,516 $ 8,627,254
------------ ------------ ------------ ------------ ------------
Adjustments:
Deferred policy
acquisition
costs, net (709,737) (1,867,733) (1,472,839) 12,874,219 13,583,956
Future policy
benefits, un-
earned premiums
and policy-
holders' funds 1,097,132 1,719,926 1,644,330 (6,195,591) (7,600,310)
Deferred
income taxes 382,364 153,626 (198,100) (413,710) (796,074)
Asset valuation
reserve -- -- -- 542,585 332,448
Interest main-
tenance reserve (35,191) 231,507 129,109 535,161 570,352
Non-admitted
assets -- -- -- 1,078,348 1,077,595
Unrealized gains
-SFAS 115 -- -- -- (899,956) 847,555
Capital and
surplus note -- -- -- (1,000,000) (1,000,000)
Other adjustments,
net (635,843) (134,236) 47,312 139,748 269,330
------------ ------------ ------------ ------------ ------------
Net difference 98,725 103,090 149,812 6,660,804 7,284,852
------------ ------------ ------------ ------------ ------------
As reported on a
GAAP basis $ 631,958 $ (383,733) $ 195,210 $ 15,637,320 $ 15,912,106
============ ============ ============ ============ ============
Under applicable laws and regulations, the Company is required to maintain
minimum surplus as to policyholders, determined in accordance with regulatory
accounting practices, in the aggregate amount of approximately $1,900,000.
The payment of dividends by the Company is subject to the regulation of the
State of Florida Department of Insurance.
The Insurance Commissioner's approval is not required if the dividend is equal
to or less than the greater of: (a) 10% of the Company's surplus as to
policyholders' derived from realized net operating profits on its business and
net realized capital gains; or (b) the Company's entire net operating profits
and realized net capital gains derived during the immediately preceding calendar
year, if the Company will have surplus as to policyholders equal to or exceeding
115% of the minimum required statutory surplus as to policyholders after the
dividend is declared and paid. As a result of such restrictions, the maximum
dividend which may be paid by the Company during 2000 without prior approval is
approximately $149,000. Accordingly, GAAP excess earnings over a statutory basis
are not available for dividends.
The Risk-Based Capital ("RBC") for Life and/or Health Insurers Model Act (the
"Model Act") was adopted by the National Association of Insurance Commissioners
(NAIC) in 1992. The main purpose of the Model Act is to provide a tool for
insurance regulators to evaluate the capital of insurers. Based on calculations
using the appropriate NAIC formula, the Company exceeded the RBC requirements at
December 31, 1999.
29
SOUTHERN SECURITY LIFE INSURANCE COMPANY
Notes to Financial Statements (continued)
3. Investments
(a) Equity securities and fixed maturities
Equity securities consist of $378,440 and $250,232 of common stock at fair
value at December 31, 1999 and 1998 respectively.
Unrealized (depreciation) appreciation in investments in equity securities
for the years ended December 31, 1999, 1998, and 1997 is $112,598, $(111),
and $39,973, respectively.
The amortized cost and estimated fair values of investments in debt
securities are as follows:
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
--------- ---------- ---------- ------
December 31, 1999:
Held-to-maturity:
U.S. Treasury
securities and obligations
of U.S. government
corporations and
agencies (guaranteed) $ 1,007,021 $ 15,789 $ -- $ 1,022,810
Corporate securities 1,977,976 2,151 8,952 1,971,175
Mortgage-backed
securities 993,874 11,355 13,878 991,351
----------- ----------- ----------- -----------
3,978,871 29,295 22,830 3,985,336
----------- ----------- ----------- -----------
Available-for-sale:
U.S. Treasury
securities and obligations
of U.S. government
corporations and
agencies (guaranteed) 4,596,187 4,599 21,561 4,579,225
Corporate securities 20,102,739 -- 820,966 19,281,773
Mortgage-backed
securities 90,341 -- 228 90,113
----------- ----------- ----------- -----------
24,789,267 4,599 842,755 23,951,111
----------- ----------- ----------- -----------
$28,768,138 $ 33,894 $ 865,585 $27,936,447
=========== =========== =========== ===========
30
SOUTHERN SECURITY LIFE INSURANCE COMPANY
Notes to Financial Statements (continued)
3. Investments, continued
(a) Equity securities and fixed maturities, continued
-------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
-------- --------- ---------- -------
December 31, 1998:
Held-to-maturity:
U.S. Treasury
securities and
obligations of
U.S. government
corporations and
agencies (guaranteed) $ 1,011,702 $ 58,298 $ -- $ 1,070,000
Corporate securities 2,758,387 49,333 -- 2,807,720
Mortgage-backed securities 1,186,821 -- -- 1,186,821
----------- ----------- ----------- -----------
4,956,910 107,631 -- 5,064,541
----------- ----------- ----------- -----------
Available-for-sale:
U.S. Treasury securities
and obligations of U.S.
government corporations
and agencies (guaranteed) 5,124,079 185,044 -- 5,309,123
Corporate securities 22,547,346 622,692 -- 23,170,038
----------- ----------- ----------- -----------
27,671,425 807,736 -- 28,479,161
----------- ----------- ----------- -----------
$32,628,335 $ 915,367 $ -- $33,543,702
=========== =========== =========== ===========
Fair values reflected in available-for-sale and held-to-maturity categories
are based on NAIC values, versus values associated with normal market
pricing services. The estimated difference for both categories was
immaterial for all years presented.
Unrealized appreciation (depreciation) of fixed maturities for years ending
December 31, 1999, 1998 and 1997 is $(1,747,058), $183,142 and $388,647
respectively.
The amortized cost and estimated fair value of fixed maturities at December
31, 1999 by contractual maturity, are summarized below. Expected maturities
will differ from contractual maturities because borrowers may have the
right to call or prepay obligations with or without call or prepayment
penalties.
Fixed maturity securities held-to-maturity:
Amortized Estimated
Cost Fair value
---------- ----------
Due in 2000 $1,000,563 $1,002,705
Due in 2001 through 2004 1,507,233 1,522,755
Due in 2005 through 2009 477,201 468,525
Due after 2009 -- --
---------- ----------
2,984,997 2,993,985
Mortgage-backed securities 993,874 991,351
---------- ----------
$3,978,871 $3,985,336
========== ==========
Fixed maturity securities available-for-sale:
Due in 2000 $ 1,199,855 $ 1,203,062
Due in 2001 through 2004 12,874,501 12,582,877
Due in 2005 through 2009 9,315,012 8,823,546
Due after 2009 1,309,558 1,251,513
----------- -----------
24,698,926 23,860,998
Mortgage-backed securities 90,341 90,113
----------- -----------
$24,789,267 $23,951,111
=========== ===========
31
SOUTHERN SECURITY LIFE INSURANCE COMPANY
Notes to Financial Statements (continued)
3. Investments, continued
(a) Equity securities and fixed maturities, continued
-------------------------------------------------
Proceeds from the sale of equity securities and fixed maturities
available for sale and the related realized gains and losses are
summarized as follows:
1999 1998 1997
---------- ---------- -------
Proceeds from sale of
equity securities $ -- $ 1,405,248 $ 2,873,980
------------ ------------ ------------
Proceeds from sale of
fixed maturities
available-for-sale $ 2,739,662 $ 9,569,250 $ 26,175,765
------------ ------------ ------------
Realized gains (losses) Fixed maturities:
Gross realized gains -- $ 319,934 278,904
Gross realized (losses) -- -- (150,045)
Equity securities:
Gross realized gains -- 205,247 357,731
Gross realized (losses) -- -- --
------------ ------------ ------------
$ -- $ 525,181 $ 486,590
============ ============ ============
Certain of the fixed maturity securities classified as available-for-sale
and held-to-maturity were called during the year ended December 31, 1999,
1998 and 1997 resulting in the following realized gains and losses:
1999 1998 1997
---- ---- ----
Held-to-maturity:
Gross realized gains $ -- $ -- $20,205
Available-for-sale:
Gross realized gains -- 1,740 21,997
------- ------- -------
$ -- $ 1,740 $42,202
======= ======= =======
Investments, aggregated by issuer, in excess of 10% of shareholders' equity
(before net unrealized gains and losses on available-for-sale securities)
at December 31, 1999 and 1998, other than investments issued or guaranteed
by the United States government are as follows:
1999 Carrying Amount
---- ---------------
Federal Express $2,100,000
Dean Witter Discover $3,964,767
Philip Morris, Inc. $5,260,000
1998
------
Dean Witter Discover $4,160,217
Federal Express $2,180,000
Philip Morris Inc. $5,815,000
(b) Concentrations of credit risk
At December 31, 1999 and 1998, the Company did not hold any unrated or
less- than-investment grade corporate debt securities. The Company also
invests in subsidized and unsubsidized student loans totaling $149,198 and
$207,006 at December 31, 1999 and 1998, respectively, which are guaranteed
by the U.S. government. Subsequent to December 31, 1999, all of these loans
were sold at their unpaid principal balance.
32
SOUTHERN SECURITY LIFE INSURANCE COMPANY
Notes to Financial Statements (continued)
3. Investments, continued
(c) Investment income
Net investment income for the years ended December 31, 1999, 1998,
and 1997 consists of the following:
1999 1998 1997
---------- ---------- ----------
Interest:
Fixed maturities $2,123,671 $2,633,888 $2,918,006
Policy and student
loans 579,774 489,991 401,621
Short-term
investments 859,699 474,949 232,342
Mortgage loans 25,759 -- --
Rental income 319,758 -- --
Dividends on equity
securities common
stock, including
mutual fund 15,610 719 16,189
---------- ---------- ----------
3,924,271 3,599,547 3,568,158
Less investment
expenses 14,898 12,400 22,847
---------- ---------- ----------
$3,909,373 $3,587,147 $3,545,311
========== ========== ==========
(d) Investments on deposit
In order to comply with statutory regulations, investments were on deposit
with the Insurance Departments of certain states as follows:
1999 1998 1997
---------- ---------- ----------
Florida $1,708,530 $1,718,097 $1,727,034
Alabama 100,702 101,170 100,000
South Carolina 302,106 303,511 304,816
Georgia 251,755 252,926 254,013
Indiana 199,855 199,578 199,317
---------- ---------- ----------
$2,562,948 $2,575,282 $2,585,180
========== ========== ==========
Certain of these assets, totaling approximately $850,000 for each of the
years ended December 31, 1999 and 1998, are restricted for the future
benefit of policyholders in a particular state.
4. Deferred policy acquisition costs
---------------------------------
Deferred policy acquisition costs at December 31, 1999, 1998 and 1997
consist of the following:
1999 1998 1997
---- ---- ----
Deferred policy acquisition
costs at beginning
of year $ 13,583,956 $ 15,451,689 $ 16,979,612
Policy acquisition costs deferred:
Commissions 1,223,187 1,053,953 1,204,604
Underwriting & issue costs 440,200 429,600 450,800
Other 421,051 427,729 414,374
Change in unrealized
appreciation
(depreciation) 235,048 (294,326) (55,084)
------------ ------------ ------------
2,319,486 1,616,956 2,014,694
Amortization of
deferred policy
acquisition costs (3,029,223) (3,484,689) (3,542,617)
------------ ------------ ------------
Deferred policy
acquisition costs
at end of year $ 12,874,219 $ 13,583,956 $ 15,451,689
============ ============ ============
33
SOUTHERN SECURITY LIFE INSURANCE COMPANY
Notes to Financial Statements (continued)
5. Property and equipment
Property and equipment consists of the following:
December 31, December 31,
1999 1998
------------ -----------
Land $ 982,027 $ 982,027
Building and improvements 2,205,795 2,198,468
Furniture and equipment 993,198 1,068,995
---------- ----------
4,181,020 4,249,490
Less accumulated depreciation 1,745,455 1,664,235
---------- ----------
$2,435,565 $2,585,255
========== ==========
Depreciation expense for the years ended December 31, 1999, 1998 and 1997
totaled $135,145, $153,348, and $145,912, respectively.
6. Future policy benefits
----------------------
At December 31, 1999 and 1998, future policy benefits, exclusive of
universal life and flexible term annuities consist of the following:
December 31, December 31,
1999 1998
----------- -----------
Life insurance $1,334,887 $1,370,360
Annuities 304,414 298,456
Accident & health
insurance 9,675 58,484
---------- ----------
Total life & health
future policy benefits $1,648,976 $1,727,300
========== ==========
Life insurance in-force aggregated approximately $1.2 billion at December
31, 1999, and 1998. Mortality and withdrawal assumptions are based upon
the Company's experience and actuarial judgment with an allowance for
possible unfavorable deviations from the expected experience.
The mortality tables used in calculating benefit reserves for non
universal life contracts are the 1965-1970 Basic Select and Ultimate for
males and the 1980 U.S. Population mortality table modified for company
expected experience.
For non-universal life policies written during 1983 through 1988, interest
rates used are 8.0 percent for policy years one through five, decreasing
by .1 percent per year for policy years six through twenty, to 6.5 percent
for policy years twenty-one and thereafter. For certain non universal life
contracts written in 1996-1999, interest rates of 6.75% level have been
assumed. For non-universal life policies written in 1982 and prior,
interest rates vary, depending on policy type, from 7 percent for all
policy years to 6 percent for policy years one through five and 5 percent
for years six and thereafter. For universal life policies written since
1988, the interest rate used is a credited rate generally based upon the
Company's investment yield less 1%.
7. Reinsurance
-----------
The Company routinely cedes and, to a limited extent, assumes reinsurance
to limit its exposure to loss on any single insured. Ceded insurance is
treated as a risk and liability of the assuming companies.
As of December 31, 1999, ordinary insurance coverage in excess of $75,000
is reinsured; however for some policies previously issued, the first
$30,000, $40,000 or $50,000 was retained and the excess ceded. The
retention limit for some substandard risks is less than $75,000. Reinsured
risks would give rise to liability to the Company in the event that the
reinsuring company were unable to
34
SOUTHERN SECURITY LIFE INSURANCE COMPANY
Notes to Financial Statements (continued)
7. Reinsurance, continued
----------------------
meet its obligations under the reinsurance agreement in force, as the
Company remains primarily liable for such obligations. Under reinsurance
agreements exclusive of the MEGA agreement discussed below, the Company
has ceded premium of $424,255, $415,080, and $432,486 included in
reinsurance premiums ceded, and received recoveries of $162,871, $88,457
and $131,449 included in annuity, death and other benefits for the years
ended December 31, 1999, 1998 and 1997, respectively.
On December 31, 1992, the Company entered into a reinsurance agreement
with The MEGA Life and Health Insurance Company ("MEGA"), ceding an 18%
share of all universal life policies in force at December 31, 1992 as a
measure to manage the future needs of the Company. The reinsurance
agreement is a co-insurance treaty entitling the assuming company to 18%
of all future premiums, while making them responsible for 18% of all
future claims and policyholder loans relating to the ceded policies. In
addition, the Company receives certain commission and expense
reimbursements.
For the years ended December 31, 1999, 1998 and 1997, the Company ceded
premiums to MEGA of $424,592, $448,355 and $481,585, included in
reinsurance ceded, and received recoveries of $576,194, $469,307 and
$503,159, included in annuity, death and other benefits, respectively. The
funds held related to reinsurance treaties of $1,475,512 and $1,419,357
represent the 18% share of policy loans ceded to the reinsurer at December
31, 1999 and 1998, respectively.
8. Notes payable
-------------
As of December 31, 1999, the Company had an unused line of credit of
$5,000,000 which is secured by student loans equaling 115% of the unpaid
principal balance. The facility bears interest at a variable rate per
annum payable monthly and expires on September 18, 2007.
9. Note payable to related party
-----------------------------
A note payable to a related party consists of amounts due on demand to
Security National Financial Corporation. The note's proceeds were obtained
in December 1988 and the note qualifies as shareholders' equity for
statutory accounting purposes in accordance with Section 628.401 of the
Florida Statutes. At December 31, 1999, the note bears interest at 9.0%
percent (payable monthly); principal repayment is contingent upon the
Company maintaining statutory surplus in excess of $1,900,000 and
obtaining approval in advance by the Florida Department of Insurance.
Interest expense relating to the balance of the note payable to the
related party during 1999, 1998 and 1997 aggregated $90,000, $90,000, and
$90,000 respectively.
10. Income taxes
-------------
The Company's income tax liability at December 31 is summarized as
follows:
1999 1998
---- ----
Current $139,160 $ --
Deferred 274,550 796,074
-------- ---------
Total $413,710 $796,074
======== ========
35
SOUTHERN SECURITY LIFE INSURANCE COMPANY
Notes to Financial Statements (continued)
10. Income taxes, continued
-----------------------
Total income taxes including taxes on the change in the value of
investments for the years ended December 31, 1999, 1998, and 1997 were as
follows:
1999 1998 1997
---- ---- ----
Tax expense (benefit)
in operations $ 150,168 $(241,907) $ 54,200
Tax on unrealized
appreciation
(depreciation) of
investments (532,532) (174,016) 163,500
--------- --------- ---------
$(382,364) $(415 923) $ 217,700
========= ========= =========
Income tax expense (benefit) for the years ended December 31, 1999, 1998
and 1997 is summarized as follows:
1999 1998 1997
---- ---- ----
Current:
Federal $ 123,268 $ 9,329 $(142,870)
State 15,891 1,207 (1,030)
--------- --------- ---------
139,159 10,536 (143,900)
--------- --------- ---------
Deferred:
Federal 9,693 (215,838) 169,100
State 1,316 (36,605) 29,000
--------- --------- ---------
11,009 (252,443) 198,100
--------- --------- ---------
$ 150,168 $(241,907) $ 54,200
========= ========= =========
Income tax expense (benefit) for the years ended December 31, 1999, 1998
and 1997 differs from "expected" tax (computed by applying the U.S. federal
income tax rate to pretax income as a result of the following:
1999 1998 1997
--------- --------- ---------
Computed "expected" tax expense
(benefit) $ 265,923 $(212,718) $ 84,800
Increase (reduction) in income
taxes resulting from:
Small life insurance
company deduction (139,195) (12,390) (76,000)
Changes in the valuation
allowance for deferred
tax assets, allocated to
income tax expense 17,590 (17,950) 11,100
(Over) under accrual of
prior year expense -- -- 6,100
State taxes, net of federal
income tax benefit 5,850 1,207 18,200
Other, net -- (56) 10,000
--------- --------- ---------
$ 150,168 $(241,907) $ 54,200
========= ========= =========
Under tax laws in effect prior to 1984, a portion of a life insurance
company's gain from operations was not currently taxed but was accumulated
in a memorandum "Policyholders' Surplus Account." As a result of the Tax
Reform Act of 1984, the balance of the Policyholders' Surplus Account has
been frozen as of December 31, 1983 and no additional amounts will be
accumulated in this account. However, distributions from the account will
continue to be taxed, as under previous law, if any of the following
conditions occur:
a. The Policyholders' Surplus exceeds a prescribed maximum, or;
36
SOUTHERN SECURITY LIFE INSURANCE COMPANY
Notes to Financial Statements (continued)
10. Income taxes, continued
b. Distributions, other than stock dividends, are made to shareholders in excess
of Shareholders' Surplus, as defined by prior law, or; c. The entity ceases to
qualify for taxation as a life insurance company, or; d. the tax deferred status
of the Policyholder's Surplus Account is modified by future tax legislation.
At December 31, 1999, the balance of the Policyholders' Surplus account
aggregated approximately $236,000. The Company has not recorded deferred income
taxes totaling approximately $80,000 relating to this amount as it has no plan
to distribute the amounts in Policyholders' Surplus in the foreseeable future.
The Tax Reform Act of 1986 enacted a new separate parallel tax system referred
to as the Alternative Minimum Tax (AMT) system. AMT is based on a flat rate
applied to a broader tax base. It is calculated separately from the regular
federal income tax and the higher of the two taxes is paid. The excess of the
AMT over regular tax is a tax credit, which can be carried forward indefinitely
to reduce regular tax liabilities of future years. In 1999, 1998 and 1997, AMT
exceeded regular tax by $27,338, $156,820, and $11,100, respectively. At
December 31, 1999, the AMT tax credit available to reduce future regular tax
totaled $235,190.
The tax effect of temporary differences that give rise to significant portions
of the deferred tax assets and deferred tax liabilities at December 31, 1999 and
1998 are presented below:
1999 1998
----------- -----------
Deferred tax assets:
Unearned revenue, due to deferral of
"front-end" fee $ 1,950,587 $ 2,266,605
Policy liabilities and accruals,
principally due to adjustments
to reserves for tax purposes 1,804,230 2,090,315
Deferred policy acquisition costs
related to unrealized appreciation
(depreciation) (126,830) 59,420
Alternative minimum tax credit
carry forwards 235,190 252,780
----------- -----------
Total gross deferred tax assets 3,863,177 4,669,120
Less valuation allowance (235,190) (252,780)
----------- -----------
Net deferred tax assets 3,627,987 4,416,340
----------- -----------
Deferred tax liabilities:
Deferred policy acquisition costs (3,908,348) (4,263,587)
Other (252,011) (629,892)
Unrealized (appreciation)
depreciation of securities 257,822 (318,935)
----------- -----------
Total gross deferred tax liabilities (3,902,537) (5,212,414)
----------- -----------
Net deferred tax (liability) $ (274,550) $ (796,074)
=========== ===========
The net change in the total valuation allowance for the years ended December 31,
1999 and 1998 was a decrease of $17,590 and $156,820, respectively. The net
change in the total valuation allowance for the year ended December 31, 1997 was
an increase of $11,100.
37
SOUTHERN SECURITY LIFE INSURANCE COMPANY
Notes to Financial Statements (continued)
10. Income taxes, continued
-----------------------
In assessing the realizability of deferred tax assets, management
considers whether it is more likely than not that some portion or all of
the deferred tax assets will not be realized. The ultimate realization
of deferred tax assets is dependent upon the generation of future
taxable income during the periods in which those temporary differences
become deductible. Management considers the scheduled reversal of
deferred tax liabilities, projected future taxable income, and tax
planning strategies in making this assessment. Based upon the level of
historical taxable income and projections for future taxable income over
the periods which the deferred tax assets are deductible, management
believes it is more likely than not the Company will realize the
benefits of these deductible differences, net of the existing valuation
allowances at December 31, 1999.
11. Related party transactions
--------------------------
The Company's general agent, Insuradyne Corporation, is a wholly-owned
subsidiary of Security National Financial Corporation. The balances due
to an affiliated insurance agency reflected in the accompanying balance
sheets principally represent earned commission due to Insuradyne. The
Company incurred commission expense to Insuradyne aggregating $175,409,
$252,955 and $323,303, in 1999, 1998, and 1997, respectively. These
amounts are included as components of acquisition costs deferred and
related amortization. Insuradyne incurred insurance-related expenses
aggregating $495, $33,374, and $25,604 in 1999, 1998 and 1997,
respectively.
Effective December 31, 1998, the Company entered into an Administrative
Services Agreement with its ultimate parent Security National Financial
Corporation (Security National). Under the terms of the Administrative
Services Agreement, all of the Company's employees became employees of
Security National. Administrative functions previously performed by the
Company are now being furnished to the Company under the Agreement. The
Company pays to Security National $250,000 per month or $3 million per
year for the administrative services and Agency Agreement.
On December 28, 1998 the Company entered into a Loan Funding and Fee
Agreement and Agency Agreement (the "Agreement") with Security National
Mortgage Company ("SNMC"), a subsidiary of Security National. Under the
terms of the Agreement, SNMC assigns their interest in residential
mortgage loans that have been pre-sold to third party investors to the
Company. The Company purchases these loans and holds them as short-term
investments until it receives the proceeds from the third party
investors. The Company receives fee income from SNMC based upon how long
the loans were outstanding. At December 31, 1999 and 1998 the Company
had outstanding loan purchases of $8,595,093 and $3,941,020,
respectively. Included in investment income is $457,861 and $534 for the
years ended December 31, 1999 and 1998, respectively.
The Company received for the year ended December 31, 1999, $219,684 as
rental income from Security National for a lease of office space in the
Company's building under the terms of the Administrative Services
Agreement.
The Company received for the year ended December 31, 1999, $230,639 in
interest income from Security National for short-term loans of which
none were outstanding as of December 31, 1999.
38
SOUTHERN SECURITY LIFE INSURANCE COMPANY
Notes to Financial Statements (continued)
12. Earnings per share
------------------
The following table sets forth the computation of basic and diluted
earnings per share:
1999 1998 1997
---- ---- ----
Numerator for basic and diluted
earnings per share:
Net income (loss) $ 631,958 $ (383,733) $ 195,210
Denominator:
Denominator for basic
earnings per share
weighted average shares 1,907,989 1,907,989 1,907,989
Effective dilutive securities:
Agent stock options -- -- 1,214
Dilutive potential common shares -- -- 1,214
Denominator for diluted
earnings per share weighted
average shares and assumed
conversions 1,907,989 1,907,989 1,908,203
Basic earnings per share $.33 $(0.20) $0.10
Diluted earnings per share $.33 $(0.20) $0.10
13. Agents' incentive stock bonus plan
----------------------------------
The Company has an incentive bonus plan for agents that was adopted
January 1, 1995 by the Company's Board of Directors and effective
through December 31, 2001. Agents that qualify under the plan have the
option to purchase shares of common stock. The number of shares of
common stock is determined on the date of the award as the number of
whole shares equal to the award based on the applicable stock price on
December 31 of the year the agent has qualified for the bonus. For each
share of common stock purchased by the agent, the Company will
concurrently award an equivalent number of shares to the agent. Awards
were granted in 1999 under this plan. The Company incurred expenses of
approximately $5,010 relating to the Company's matching number of
shares. If the agent does not purchase the shares within the designated
period, then the agent forfeits their rights to purchase the shares of
common stock as well as the matching number of shares to be contributed
by the Company.
14. Disclosures about fair value of financial instruments
-----------------------------------------------------
Statement of Financial Accounting Standards No. 107 Disclosures About
Fair Value of Financial Instruments (SFAS 107) requires the Company to
disclose estimated fair value information. The following methods and
assumptions were used by the Company in estimating fair values of
financial instruments as disclosed herein:
Cash and cash equivalents, short-term investments and policy and student
loans: The carrying amount reported in the balance sheet for these
instruments approximate their fair value.
Investment securities available-for-sale and held-to-maturity: Fair
value for fixed maturity and equity securities is based on quoted market
prices at the reporting date for those or similar investments.
Policyholders' account balances: The fair values for policyholder
account balances are based on their approximate surrender values.
39
SOUTHERN SECURITY LIFE INSURANCE COMPANY
Notes to Financial Statements (continued)
14. Disclosures about fair value of financial instruments, continued
----------------------------------------------------------------
The following table presents the carrying amounts and estimated fair
values of financial instruments held at December 31, 1999 and 1998. The
fair value of a financial instrument is the amount at which the
instrument could be exchanged in a current transaction between willing
parties.
1999 1998
---------------------- --------------
Carrying Estimated Carrying Estimated
amount fair value amount fair value
-------- ---------- -------- ----------
Financial assets:
Fixed maturities
held-to-maturity
(see note 3) $ 3,978,871 $ 3,985,336 $ 4,956,910 $ 5,064,541
Fixed maturities
available-for-
sale (see note 3) 23,951,111 23,951,111 28,479,161 28,479,161
Equity securities
available-for-sale 378,440 378,440 250,232 250,232
Mortgage loans 1,497,688 1,497,688 -- --
Policy and student loans 8,328,847 8,328,847 8,462,438 8,462,438
Short-term investments 8,595,093 8,595,093 11,434,983 11,434,983
Cash and cash equivalents 4,013,401 4,013,401 682,389 682,389
Financial liabilities:
Policy liabilities-
policyholders'
account balances $50,377,101 $46,586,173 $52,520,300 $46,755,788
15. Legal proceedings
-----------------
Lawsuits against the Company have arisen in the normal course of the
Company's business. However, contingent liabilities arising from
litigation and other matters are not considered material in relation to
the financial position of the Company.
To the best of the Company's knowledge, it has no potential or pending
contingent liabilities that might be material to the Company's financial
condition, results of operations or liquidity pursuant to product and
environmental liabilities.
40
Schedule I
SOUTHERN SECURITY LIFE INSURANCE COMPANY
Summary of Investments Other Than
Investments in Related Parties
December 31, 1999
Number of
shares or Amount at
units-principal which shown
amounts of Fair in the
Type of investment bonds or notes Cost value balance sheet
- ------------------ -------------- ---- ----- -------------
Fixed maturities held-for-investment:
U.S. Government and government
agencies and authorities 1,000,000 $ 1,007,021 $ 1,022,810 $ 1,007,021
Public utilities 500,000 500,010 500,000 500,010
Industrial and miscellaneous 1,500,000 1,477,966 1,471,175 1,477,966
Special revenue and special assessment
of agencies and authorities of
governments and political subdivisions 1,001,852 993,874 991,351 993,874
----------- ----------- ----------- -----------
Total fixed maturities held for investment 4,001,852 3,978,871 3,985,336 3,978,871
----------- ----------- ----------- -----------
Fixed maturities available-for-sale:
U.S. Government and government
agencies and authorities 4,550,000 4,596,188 4,579,225 4,579,225
Public utilities 655,000 687,540 666,528 666,528
Industrial and miscellaneous 18,860,000 19,415,199 18,615,245 18,615,245
Special revenue and special assessment
of agencies and authorities of
governments and political subdivisions 90,338 90,341 90,113 90,113
----------- ----------- ----------- -----------
Total fixed maturities available for sale 24,155,338 24,789,268 23,951,111 23,951,111
----------- ----------- ----------- -----------
28,157,190 28,768,139 27,936,447 27,929,982
=========== ===========
Equity securities:
Common, including investments
in mutual fund 11,524 225,980 378,440 378,440
=========== ===========
Mortgage loans 1,497,688 1,497,688
Policy loans 8,179,649 8,179,649
Student loans 149,198 149,198
Short-term investments 8,595,093 8,595,093
Other invested assets -- --
----------- -----------
Total investments $47,415,747 $46,730,050
=========== ===========
See accompanying auditors' report.
41
SOUTHERN SECURITY LIFE INSURANCE COMPANY
Financial Data Schedule
For the periods ending December 31, 1999, 1998 and 1997
December 31, December 31, December 31,
1999 1998 1997
----------- ----------- --------
Fixed maturities held for sale $ 23,951,111 $ 28,479,161 $ 31,843,324
Fixed maturities held to
maturity (carrying value) 3,978,871 4,956,910 10,501,712
Fixed maturities held to
maturity (market value) 3,985,336 5,064,541 10,631,003
Investment in equity
securities 378,440 250,232 839,973
Mortgage loans on real estate 1,497,688 -- --
Investment in real estate -- -- --
Total investments 46,730,050 53,583,724 50,870,390
Cash and cash equivalents 4,080,484 682,389 2,448,994
Reinsurance recoverable on
paid losses 373,459 306,258 359,688
Deferred policy acquisition costs 12,874,219 13,583,956 15,451,689
Total assets 77,208,941 81,205,193 82,142,465
Policy liabilities-future
benefits, losses, claims 1,648,976 1,727,300 1,409,031
Policy liabilities-unearned
premiums 5,323,954 6,023,399 7,108,662
Policy liabilities-other claims
and benefits 540,407 540,789 427,649
Other policyholder funds 69,789 64,738 59,686
Notes payable, bonds, mortgages,
and similar debt 1,000,000 1,000,000 1,000,000
Preferred stocks mandatory
redemption -- -- --
Preferred stocks non-
mandatory redemption -- -- --
Common stock 1,907,989 1,907,989 1,907,989
Other stockholders equity 4,011,519 4,011,519 4,011,519
Total liabilities and
stockholders equity 77,208,941 81,205,193 82,142,465
Premiums 6,901,546 7,228,227 7,643,650
Net investment income 3,909,373 3,587,147 3,545,311
Realized investment gains
and losses -- 525,181 506,795
Other income 715,128 -- --
Benefits, claims, losses
and settlement expenses 4,453,564 4,012,491 4,307,013
Underwriting acquisition and
insurance expenses-
amortization of deferred
policy acquisition costs 3,029,223 3,484,689 3,542,617
Underwriting acquisitions and
insurance expense other $ 3,261,134 $ 4,134,686 $ 3,472,255
Income or (loss) before taxes 782,126 (625,640) 249,410
Income tax expense 150,168 (241,907) 54,200
Income (Loss) continuing
operations 631,958 (383,733) 195,210
Discontinued operations -- -- --
Extraordinary items -- -- --
Cumulative effect-changes in
accounting principals -- -- --
Net income (loss) 631,958 $ (383,733) $ 195,210
Earnings per share - basic $ .33 $ (.20) $ .10
Earnings per share - diluted $ .33 $ (.20) $ .10
42
Schedule III
SOUTHERN SECURITY LIFE INSURANCE COMPANY
Supplementary Insurance Information
December 31, 1999, 1998 and 1997
Future policy Other
Deferred benefits, Policy- policy
policy losses claims holders' claims & Net
acquisition and loss account Unearned benefits Premium investment
cost expenses balances premiums payable revenue income
----------- ------------- -------- -------- -------- ------- ------
1999 Life
and
annuities $12,874,219 1,648,976 50,377,101 5,323,954 540,407 6,901,546 3,909,373
=========== =========== =========== =========== =========== =========== ===========
1998 Life
and
annuities $13,583,956 1,727,300 52,520,300 6,023,399 540,789 7,228,227 3,587,147
=========== =========== =========== =========== =========== =========== ===========
1997 Life
and
annuities $15,451,689 1,409,031 52,335,511 7,108,662 427,649 7,643,650 3,545,311
=========== =========== =========== =========== =========== =========== ===========
See accompanying auditors' report.
43
SOUTHERN SECURITY LIFE INSURANCE COMPANY
Supplementary Insurance Information
December 31, 1999, 1998 and 1997
Benefits Amortization
claims of deferred
losses & policy Other
settlement acquisition operating
expenses costs expenses
-------- ----------- --------
1999 Life
and
annuities 4,453,564 3,029,223 3,261,134
=========== =========== ===========
1998 Life
and
annuities 4,346,820 3,484,689 4,134,686
=========== =========== ===========
1997 Life
and
annuities 4,431,474 3,542,617 3,472,255
=========== =========== ===========
Schedule IV
SOUTHERN SECURITY LIFE INSURANCE COMPANY
Reinsurance
December 31, 1999, 1998 and 1
Percentage
Ceded to Assumed of amount
other from other assumed
Direct amount companies companies Net amount to net
------------- --------- --------- ---------- ------
December 31, 1999:
Life insurance in force $ 896,846,000 250,691,000 558,571,000 1,204,726,000 46%
============== ============== ============== ============== ==============
Premiums:
Life insurance $ 7,126,938 984,550 537,797 6,680,185 8%
Accident & health insurance 236,536 15,175 -- 221,361 --
-------------- -------------- -------------- -------------- ==============
Total Premiums $ 7,363,474 999,725 537,797 6,901,546 8%
============== ============== ============== ============== ==============
December 31, 1998:
Life insurance in force $ 919,014,000 297,913,000 548,515,000 1,169,616,000 47%
============== ============== ============== ============== ==============
Premiums:
Life insurance 7,366,153 863,436 566,628 7,069,345 8%
Accident & health insurance 158,882 -- -- 158,882 --
-------------- -------------- -------------- -------------- --------------
Total Premiums $ 7,525,035 863,436 566,628 7,228,227 8%
============== ============== ============== ============== ==============
December 31, 1997:
Life insurance in force $1,026,038,000 337,901,000 532,772,000 1,220,909,000 44%
============== ============== ============== ============== ==============
Premiums:
Life insurance 8,055,672 914,071 490,726 7,632,327 6.4%
Accident & health insurance 11,323 -- -- 11,323 --
-------------- -------------- -------------- -------------- --------------
Total Premiums $ 8,066,995 914,071 490,726 7,643,650 6.4%
============== ============== ============== ============== ==============
44
Item 9. Change in and disagreements on accounting and financial disclosure.
- ---------------------------------------------------------------------------
Southern Security Life, (the "Company") retained Tanner + Co. as its independent
auditors and replaced Ernst & Young LLP effective December 1, 1999. The Company
retained Ernst & Young LLP as its independent auditors and replaced KPMG Peat
Marwick LLP effective February 21, 1999. No report of KPMG Peat Marwick LLP or
Ernst & Young LLP on the financial statements of the Company for either of the
past two years contained an adverse opinion, or disclaimer of opinion, or was
qualified or modified as to uncertainty, audit scope, or accounting principles.
Since the engagement of KPMG Peat Marwick LLP and Ernst & Young, LLP for the
Company's two most recent fiscal years and through the date of replacement,
there were no disagreements between the Company and KPMG Peat Marwick LLP and
Ernst and Young, LLP on any matter of accounting principles or practices,
financial statement disclosure, or auditing scope or procedure. The change in
independent accountants was approved by the Company's Board of Directors and
disclosed in a Form 8-K, which was filed with the Securities and Exchange
Commission on December 21, 1999. Reference is made to current reports on Forms
8-K dated December 21, 1999.
PART III
Item 10. Directors and executive officers of the Company.
- ---------------------------------------------------------
The Company's Board of Directors consists of nine persons, six of whom are not
employees of the Company. There is no family relationship between or among any
of the directors, except that Scott M. Quist and G. Robert Quist are the sons of
George R. Quist. The following table sets forth certain information with respect
to the directors and executive officers of the Company.
Director
Name Age Since Position(s) with the Company
- ---- --- -------- ----------------------------
George R. Quist 79 December 1998 Chairman of the Board, President
and Chief Executive Officer
William C. Sargent 71 December 1998 Senior Vice President, Secretary
and Director
Scott M. Quist 46 December 1998 First Vice President, General
Counsel, Treasurer and Director
Charles L. Crittenden 80 December 1998 Director
Sherman B. Lowe 85 December 1998 Director
R.A.F. McCormick 86 December 1998 Director
H. Craig Moody 46 December 1998 Director
Norman G. Wilbur 61 December 1998 Director
Robert G. Hunter 40 December 1998 Director
G. Robert Quist 48 April 1999 Director
Committees of the Board of Directors include an executive committee, on which
George Quist, Scott Quist, Sargent and Moody serve; an audit committee, on which
Crittenden, Lowe, Moody, and Wilbur serve; and a compensation committee, on
which Crittenden, Lowe and George Quist serve.
The following is a description of the business experience of each of the
directors.
George R. Quist, age 79, has been Chairman of the Board, President and Chief
Executive Officer of the Company since December 1998. Mr. Quist is also Chairman
of the Board, President and Chief Executive Officer of Security National
Financial Corporation and has served in this position since October 1979. From
1960 to 1964, he was Executive Vice President and Treasurer of Pacific Guardian
Life Insurance Company. From 1946 to 1960, he was an agent, District Manager and
Associate General Agent for various insurance companies. Mr. Quist also served
from 1981 to 1982 as the President of The National Association of Life
Companies, a trade association of 642 life insurance companies, and from 1982 to
1983 as its Chairman of the Board.
45
William C. Sargent, age 71, has been Senior Vice President, Secretary and a
director since December 1998. Mr. Sargent is also Senior Vice President,
Secretary and a Director of Security National Financial Corporation and has
served in this position since February 1980. Prior to 1980, he was employed by
Security National as a salesman and agency superintendent.
Scott M. Quist, age 46, has been General Counsel, First Vice President,
Treasurer and a director since December 1998. Mr. Quist is also First Vice
President, General Counsel, Treasurer and a Director of Security National
Financial Corporation and has served in this position since May 1986. From 1980
to 1982, Mr. Quist was a tax specialist with Peat, Marwick, Mitchell, & Co., in
Dallas, Texas. From 1986 to 1991, he was a treasurer and director of The
National Association of Life Companies, a trade association of 642 insurance
companies until its merger with the American Council of Life Companies. Mr.
Quist has been a member of the Board of Governors of the Forum 500 Section
(representing small insurance companies) of the American Council of Life
Insurance. Mr. Quist has also served as regional director of Key Bank of Utah
since November 1993. Mr. Quist is currently a director and Vice President of the
National Alliance of Life Companies, a trade association of over 200 life
companies.
Charles L. Crittenden, age 80, has been a director of the Company since December
1998. Mr. Crittenden is also a Director of Security National Financial
Corporation and has served in this position since October 1979. Mr. Crittenden
has been sole stockholder of Crittenden Paint & Glass Company since 1958. He is
also an owner of Crittenden Enterprises, a real estate development company and
Chairman of the Board of Linco, Inc.
Sherman B. Lowe, age 85, has been a director of the Company since December 1998.
Mr. Lowe is also a Director of Security National Financial Corporation and has
served in this position since October 1979. Mr. Lowe was formerly President and
Manager of Lowe's Pharmacy for over 30 years. He is now retired. He is an owner
of Burton-Lowe Ranches, a general partnership.
R.A.F. McCormick, age 86, has been a director of the Company since December
1998. Mr. McCormick is also a Director of Security National Financial
Corporation and has served in this position since October 1979. He is a past
Vice President of Sales for Cloverclub Foods. He is now retired.
H. Craig Moody, age 46, has been a director of the Company since December 1998.
Mr. Moody is also a Director of Security National Financial Corporation and has
served in this position since September 1995. Mr. Moody is owner of Moody &
Associates, a political consulting and real estate company. He is a former
Speaker and House Majority Leader of the House of Representatives of the State
of Utah.
Norman G. Wilbur, age 61, has been a director of the Company since December
1998. Mr. Wilbur is also a Director of Security National Financial Corporation
and has served in this position since October 1998. Mr Wilbur worked for J.C.
Penny's regional offices in budget and analysis. His final position was Manager
of Planning and Reporting for J.C. Penney's stores. After 36 years with J.C.
Penny's, he took an option of an early retirement in 1997. Mr. Wilbur is a past
board member of a homeless organization in Plano, Texas.
Robert G. Hunter, M.D., age 40, has been a director of the Company since
December 1998. Dr. Hunter is also a Director of Security National Financial
Corporation and has served in this position since October 1998. Dr. Hunter is
currently a practicing physician in private practice. Dr. Hunter created the
State Wide E.N.T. Organization (Rocky Mountain E.N.T., Inc.) where he is
currently a member of the Executive Committee. He is Chairman of Surgery at
Cottonwood Hospital, a delegate to the Utah Medical Association and a delegate
representing Utah to the American Medical Association, and a member of several
medical advisory boards.
G. Robert Quist, age 48, has served as President of Big Willow Water Company
from 1987 to the present time. He has served on the Board of Directors of
Associated Investors Company of Hawaii, has served on the Board of Directors and
is Secretary/Treasurer of the Utah Cemetery Association.
46
Executive Officers
The following table sets forth certain information with respect to the executive
officers of the Company (the business biographies set forth above):
Name Age Title
- ------- ------ -------
George R. Quist (1) 79 Chairman of the Board, President and
Chief Executive Officer
William C. Sargent 71 Senior Vice President and Secretary
Scott M. Quist (1) 46 First Vice President, General Counsel and
Treasurer
(1) George R. Quist is the father of Scott M. Quist.
The Board of Directors of the Company has a written procedure which requires
disclosure to the Board of any material interest or any affiliation on the part
of any of its officers, directors or employees which is in conflict or may be in
conflict with the interests of the Company.
No director, officer or 5% stockholder of the Company or its subsidiaries, or
any affiliate thereof has had any transactions with the Company or its
subsidiaries during 1999 or 1998.
Each of the directors are board members of Security National Financial
Corporation (the ultimate parent of the Company) with the exception of G. Robert
Quist, which has a class of equity securities registered under the Securities
Exchange Act of 1934, as amended. In addition, Scott M. Quist is a regional
director of Key Bank of Utah. All directors of the Company hold office until the
next annual meeting of stockholders, until their successors have been elected
and qualified, or until their earlier resignation or removal.
Item 11. Executive compensation.
- --------------------------------
(a) Summary compensation. The following summary compensation table is
provided with respect to the Company's Chief Executive Officer and its Executive
Vice President, who constitute all of the executive officers of the Company
whose total annual salary and bonus exceed $100,000:
SUMMARY COMPENSATION TABLE
Long Term Compensation
---------------------------------------
Annual Compensation Awards Awards Payouts
-------------------------------------------------------------------------------------------------------
(a) (b) (c) (d) (e) (f) (g) (h) (i)
Other Restricted Securities All other
Name and Annual Stock Underlying LTIP Compen-
Principal Compensation Awards Options/ Payouts sation
Position Year Salary($) Bonus($) ($) ($) SARs(#) ($) $
- -----------------------------------------------------------------------------------------------------------------------------------
President
and Chief
Executive
Officer
George R. Quist(5) 1999 $0 $0 $0 $0 N/A N/A N/A
George R. Quist(1) 1998 $0 $0 $0 $0 N/A N/A N/A
George Pihakis 1998 $244,800 $0 $13,625(2) $0 N/A N/A $1,050,000 (3)
George Pihakis 1997 $244,800 $0 $11,674(2) $0 N/A N/A N/A
Executive Vice
President
David C. Thompson(5) 1999 $0 $0 $0 $0 N/A N/A N/A
David C. Thompson 1998 $121,275 $0 $13,313(4) $0 N/A N/A N/A
David C. Thompson 1997 $121,275 $0 $14,043(4) $0 N/A N/A N/A
(1) New officers appointed in December 1998 did not receive any compensation in 1998.
(2) During 1998 this amount included $6,350 paid in the form of a
director's fee, and $7,275 paid in the form of a car allowance.
47
Item 11. Executive compensation, continued
- -------------------------------------------
During 1997 this amount included $6,600 paid in the form of a
director's fee, $550 paid in the form of an executive committee fee,
and $4,524 paid in the form of a car allowance.
(3) Payment of lump sum settlement under Executive Compensation Agreement.
See "Item 11, Executive Compensation (e) Employee Contracts."
(4) During 1998 this amount included $6,350 paid in the form of a
director's fee,$6,000 paid in the form of a car allowance, and $963
paid in the form of dues at a social club used exclusively for
business purposes. During 1997 this amount included $6,600 paid in the
form of a director's fee, $550 paid in the form of an executive
committee fee, $6,000 paid in the form of a car allowance, and $893
paid in the form of dues at a social club used exclusively for
business purposes.
(5) Effective January 1, 1999, the Company entered into an Administrative
Services Agreement with its ultimate parent Security National
Financial Corporation (Security National). Under the terms of the
Administrative Services Agreement, all of the Company's employees
became employees of Security National. Administrative functions
previously performed by the Company are now being furnished to the
Company under this Agreement. The Company pays to Security National
$250,000 per month or $3 million per year for the Administrative
services.
(b) Perquisites. Executive officers of the Company who are employees of the
Company are covered under a group life, group disability, and
hospitalization plan that does not discriminate in favor of officers and
that is generally available to all salaried employees. The Company does not
have a pension, retirement or other deferred compensation plan, or any other
similar arrangement.
(c) Director's fees and other fees. Directors of the Company prior to
December 17, 1998 received a director's fee of $6,600 per year for serving
as director of the Company. Each director of the Company also received the
sum of $275 for each committee meeting attended, if such committee meeting
is not in conjunction with a meeting of the Company's Board of Directors
held at the same time and place. New directors elected in December 1998 did
not receive any compensation in 1998 or 1999.
(d) Compensation committee interlocks and insider participation. The
Executive Committee of the Company's Board of Directors makes recommendation
to the Board of Directors concerning the compensation of the Company's
executive officers. Subsequently, the Board of Directors makes all final
decisions concerning such compensation.
(e) Employee contracts. As part of the acquisition by Security National
Financial Corporation (SNFC) on December 17, 1998 of SSLIC Holding Company
(formerly Consolidare Enterprises, Inc.), SNFC caused the Company to pay
$1,050,000 to George Pihakis, President and Chief Executive Officer of the
Company prior to closing, as a lump sum settlement of the executive
compensation agreement between the Company and Mr. Pihakis.
Item 12. Security ownership of certain beneficial owners and management.
- ------------------------------------------------------------------------
The following table sets forth, as of December 31, 1999, information with
respect to the only persons known by the Company to be the beneficial owner of
more than 5% of the Company's outstanding voting securities:
Number of Shares
Title and Nature of
of Name and Address of Beneficial Percent
Class Beneficial Owner Ownership of Class
------- ------------------------------------ ----------- --------
Common SSLIC Holding Company Inc., formerly
Shares Consolidare Enterprises, Inc. 1,170,195 61.3%
c/o Security National Life Ins. Co. Direct
5300 S 360 W, Suite 200
Salt Lake City, UT 84123
Common Capital Indemnity Corp., 151,871 8.0%
Shares George A. Fait Direct
4610 University Ave, Madison, WI
48
Item 13. Certain relationships and related transactions.
- --------------------------------------------------------
Insuradyne Corporation, a wholly-owned subsidiary of Security National Financial
Corporation, serves as general agent for the Company, pursuant to a general
agency agreement, which is terminable by either party with 30 days notice. In
such capacity, Insuradyne receives a commission on the first year commissionable
premium on certain of the Company's policies as well as a small renewal
commission on certain other policies. In accordance with the Florida Insurance
Code, a copy of the Company's General Agency Agreement with Insuradyne
Corporation was filed with and approved by the Florida Department of Insurance.
Management of the Company believes that the terms of its General Agency
Agreement with Insuradyne are as favorable to the Company as terms which could
be obtained from independent third parties. During 1999, gross commissions in
the amount of $175,409 were earned by Insuradyne Corporation. At December 31,
1999, the Company owes $195,785 to Insuradyne as a result of commissions earned
by Insuradyne but for which Insuradyne has not yet requested payment.
No director or officer of the Company or any associates of any director or
officer of the Company was indebted to the Company at December 31, 1999.
The Company continues to be indebted to its parent, SNFC, in the amount of
$1,000,000, pursuant to a promissory note dated December 1988, which bears
interest at the annual rate of interest equal to the prime rate (as hereinafter
defined) plus 2%, with such interest rate not to be less than 9% nor in excess
of 11%. For purposes of this promissory note, prime rate is defined to mean the
prime rate as announced by Compass Bank, Birmingham, Alabama, from time to time,
as its prime rate (which interest rate is only a bench mark, is purely
discretionary and is not necessarily the best or lowest rate charged borrowing
customers). This promissory note is due on demand and is payable out of capital
surplus in excess of $1,900,000, pursuant to Florida Statutes ss.628.401 (1990).
Interest and principal can only be repaid upon the express written approval of
the Florida Department of Insurance.
The Company entered into an Administrative Services Agreement dated December 17,
1998 with SNFC. Under the terms of the agreement, SNFC has agreed to provide the
Company with certain defined administrative and financial services,
underwriting, data processing, legal, building management, marketing advisory
services and investment services. In consideration for the services to be
provided by SNFC, the Company shall pay SNFC an administrative services fee of
$250,000 per month, which may be increased, beginning on January 1, 2001, to
reflect increases in Consumer Price Index, over the index amount as of January
1, 2000.
The Administrative Services Agreement shall remain in effect for an initial term
expiring on December 16, 2003. However, the term of the agreement may be
automatically extended for an additional one-year term unless either the Company
or SNFC shall deliver a written notice on or before September 30 of any year
stating to the other its desire not to extend the term of the agreement. SSLIC
Holding Company, a wholly owned subsidiary of Security National Life Insurance
Company, owns 61.3% of the outstanding shares of common stock of the Company.
Security National Life Insurance Company is a wholly owned subsidiary of SNFC.
In addition, George R. Quist, the Company's President and Chef Executive Officer
is the President and Chief Executive Officer of SNFC; Scott M. Quist, the
Company's First Vice President, General Counsel and Treasurer is the First Vice
President, General Counsel and Treasurer of SNFC; and William C. Sargent, the
Company's Senior Vice President and Secretary is the Senior Vice President and
Secretary of SNFC. Finally, the directors of the Company also serve as the
directors of SNFC. See Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operation.
On December 28, 1998 the Company entered into a Loan Funding and Fee Agreement
and Agency Agreement (the "Agreement") with Security National Mortgage Company
("SNMC"), a subsidiary of SNFC. Under the terms of the Agreement SNMC assigns
their interest in residential mortgage loans that have been pre-sold to third
party investors to the Company. The Company purchases these loans and holds them
as short-term investments until it receives the proceeds from the third-party
investors. The Company receives fee income from SNMC based upon how long the
loans were outstanding. At December 31, 1999 and 1998 the Company had
outstanding loan purchases of $8,595,093 and $3,941,020 respectively. Included
in investment income is $457,861 and $534 for the years ended December 31, 1999
and 1998, respectively.
The Company received for the year ended December 31, 1999, $219,684 as rental
income from SNFC for a lease of office space in the Company's building under the
terms of the Administrative Services Agreement.
The Company received for the year ended December 31, 1999, $230,639 in interest
income from SNFC for short-term loans of which none were outstanding as of
December 31, 1999.
49
PART IV
Item 14. Financial statements, exhibits filed and reports on Form 10-K.
Page Number
-----------
(a) 1. See item 8
----------
2. Supplemental Schedules
Required Financial Data - for the years ended
December 31, 1998, 1997 and 1996 - included in Part
II, Item 8:
Schedule I - Summary of Investments -
Other than Investments in Related
Parties.........................................41
Financial Data Schedule.........................42
Schedule III - Supplementary Insurance
Information.....................................43
Schedule IV - Reinsurance.......................44
Schedules other than those listed above have been omitted because they are not
applicable or because the required information is included in the financial
statements and notes thereto or in Item 7 - Management's Discussion and Analysis
of Financial Condition and Results of Operations.
50
3. Exhibits
Exhibit Document
No.
3. Articles of Incorporation, as amended, and Bylaws, as amended,
dated September 1994, incorporated by reference from the
Annual Report on Form 10-K for fiscal year ended December 31,
1994.
10.A Revolving Financing Agreement between the Company and the
Student Loan Marketing Association, dated September 19, 1996,
incorporated by reference from Annual Report on Form 10-K for
fiscal year ended December 31, 1997.
10.B Reinsurance Agreement between the Company and United Group
Insurance Company, dated December 31, 1992 incorporated by
reference from Annual Report on Form 10-K for fiscal year
ended December 31, 1992.
10.C Agency Agreement between the Company and Insuradyne
Corporation, incorporated by reference from Annual Report on
Form 10-K for fiscal year ended December 31, 1993.
10.D Administrative Services Agreement between the Company and
Security National Financial Corporation dated December 17,
1998, incorporated by reference from Annual Report on Form
10-K for fiscal year ended December 31, 1998.
10.E Agency Agreement between the Company and Security National
Mortgage Company dated December 28, 1998.
10.F Loan Funding and Fee Agreement between the Company and
Security National Mortgage Company dated December 28, 1998.
11. Statement Re Computation of Net Income per common share
27. Financial Data Schedule
b) Reports on Form 8-K
-------------------
On December 21, 1999, the Company filed a report on Form 8-K regarding
the engagement of Tanner + Co. as its independent auditors to replace
Ernst & Young LLP.
51
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Company has duly caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized.
SOUTHERN SECURITY LIFE INSURANCE COMPANY
Dated: March 30, 2000 By: George R. Quist
---------------
George R. Quist
Chairman of the Board, President and Chief
Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934 as amended,
this report has been signed by the following persons in counterpart on behalf of
the Company on the dates indicated:
Signature Title Date
- --------- ----- ----
George R. Quist Chairman of the March 30, 2000
Board, President and
Chief Executive Officer
and (Principal Executive
Officer)
Scott M. Quist First Vice President, March 30, 2000
General Counsel, and
Treasurer and Director
(Principal Financial and
Accounting Officer)
William C. Sargent Senior Vice President, March 30, 2000
Secretary and Director
Charles L. Crittenden Director March 30, 2000
Sherman B. Lowe Director March 30, 2000
R.A.F. McCormick Director March 30, 2000
H. Craig Moody Director March 30, 2000
Norman G. Wilbur Director March 30, 2000
Robert G. Hunter Director March 30, 2000
G. Robert Quist Director March 30, 2000
52
SOUTHERN SECURITY LIFE INSURANCE COMPANY
EXHIBIT 11
COMPUTATION OF NET INCOME
PER COMMON SHARE
1999 1998 1997
---------- --------- --------
Weighted Average
Shares Outstanding 1,907,989 1,907,989 1,907,989
Net Income (Loss) 631,958 $ (383,733) $ 195,210
Per Share Amount .33 $ (.20) $ .10
53
SOUTHERN SECURITY LIFE INSURANCE COMPANY
EXHIBIT 10E
AGENCY AGREEMENT
54
AGENCY AGREEMENT
THIS AGENCY AGREEMENT (the "Agreement") was made and entered into this
25th day of December 1998, by and between Southern Security Life Insurance
Company a Florida corporation (the "Company") and Security National Mortgage
Company, a Utah corporation (the "Agent"). The Company and Agent are also
referred to herein, individually, as "party" and collectively, as "parties".
RECITALS
WHEREAS, the Company invests funds in short-term mortgage instruments
which meet the standards of the Federal National Mortgage Association, the
Federal Home Loan Mortgage Corporation and Government National Mortgage
Association (hereinafter referred to individually as a "Qualifying Loan" and
collectively as "Qualifying Loans");
WHEREAS, Agent underwrites and originates Qualifying Loans which it sells
to third party institutional or private investors;
WHEREAS, the Company has agreed, at its sole discretion, to fund
Qualifying Loans pursuant to a Loan Funding and Fee Agreement dated December 28,
1998, by and between Agent and the Company (hereinafter the "Funding
Agreement");
WHEREAS, Agent has acted as the Company's agent since December 28, 1998,
in connection with Qualifying Loan transactions pursuant to an understanding
between the Company and Agent in which Agent is authorized to take physical
possession of the Promissory Notes (the "Promissory Notes") executed by the
borrower or borrowers in such transactions following the closing of the
Qualifying Loans, and deliver the Promissory Notes from title companies closing
Qualifying Loan transactions to the Company and subsequently deliver the
Promissory Notes from the Company to the Agent's executive offices for purposes
of assembling and completing the Qualifying Loan documents, including the
Promissory Note, to send to third party institutional or private investors;
WHEREAS, the Company and Agent desire to memorialize in writing their
understanding regarding their agency relationship;
NOW THEREFORE, in consideration of the mutual promises and agreements
contained herein, and for other good and valuable consideration, the receipt and
sufficiency of which is hereby acknowledged, the parties agree as follows:
1. Appointment of Agent. The Company hereby ratifies and approves the
authorization of Agent to serve as Agent for the Company effective as of
December 28, 1998, in accordance with the instructions hereinafter set forth in
this Agreement, and Agent hereby ratifies and approves its acceptance of such
appointment effective as of December 28, 1998.
2. Assignment of Qualifying Loans. For each Qualifying Loan underwritten
and originated by Agent which is funded by the Company pursuant to the Funding
Agreement, Agent does hereby ratify and approve its assignment to the Company
effective as of December 28, 1998, upon execution by the borrower or borrowers
in a Qualifying Loan transaction, of all its right, title and interest in the
Promissory Notes executed by the borrower or borrowers in such transaction,
which Promissory Notes shall be payable to Agent or its assignees.
3. Duties of Agent. Following the closing of each Qualifying Loan, Agent
hereby ratifies and approves its agreement as of December 28, 1998 to take
physical possession of the Promissory Notes on behalf of and for the sole
benefit of the Company and to hold, transfer or convey such Notes as from time
to time directed by the Company or its successors or assigns, including but not
limited to, the delivery of the Promissory Notes from the title company closing
a Qualifying Loan transaction to the Company and the subsequent delivery of the
Promissory Notes from the Company to the Agent's executive offices for purposes
of assembling and compiling the Qualifying Loan documents, including the
Promissory Notes, to be sent to third party institutional or private investors
purchasing the Qualifying Loans.
55
4. Governing Law. This Agreement shall be governed and construed and
enforced in accordance with the laws of the State of Utah.
5. Amendments; Waiver. This Agreement may not be amended, modified,
superseded or cancelled, nor may any of the terms, covenants, representations,
warranties, conditions or agreements herein be waived, except by a written
instrument executed by the party against whom such amendment, modification,
supersedure, cancellation or waiver is charged. The failure of either of the
parties at any time or times to require performance of any provision hereof
shall in no manner effect the right at a later time to enforce the same. No
waiver by either of the parties of any condition, or of any breach of any term,
covenant, representation, warranty, condition, or agreement contained herein,
shall be deemed to be or shall be construed to be a waiver or continuing waiver
or any such condition or breach or a waiver of any condition or of the breach of
any other term, covenant, representation, warranty, condition or agreement
hereof.
6. Headings, Construction. The captions and headings contained herein are
for convenience and reference only, and shall not in any way affect the meaning
or interpretation of this Agreement. Notwithstanding any rule or maxim or
construction to the contrary, any ambiguity or uncertainty in this Agreement
shall not be construed against either of the parties based upon authorship or
any of the provisions hereof.
7. Notices. Any notice pursuant to this Agreement to be given or made by a
party to or on the other party shall be sufficiently given or made if sent by
first class mail, postage prepaid, addressed (until another address is filed in
writing by a party with the other party) as follows:
The Company:
Scott M. Quist, Esq., First Vice President
Southern Security Life Insurance Company
5300 South 360 West, Suite 250
Salt Lake City, Utah 84123
The Agent:
Mr. J. Lynn Beckstead, Jr., President
Security National Mortgage Company
5300 South 360 West, Suite 150
Salt Lake City, Utah 84123
56
8. Counterparts. This Agreement may be executed by facsimile and may be executed
in one or more counterparts, each of which shall be deemed an original, and all
of which, when take together, shall constitute one and the same instrument.
9. Successors and Assigns. This Agreement shall be binding on all successors and
assigns of the parties.
WITNESS WHEREOF, the parties have caused this Agreement to be duly executed as
of the day and year first above written.
SECURITY NATIONAL
MORTGAGE COMPANY
By: J. Lynn Beckstead, Jr.
Its: President
SOUTHERN SECURITY LIFE
INSURANCE COMPANY
By: David M. Thompson
Its: Vice President
57
SOUTHERN SECURITY LIFE INSURANCE COMPANY
EXHIBIT 10F
LOAN FUNDING AND FEE AGREEMENT
58
LOAN FUNDING AND FEE AGREEMENT
This Loan Funding and Fee Agreement (this "Funding and Fee Agreement") is
entered into as of the 28th day of December, 1998 by and between Southern
Security Life Insurance Company ("SSL") and Security National Mortgage Company
(as "SNM") with reference to the following facts:
SNM, in their normal course of business, enters into certain
agreements ("Forward Commitments") with third party institutional or
private investors to sell packages of loans that are underwritten
pursuant to the guidelines of certain agencies, including but not
limited to the Federal National Mortgage Association, the Federal Home
Loan Mortgage Corporation and the Government National Mortgage
Association ("Qualifying Loans").
SNM then underwrites and originates Qualifying Loans that meet the
terms and conditions of the Forward Commitments. These individual
loans must be funded prior to delivery to the third-party
institutional investors.
SSL desires to invest its funds in short-term instruments that meet
the standards of Qualifying Loans.
NOW THEREFORE, in consideration of the mutual promises and agreements
contained in this Funding and Fee Agreement and other good and valuable
consideration, the receipt and sufficiency of which are hereby acknowledged, the
parties hereto hereby agree as follows:
1. Loan Funding. SSL agrees to fund, at its sole discretion, proposed
individual loan transactions that, when funded, would be Qualifying Loans
meeting the terms and conditions of a validly existing Forward Commitment,
subject to the terms of this Funding and Fee Agreement.
2. Required Documentation. In order for an individual loan to be
considered by SSL for funding, the following documentation must be submitted:
(i) a copy of each HUD Closing Statement for each Qualifying Loan to
be funded;
(ii) a copy of the Purchase Certificate, or similar document, from a
third-party investor, evidencing that the proposed loan is
subject to a valid Forward Commitment; and
(iii) a copy of the Approved Underwriter's Worksheet.
3. Assignment of Interests. In the event that SSL agrees to fund any
Qualifying Loan, SNM hereby agrees to assign all of its rights, privileges and
interest in and to each individual Qualifying Loan and its rights, privileges
and interests in and to the Forward Commitment the Qualifying Loan is subject
to. SNM agrees to take all steps reasonably requested by SSL to perfect the
assignments made under this paragraph, including but not limited to, at the
discretion of SSL the execution of a Uniform Commercial Code Financing Statement
and written notification to each party of any Forward Commitment.
4. Payments Under Forward Commitments. SNM agrees to instruct the third-party
investor under a Forward Commitment fulfilled with Qualifying Loans funded by
SSL to wire the purchase price directly to SSL.
5. Fee. A fee, (the "Fee"), in an amount equal to the Key Bank of Utah
Prime Rate plus one percent (1%) will be charged to SSL on the principal balance
of any Qualifying Loan funded by SSL. In the event Key Bank of Utah, for
whatever reason, discontinues to publish or otherwise make known its Prime Rate,
the Fee shall accrue at a rate equal to the First Security Bank of Utah Prime
Rate. In the event First Security Bank of Utah discontinues to purchase or
otherwise make know its Prime Rate, the Fee shall accrue at a rate equal to the
Zions First National Bank of Utah Prime Rate.
6. Net Proceeds. SSL will take the amount received from the investor under
an assigned Forward Commitment and deduct from it the combined total of the Fee
described in paragraph 5 above and the principal balance of the Qualifying Loan
previously funded. The balance remaining, or Net Proceeds, will then be
forwarded to SNM. In the event that Net Proceeds from any transaction is not
equal to or greater than the Fee charged for that transaction, SSL shall deduct
any balance due from any other transaction subject to the terms of this Fee and
Funding Agreement. In the event no other transactions are available to handle
any such shortfall, SNM shall pay such shortfall upon receipt of written demand
from SSL.
59
7. Addresses. Any communications between the parties or notices provided for
in this Funding and Fee Agreement may be given by mailing them, first
class, postage prepaid, as follows:
Southern Security Life Security National
Insurance Company: Mortgage Company:
Scott M. Quist, Esq., First Vice President Mr. J. Lynn Beckstead, President
Security National Life Insurance Company Security National Mortgage Co.
5300 South 360 West, Suite 250 5300 South 360 West, Suite 150
Salt Lake City, Utah 84123 Salt Lake City, Utah 84123
or to such other address as either party may indicate to the other in writing
after the date of this Funding and Fee Agreement.
8. Assignment. This Funding and Fee Agreement shall bind and inure to the
benefit of the parties and their respective successors and assigns; provided,
however, that SNM shall not assign this Funding and Fee Agreement or any of the
rights, duties, or obligations of SNM under this Funding and Fee Agreement
without the prior written consent of SSL.
9. Delay or Omission. No delay or omission to exercise any right, power,
or remedy accruing to SSL on any breach or default of SSL under this Funding and
Fee Agreement shall impair any such right, power, or remedy of SSL, nor shall it
be construed to be a waiver of any such breach or default, or an acquiescence in
such breach or default, or waiver of or acquiescence in any similar breach or
default occurring later; nor shall any waiver of any single breach or default be
considered a waiver of any other prior or subsequent breach or default. Any
waiver, permit, consent, or approval of any kind by SSL of any breach or default
under this Funding and Fee Agreement, or any waiver by SSL or any provision or
condition of this Funding Fee Agreement, must be in writing and shall be
effective only to the extent specifically set forth in that writing. All
remedies, either under this Funding and Fee Agreement or by law or otherwise
afforded to SSL shall be cumulative and not alternative.
10. Attorneys Fees. In the event of any legal action or suit in relation
to this Funding and Fee Agreement or any note or other instrument or agreement
required under this Funding and Fee Agreement, or in the event SSL incurs any
legal expense in protecting its rights under this Funding and Fee Agreement in
any legal proceeding, SNM, in addition to all other sums which SNM may be called
on to pay, will pay to SSL the amount of such legal expense and will, if SSL
prevails in such action pay to SSL a reasonable sum for its attorney's fees and
all other costs and expenses.
11. Legal Representation. SNM and SSL both have had the opportunity to be
represented by legal counsel in connection with the negotiation, execution and
delivery of this Funding and Fee Agreement, and such legal counsel have had the
opportunity to review this Funding and Fee Agreement and have it explained to
them. As a result, the wording of this Funding and Fee Agreement and of the
instruments or documents relating thereto is not to be strictly construed
against either party but be fairly interpreted as the agreement of the parties.
12. Further Assurances. SNM agrees to execute all documents and
instruments and to take all other actions as may specifically be provided for
herein or as may be required in order to consummate the purposes of this Funding
and Fee Agreement. SNM shall diligently and in good faith pursue the
satisfaction of all conditions and contingencies in this Funding and Fee
Agreement.
13. Third Parties. Except as specifically set forth herein or in any of
the loan documents, no third party shall be benefitted by any of the provisions
of this Funding and Fee Agreement, nor shall any such third party have the right
to rely in any manner upon any of the terms hereof, and none of the covenants,
representations, warranties or agreements herein contained shall run in favor or
any third party not specifically referenced herein.
14. Time is of the Essence. Time is of the essence for the performance of
all obligations and the satisfaction of all conditions of this Funding and Fee
Agreement. The parties intend that all time periods specified in this Funding
and Fee Agreement shall be strictly applied, without any extension (whether or
not material) unless specifically agreed to in writing by all parties.
15. Entire Agreement. This Funding and Fee Agreement, and the other
documents executed in connection herewith, contain or expressly incorporate by
reference the entire agreement of the parties with respect to the matters
contemplated herein and supersede all prior negotiations with respect to the
subject matter hereof.
60
16. Counterparts. This Funding and Fee Agreement may be executed in
counterparts, each of which shall be deemed an original, and all of which
together shall constitute one and the same instrument. However, this Funding and
Fee Agreement shall not be binding on any party until it has been executed and
delivered by SNM to SSL.
17. Choice of Law. This Funding and Fee Agreement shall be governed by,
and construed and enforced in accordance with, the laws of the State of Utah. In
any action brought under or arising out of this Funding and Fee Agreement, the
parties consent to jurisdiction or any competent Court within the County of Salt
Lake, State of Utah and consent to service of process by any means authorized by
Utah law.
IN WITNESS WHEREOF, the parties to this Funding and Fee Agreement have
executed this Funding Agreement by their duly authorized officers as of December
28, 1998.
Security National Mortgage Company
By: J. Lynn Beckstead, Jr.
Its: President
Southern Security Life Insurance Company
By: David M. Thompson
Its: Vice President
61