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, 2001, 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 Identification Number)
of incorporation or organization)
755 Rinehart Road, Lake Mary, Florida 32746
- ------------------------------------- -----
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (407) 321-7113
---------------
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 28, 2002 was approximately $5,832,913.
As of March 29, 2002, 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 2002 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.
During 2001 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 12% and 14% of
the first year premiums collected by the Company in 2001 and 2000, 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 88% and 86% of the first year premiums
collected in 2001 and 2000. 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:
2001 2000 1999
==== ==== ====
Per- Per- Per-
Amount centage Amount centage Amount centage
Life
Insurance-
Ordinary (1)(2) $7,167,157 89% $7,568,550 91% $8,103,864 92%
Individual
Annuities (1) 149,424 2% 89,623 1% 46,348 1%
Life
Insurance-
Group (SGLI) 589,779 7% 497,070 6% 438,124 5%
Other -
Accident & Health 145,134 2% 169,203 2% 205,872 2%
---------- ---------- ---------- ---------- ---------- ----------
$8,051,494 100% $8,324,446 100% $8,794,208 100%
========== ========== ========== ========== ========== ==========
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 2001, 2000, and 1999 premium income for life insurance-ordinary
are net of reductions of $831,358, $923,648, and $1,236,735,
respectively, in ceded premium paid to all reinsurers, including Mega
Life.
The following table gives information on auditing standards generally accepted
in the United States of America concerning operating ratios of the Company for
the periods indicated:
2001 2000 1999
---- ---- ----
Total Net Insurance
Revenues $ 6,736,027 $ 6,698,869 $ 6,901,546
Benefit Costs Paid or
Provided:
Amount $ 4,482,588 $ 5,109,411 $ 4,453,564
Ratio to Net Insurance
Revenue 66.6% 76.3% 64.5%
Amortization of Deferred Policy
Acquisition Expenses:
Amount $ 2,197,399 $ 1,797,320 $ 3,029,223
Ratio to Net Insurance
Revenue 32.6% 26.8% 43.9%
General Insurance Expenses:
Amount $ 3,835,165 $ 3,529,381 $ 3,261,134
Ratio to Net Insurance
Revenue 56.9% 52.7% 47.3%
Income Before Income
Taxes:
Amount $ 87,841 $ 198,365 $ 782,126
Ratio to Net Insurance
Revenue 1.3% 3.0% 11.3%
Ratio to Total Revenue and
Investment Income .8% 1.9% 6.8%
Ratio to Equity .5% 1.2% 5.0%
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):
2001 2000 1999
---- ---- ----
(In thousands except lapse ratios)
Total life insurance in force at beginning of period:
Ordinary Whole Life &
Endowment-Participating $ 30 $ 238 $ 532
Ordinary Whole Life &
Endowment-Non-Participating 732,433 892,962 913,683
Term 78,770 3,646 4,799
Reinsurance Assumed 558,575 558,571 548,515
----------- ----------- -----------
Total $ 1,369,808 $ 1,455,417 $ 1,467,529
Additions (including re-
insurance assumed):
Ordinary Whole Life &
Endowment-Participating $ -- $ -- $ --
Ordinary Whole Life &
Endowment-Non-Participating 55,785 60,589 66,591
Term 2,487 -- --
Reinsurance Assumed 250,240 4,121 22,402
----------- ----------- -----------
Total $ 308,512 $ 64,710 $ 88,993
Terminations:
Death $ 2,822 2,313 2,172
Lapse and Expiry 21,875 22,398 31,418
Surrender 97,483 125,086 67,515
Other (11,854) 522 --
----------- ----------- -----------
Total $ 110,326 $ 150,319 $ 101,105
Life Insurance in force at end of period:
Ordinary Whole Life &
Endowment-Participating $ 180 $ 30 $ 238
Ordinary Whole Life &
Endowment-Non-Participating 708,789 732,433 892,962
Term 72,752 78,770 3,646
Reinsurance Assumed 786,273 558,575 558,571
----------- ----------- -----------
Total $ 1,567,994 $ 1,369,808 $ 1,455,417
Reinsurance Ceded (179,242) (210,365) (250,691)
----------- ----------- -----------
Total after Reinsurance Ceded $ 1,388,752 $ 1,159,443 $ 1,204,726
=========== =========== ===========
Lapse Ratio (Reflecting termina-
tion by surrender and lapse;
ordinary life insurance only): 13.8% 16.1% 9.1%
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)
- ----- ---------- ---------- ---------- ---------
2001 $50,560,334 $ 3,876,422 $ 3,866,966 7.65%
2000 $50,444,329 $ 3,959,061 $ 3,935,607 7.80%
1999 $50,221,950 $ 3,924,271 $ 3,909,373 7.78%
(1) Computed by summing the beginning and ending investment and cash
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 of total liabilities. The Company's required statutory minimum
surplus calculated in accordance with this section is approximately $1,896,000.
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, 2001, the
Company had statutory capital and surplus of $8,459,700, 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, 2001, 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 using the CRVM method.
In preparing financial statements in accordance with U.S. 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
approximately one-half of the second floor of the building. Approximately 94% of
the remaining rentable space was leased as of December 31, 2001.
Item 3. Legal Proceedings.
- --------------------------
An action was brought against the Company in July 1999 by Dorothy Ruth Campbell
in the Circuit Court of Escambia County, Alabama. The action arises out of a
denial of coverage under a $10,000 insurance policy. 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 certain discovery has taken place. The Company
intends to vigorously defend the matter.
An action was brought against the Company by National Group Underwriters, Inc.
("NGU") in state court in the State of Texas. The case was removed by the
Company to the United States District Court for the Northern District of Texas,
Fort Worth Division, with Civil No. 4:01-CV-403-E. An Amended Complaint was
filed on or about July 18, 2001. The Amended Complaint asserts that NGU had a
contract with the Company wherein NGU would submit applications for certain
policies of insurance to be issued by the Company. It is alleged that disputes
have arisen between NGU and the Company with regard to the calculation and
payment of certain advanced commissions as well as certain production bonuses.
7
NGU alleges that it "has been damaged far in excess of the $75,000 minimum
jurisdictional limits of this Court." NGU also seeks attorney's fees and costs
as well as prejudgment and postjudgment interest. A second amended complaint and
a third amended complaint which included a fraud claim were filed. A motion was
filed by the Company to dismiss the third amended complaint, including the fraud
claim. The court denied the motion. The Company has counterclaimed for what it
claims to be a debit balance owing to it pursuant to the relationship between
the parties with said counterclaim seeking an amount in excess of $625,000 (said
amount potentially subject to reduction as premiums are received). The Company
is also seeking to recover attorney's fees and costs, as well punitive damages
on two of its causes of action. NGU has filed a motion to dismiss certain of the
counterclaims. The Company has pending a motion for change of venue of the case
to Salt Lake City, Utah. The Company intends to vigorously defend the matter as
well as prosecute its counterclaims.
The Company is not a party to any other legal proceedings outside the ordinary
course of the Company's business or to any other legal proceedings which, if
adversely determined, would have a material adverse effect on the Company or its
business.
Item 4. Submission of Matters to a Vote of Security Holders.
- ------------------------------------------------------------
At the annual stockholders meeting held on October 4, 2001, the following
matters were acted upon: (i) eight directors consisting of George R. Quist,
William C. Sargent, Scott M. Quist, Charles L. Crittenden, Dr. Robert G. Hunter,
H. Craig Moody, G. Robert Quist and Norman G. Wilbur were elected to serve until
the next annual stockholders meeting or until their respective successors are
elected and qualified (for George R. Quist, 1,485,424 votes were cast in favor
of election, 1,300 votes were cast against election and there were no
abstentions; for William C. Sargent, 1,485,384 votes were cast in favor of
election, 1,340 votes were cast against election and there were no abstentions;
for Scott M. Quist, 1,485,284 votes were cast in favor of election, 1,440 votes
were cast against election and there were no abstentions; for Charles L.
Crittenden, 1,485,384 votes were cast in favor of election and 1,340 votes were
cast against election and there were no abstentions; for Dr. Robert G. Hunter,
1,485,524 votes were cast in favor of election, 1,200 votes cast against
election and there were no abstentions; for H. Craig Moody, 1,485,484 votes were
cast in favor of election, 1,240 votes cast against election and there were no
abstentions; for G. Robert Quist, 1,485,484 votes in favor of election, 1,240
votes were cast against election and there were no abstentions; for Norman G.
Wilbur, 1,485,524 votes were cast in favor of election, 1,200 votes were cast
against election and there were no abstentions); and (ii) the appointment of
Tanner + Co., as the Company's independent accountants for the fiscal year ended
December 31, 2001, was ratified (with 1,490,164 votes cast for appointment,
25,560 votes against appointment and 16,500 abstentions).
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.
8
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
- -------------------------------------------------------------------------------
2001 2000
- -------------------------------------------------------------------------------
Mar.31 Jun.30 Sep.30 Dec.31 Mar.31 Jun.30 Sep.30 Dec.31
------ ------ ------ ------ ------ ------ ------ ------
Common
Shares:
High 3.75 3.25 3.33 3.50 5.00 5.00 4.69 4.38
Low 3.13 3.12 3.13 2.80 4.66 4.00 4.00 3.50
(b) Approximate Number of Holders of Common Stock. There were 1,287
holders of record of the Company's Common Stock at December 31, 2001.
(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 2002 pursuant to such
regulation is approximately $97,000.
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,
2001 2000 1999 1998 1997
---- ------ ------ ------ ------
Revenues:
Life insurance
premiums and
policy charge $ 6,736,027 $ 6,698,869 $ 6,901,546 $ 7,228,227 $ 7,643,650
Net investment
income 3,866,966 3,935,607 3,909,373 3,587,147 3,545,311
Realized Gain
(loss) on
investments -- -- -- 525,181 506,795
Other revenue, net -- -- 715,128 -- --
--------------- --------------- --------------- --------------- ---------------
Total Revenue 10,602,993 10,634,476 11,526,047 11,340,555 11,695,756
Benefits, Losses
& Expenses:
Insurance living
benefits 2,186,664 2,243,331 2,614,754 2,483,197 2,459,638
Insurance death
benefits 2,360,265 1,549,116 1,917,134 1,529,294 1,847,375
Increase (decrease)
in policy
reserves (64,341) 1,316,964 (78,324) 334,329 124,461
Amortization of
deferred policy
acquisition
costs 2,197,399 1,797,320 3,029,223 3,484,689 3,542,617
Commissions and
general
expenses 3,835,165 3,529,380 3,261,134 4,134,686 3,472,255
--------------- --------------- --------------- --------------- ---------------
Total expenses 10,515,152 10,436,111 10,743,921 11,966,195 11,446,346
Income (loss)
before income
taxes 87,841 198,365 782,126 (625,640) 249,410
Income tax expense
(benefit) 16,865 38,105 150,168 (241 907 54,200
--------------- --------------- --------------- --------------- ---------------
NET INCOME (LOSS) $ 70,976 $ 160,260 $ 631,958 $ (383,733) $ 195,210
=============== =============== =============== =============== ===============
Weighted average
number of
shares
outstanding
(basic and
diluted) 1,907,989 1,907,989 1,907,989 1,907,989 1,907,989
--------------- --------------- --------------- --------------- ---------------
Basic income (loss)
per common share $.04 $.08 $.33 $(.20) $.10
==== ==== ==== ===== ====
Diluted income (loss)
per common share $.04 $.08 $.33 $(.20) $.10
==== ==== ==== ===== ====
Shareholders'
Equity $ 16,903,270 $ 16,198,535 $ 15,637,320 $ 15,912,106 $ 16,132,018
=============== =============== =============== =============== ===============
Shareholders'
equity per
common
share $8.86 $8.49 $8.20 $8.34 $8.45
===== ===== ===== ===== =====
Assets $ 77,479,328 $ 77,125,931 $ 77,208,941 $ 81,205,193 $ 82,142,465
--------------- --------------- --------------- --------------- ---------------
Life Insurance:
Insurance in
force $ 1,567,994,000 $ 1,369,808,000 $ 1,455,417,000 $ 1,467,529,000 $ 1,558,810,000
--------------- --------------- --------------- --------------- ---------------
Individual
insurance
issued during
current
year $ 72,083,000 $ 64,710,000 $ 66,591,000 $ 68,935,000 $ 82,390,000
--------------- --------------- --------------- --------------- ---------------
Long term
obligation $ 1,000,000 $ 1,000,000 $ 1,000,000 $ 1,000,000 $ 1,000,000
--------------- --------------- --------------- --------------- ---------------
Dividends
declared per
common share $.00 $.00 $.00 $.00 $.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, 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, 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
2001 Compared to 2000
Total revenues decreased by $31,000, or .3%, to $10,603,000 for fiscal year 2001
from $10,634,000 for fiscal year 2000. Contributing to this decrease in total
revenues was a $68,000 reduction in net investment income.
Net insurance revenues increased by $37,000, or .6%, to $6,736,000 for fiscal
year 2001, from $6,699,000 for fiscal year 2000. This increase was primarily the
result of an increase in traditional life sales.
Net investment income decreased by $68,000, or 1.7%, to $3,867,000 for fiscal
year 2001 from $3,935,000 for fiscal year 2000. Investment yield slightly
decreased for the fiscal year 2001 from 7.8% in 2000 to 7.65% in 2001.
Benefits and claims decreased by $626,000, or 12.2%, to $4,483,000 for fiscal
year 2001, from $5,109,000 for the comparable period in 2000. The decrease was
primarily due to a decrease in traditional life reserves.
The amortization of deferred policy acquisition costs increased by $400,000 or
22.3%, to $2,197,000, for fiscal year 2001, from $1,797,000 for the comparable
period in 2000. The increase in amortization expense was in line with actuarial
assumptions.
Operating expenses increased by $305,000, or 8.6%, to $3,835,000 for fiscal year
2001 from $3,530,000 for the same period in 2000. The increase was primarily due
to increased marketing, legal expenses and provision for doubtful accounts.
11
2000 Compared to 1999
Total revenues decreased by $892,000, or 7.7%, to $10,634,000 for fiscal year
2000 from $11,526,000 for fiscal year 1999. Contributing to this decrease in
total revenues was a $203,000 reduction in net insurance revenues and a $715,000
reduction in other revenue.
Net insurance revenues decreased by $203,000, or 2.9%, to $6,699,000 for fiscal
year 2000, from $6,902,000 for fiscal year 1999. 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 $26,000, or .7%, to $3,936,000 for fiscal
year 2000 from $3,909,000 for fiscal year 1999. Investment yield slightly
increased for the fiscal year 2000 from 7.78% in 1999 to 7.8% in 2000.
There was no other revenue for fiscal year 2000, as compared to $715,000 in
other revenue in 1999. The amount of other revenue 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 $655,000, or 14.7%, to $5,109,000 for fiscal
year 2000, from $4,454,000 for the comparable period in 1999. The increase was
primarily due to an increase in traditional life reserves as a result of
additional policies in force of traditional life products.
The amortization of deferred policy acquisition costs decreased by $1,232,000,
or 40.7%, to $1,797,000 for fiscal year 2000, from $3,029,000 for the comparable
period in 1999. The decrease in amortization expense was primarily due to
adjusting the amortization rate to the Company's current assumptions.
Operating expenses increased by $269,000, or 8.3%, to $3,530,000 for fiscal year
2000 from $3,261,000 for the same period in 1999. The increase was primarily due
to increased marketing and home office building expenses.
Liquidity and Capital Resources.
- -------------------------------
The Company attempts to match the duration of invested assets with its
policyholder liabilities. The Company may sell investments other than those
held- to-maturity in the portfolio to help in this timing; however, to date,
that has not been necessary. The Company purchases short-term investments on a
temporary basis to meet the expectations of short-term requirements of the
Company's products. The Company's investment philosophy is intended to provide a
rate of return which will persist during the expected duration of policyholder
liabilities regardless of future interest rate movements.
The Company's investment policy is to invest predominantly in fixed maturity
securities, mortgage loans, and warehouse mortgage loans on a short-term basis
before selling the loans to investors in accordance with the requirements and
laws governing life insurance companies. Bonds owned by the Company amounted to
$24,521,000 as of December 31, 2001 as compared to $28,742,000 as of December
31, 2000. This represents 49.8% and 60.6% of the total investments as of
December 31, 2001 and December 31, 2000, 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, 2001, and at December 31, 2000, the Company had
investments in bonds in rating categories three through nine, which are
considered non-investment grade of $482,000 and $0, respectively.
If market conditions were to cause interest rates to change, the market value of
the fixed income portfolio (approximately $26.884 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 $1.513 $.728 $(.677) $(1.307)
12
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, 2001
and December 31, 2000, 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 2001 was 13.8% as
compared to a rate of 16.1% for 2000.
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.
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 through
December 31, 2001.
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 2001 and 2000.
The Company has leased approximately 94% of the available space in its principal
office building and does not anticipate significant capital expenditures to the
rental space.
13
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 2001, the Financial Accounting Standards Board issued Statements of
Financial Accounting Standards No. 141, "Business Combinations" (SFAS No. 141)
and No. 142, "Goodwill and Other Intangibles" (SFAS No. 142). SFAS No. 141
requires that the purchase method of accounting be used for all business
combinations initiated after June 30, 2001. The statement also establishes
specific criteria for recognition of intangible assets separately from goodwill
and requires unallocated negative goodwill to be written off immediately as an
extraordinary gain. SFAS No. 142 primarily addresses the accounting for goodwill
and intangible assets subsequent to their acquisition. The statement requires
that goodwill and indefinite lived intangible assets no longer be amortized and
be tested for impairment at least annually. The amortization period of
intangible assets with finite lives will no longer be limited to forty years.
In August 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 144, "Accounting for the Impairment of Long-
Lived Assets". This Statement addresses financial accounting and reporting for
the impairment of long-lived assets and for long-lived assets to be disposed of.
This Statement supersedes FASB Statement 121 and APB Opinion No. 30. However,
this Statement retains certain fundamental provisions of Statement 121, namely;
recognition and measurement of the impairment of long-lived assets to be held
and used, and measurement of long-lived assets to be disposed of by sale. The
Statement also retains the requirement of Opinion 30 to report discontinued
operations separately from continuing operations. This Statement also Amends ARB
No. 51 to eliminate the exception of consolidation for a temporarily controlled
subsidiary. The provisions of this statement are effective for financial
statements issued for fiscal years beginning after December 15, 2001.
14
In June 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 143, "Accounting for Asset Retirement
Obligations". This Statement addresses financial accounting and reporting for
obligations associated with the retirement of tangible long-lived assets and the
associated asset retirement costs. This Statement is effective for financial
statements issued for fiscal years beginning after June 15, 2002.
The adoption of these statements is not expected to have a significant impact on
the Company's financial statements.
The Company adopted Statement of Financial Accounting Standards No. 140,
Accounting for Transfers and Servicing of Financing Assets and Extinguishments
of Liabilities - a replacement of FASB Statement No. 125 (FAS 140) on April 1,
2001. This standard revises the standards for accounting for securitizations and
other transfers of financial assets and collateral and requires certain
disclosures, but carries over most of FAS 125's provisions without
reconsideration. This Statement is effective for recognition and
reclassification of collateral and for disclosures relative to securitization
transactions and collateral for fiscal years ending after December 15, 2000. The
adoption of FAS 140 did not have a material impact on the Company's financial
position or results of operations.
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 Sheet-December 31, 2001 and 2000................................17
Statement of Operations - years ended
December 31, 2001, 2000 and 1999........................................19
Statement of Shareholders' Equity-years
ended December 31, 2001, 2000 and 1999..................................20
Statement of Cash Flows - years ended
December 31, 2001, 2000 and 1999........................................21
Notes to Financial Statements...........................................23
15
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, 2001 and 2000 and the related statements of
operations, shareholders' equity, and cash flows for the three years in the
period ended December 31, 2001. In connection with our audits 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 audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. 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 audits provide reasonable
basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Southern Security Life
Insurance Company at December 31, 2001 and 2000, and the results of its
operations and its cash flows for the three years in the period ended December
31, 2001, in conformity with accounting principles generally accepted in the
United States of America. 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 21, 2002
16
SOUTHERN SECURITY LIFE INSURANCE COMPANY
Balance Sheet
December 31, 2001 and 2000
Assets 2001 2000
- ------ ---- ----
Investments (note 3):
Fixed maturities held-to-maturity
(fair value, $3,250,894 and
$5,273,032 at December 31,
2001 and 2000, respectively) $ 3,156,650 $ 5,374,204
Securities available-for-sale,
at fair value:
Fixed maturities (cost of
$20,459,833 at December 31,
2001 and $23,419,358 at
December 31, 2000) 21,364,731 23,367,483
Equity securities
(cost, $316,293 and
$327,674 at December 31,
2001 and 2000, respectively) 372,183 358,932
Mortgage loans 2,268,292 2,298,163
Policy and student loans 8,181,223 8,220,736
Short-term investments (note 11) 13,860,534 7,814,813
----------- -----------
49,203,613 47,434,331
Cash and cash equivalents 1,969,055 2,513,668
Accrued investment income 613,280 610,474
Deferred policy acquisition costs
(note 4) 12,974,390 13,211,413
Policyholders' account balances on
deposit with reinsurer (note 7) 7,148,068 7,434,750
Reinsurance receivable (note 7) 569,163 324,793
Receivables:
Agent balances, net 1,005,535 1,208,378
Other 722,075 279,567
Property and equipment, net,
at cost (note 5) 2,491,062 2,542,384
Investment in affiliate at cost 783,087 1,566,173
----------- -----------
$77,479,328 $77,125,931
=========== ===========
See accompanying notes to financial statements.
17
SOUTHERN SECURITY LIFE INSURANCE COMPANY
Balance Sheet (continued)
December 31, 2001 and 2000
Liabilities and Shareholders' Equity 2001 2000
- ------------------------------------ ---- ----
Liabilities:
Policy liabilities and accruals
(notes 6 and 7): $ 2,901,599 $ 2,965,940
Future policy benefits:
Policyholders' account balances 47,601,259 48,722,138
Unearned revenue 4,694,563 4,948,989
Other policy claims and benefits
payable 1,147,403 580,196
Other policyholders' funds, dividend
and endowment accumulations 64,045 72,890
Funds held related to reinsurance
treaties (note 7) 1,379,640 1,417,216
Note payable to related party
(note 9) 1,000,000 1,000,000
Due to affiliated insurance
agency (note 11) 193,689 151,689
General expenses accrued 93,436 157,944
Unearned investment income 357,322 323,830
Other liabilities 247,665 28,488
Income taxes (note 10) 895,437 558,076
------------ ------------
60,576,058 60,927,396
------------ ------------
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) 558,131 (75,628)
Retained earnings 10,425,631 10,354,655
------------ ------------
16,903,270 16,198,535
Commitments and contingencies
(notes 7 and 15) -- --
------------ ------------
$ 77,479,328 $ 77,125,931
============ ============
18
SOUTHERN SECURITY LIFE INSURANCE COMPANY
Statement of Operations
Years ended December 31, 2001, 2000, and 1999
2001 2000 1999
---- ---- ----
Revenues:
Net insurance revenues $ 6,736,027 $ 6,698,869 $ 6,901,546
Net investment income
(notes 3 and 11) 3,866,966 3,935,607 3,909,373
Other revenue, net -- -- 715,128
----------- ----------- -----------
10,602,993 10,634,476 11,526,047
----------- ----------- -----------
Benefits, claims and expenses:
Benefits and claims 4,482,588 5,109,411 4,453,564
Amortization of deferred
policy acquisition
costs (note 4) 2,197,399 1,797,320 3,029,223
Operating expenses
(notes 9 and 11) 3,835,165 3,529,380 3,261,134
----------- ----------- -----------
10,515,152 10,436,111 10,743,921
----------- ----------- -----------
Income before
income taxes 87,841 198,365 782,126
Income tax expense (note 10) 16,865 38,105 150,168
----------- ----------- -----------
Net income $ 70,976 $ 160,260 $ 631,958
=========== =========== ===========
Basic and diluted net
income per share
of common stock (note 12) $ .04 $ .08 $ .33
=========== =========== ===========
See accompanying notes to financial statements.
19
SOUTHERN SECURITY LIFE INSURANCE COMPANY
Statement of Shareholders' Equity
Years ended December 31, 2001, 2000, 1999
Accumulated
Capital other
Common Stock in excess comprehensive Retained
Shares Amount of par income earnings Total
--------- ---------- --------- ------ -------- -----
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 income 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
------------ ------------ ------------ ------------ ------------ ------------
Comprehensive Income (loss):
Net income for the year -- -- -- -- 160,260 160,260
Unrealized depreciation of
securities available
for sale -- -- -- 400,955 -- 400,955
------------ ------------ ------------ ------------ ------------ ------------
Total comprehensive gain 561,215
------------
Balances,
December 31, 2000 1,907,989 1,907,989 4,011,519 (75,628) 10,354,655 16,198,535
------------ ------------ ------------ ------------ ------------ ------------
Comprehensive Income (loss):
Net income for the year -- -- -- -- 70,976 70,976
Unrealized depreciation of
securities available
for sale -- -- -- 633,759 -- 633,759
------------ ------------ ------------ ------------ ------------ ------------
Total comprehensive loss 704,735
------------
Balances,
December 31, 2001 1,907,989 $ 1,907,989 $ 4,011,519 $ 558,131 $ 10,425,631 $ 16,903,270
============ ============ ============ ============ ============ ============
See accompanying notes to financial statements.
20
SOUTHERN SECURITY LIFE INSURANCE COMPANY
Statement of Cash Flows
Years ended December 31, 2001, 2000, 1999
2001 2000 1999
---- ---- ----
Cash flows provided by (used in) operating activities:
Net income $ 70,976 $ 160,260 $ 631,958
Adjustments to reconcile net
cash provided by (used in)
operating activities:
Depreciation and amortization 270,792 260,956 286,514
Loss on disposal of property,
plant & equipment -- 1,886 15,180
Deferred income taxes 22,623 (9,426) 11,009
Amortization of deferred
policy acquisition costs 2,197,399 1,797,320 3,029,223
Acquisition costs deferred (1,898,971) (2,206,125) (2,084,438)
Change in assets and liabilities
affecting cash provided by
operations:
Accrued investment income (2,806) (27,566) (18,790)
Accounts receivable (239,665) (78,683) (63,291)
Reinsurance receivable (244,370) 48,666 (67,201)
Other policy claims and
future benefits payable 502,866 1,356,753 (78,706)
Policyholders' account balances 2,119,312 2,080,769 2,585,204
Funds held under reinsurance (37,576) (58,296) 56,155
Unearned premiums (291,269) (331,998) (840,474)
Dividend and endowment
accumulations (8,845) 3,101 5,051
Payable to affiliated
insurance agent 47,894 (44,096) 172,914
Income taxes payable (57,470) (46,738) 139,159
Other liabilities 182,378 (16,125) (651,872)
----------- ----------- -----------
Net cash provided by operating
activities $ 2,633,268 $ 2,890,658 $ 3,127,595
----------- ----------- -----------
Cash flows from (used in) investing activities:
Purchase of investments:
Purchase of investments
held-to-maturity $ -- $(2,606,749) $ (477,150)
Purchase of equity securities -- (916,815) (766,662)
Proceeds from maturity of
held-to maturity securities 2,220,802 1,210,272 1,446,315
Proceeds from maturity of
available-for-sale securities 2,814,816 1,225,522 2,739,662
Proceeds from sale of available-
for-sale securities (equity and
fixed maturity) 794,356 -- --
Purchase of mortgage loan -- (825,000) (1,500,000)
Repayment of mortgage loans 29,871 24,525 2,312
Net change in short-term
investments (6,045,721) 780,280 2,839,890
Net change in policy and
student loans 39,513 238,236 3,466
Acquisition of property and
equipment (78,009) (224,129) (635)
----------- ----------- -----------
Net cash provided by (used in)
investing activities $ (224,372) $(1,093,858) $ 4,287,198
----------- ----------- -----------
21
SOUTHERN SECURITY LIFE INSURANCE COMPANY
Statement of Cash Flows
Years ended December 31, 2001, 2000, 1999
2001 2000 1999
---- ---- ----
Cash flows from financing activities:
Receipts from universal life and
certain annuity policies
credited to policyholder
account balances 5,037,521 5,765,790 6,662,558
Return of policyholder account
balances on universal life
and certain annuity policies (7,991,030) (9,129,406) (10,679,256)
------------ ------------ ------------
Net cash used in financing
activities $ (2,953,509) $ (3,363,616) $ (4,016,698)
------------ ------------ ------------
Increase (decrease) in cash and
cash equivalents (544,613) (1,566,816) 3,398,095
Cash and cash equivalents at
beginning of year 2,513,668 4,080,484 682,389
------------ ------------ ------------
Cash and cash equivalents at
end of year $ 1,969,055 $ 2,513,668 $ 4,080,484
============ ============ ============
Supplemental schedule of cash flow
information:
Interest paid during the
year $ 97,240 $ 105,000 $ 90,000
============ ============ ============
Income taxes paid during the
year $ 57,470 $ 94,365 $ --
============ ============ ============
Change in market value adjustments-
investments available-for-sale:
Fixed maturities $ 956,773 $ 786,282 $ (1,645,893)
Equity securities 24,632 (121,202) 112,598
Change in deferred acquisition
costs 61,405 (71,611) 235,048
Change in premium deposit funds (36,843) 42,967 (141,029)
Deferred income tax asset
(liability) (372,208) (235,481) 532,532
---------- ------------ ------------
Accumulated comprehensive income
Net change in unrealized
appreciation (depreciation) $ 633,759 $ 400,955 $ (906,744)
============ ============ ============
See accompanying notes to financial statements.
22
SOUTHERN SECURITY LIFE INSURANCE
COMPANY Notes to Financial
Statements December 31, 2001, 2000, 1999
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 Alabama (13%), Florida (40%), Georgia
(10%), and Texas (11%). None of the remaining ten 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
75.0% of the Company's voting securities at December 31, 2001.
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 75.0% 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 U.S.
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.
23
SOUTHERN SECURITY LIFE INSURANCE COMPANY
Notes to Financial Statements (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 and mortgage loans held as short
term investments 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.
24
SOUTHERN SECURITY LIFE INSURANCE COMPANY
Notes to Financial Statements (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) Property and Equipment
Property and equipment are recorded at cost, less accumulated
depreciation. Depreciation and amortization on capital leases and
property and equipment are determined using the straight-line
method over the estimated useful lives of the assets or terms of
the lease. Expenditures for maintenance and repairs are expensed
when incurred and betterments are capitalized. Gains and losses
on sale of property and equipment are reflected in operations.
(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.
25
SOUTHERN SECURITY LIFE INSURANCE COMPANY
Notes to Financial Statements (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) Impairment of Long-Lived Assets
The Company reviews its long-lived assets for impairment whenever
events or changes in circumstances indicate that the carrying
amount of the assets may not be recoverable through undiscounted
future cash flows. If it is determined that an impairment loss
has occurred based on expected cash flows, such loss is
recognized in the statement of operations.
(n) Earnings (Loss) Per Common Share
The computation of basic earnings (loss) per common share is
based on the weighted average number of shares outstanding during
each year.
The computation of diluted earnings per common share is based on
the weighted average number of shares outstanding during the
year, plus the common stock equivalents that would arise from the
exercise of stock options outstanding, using the treasury stock
method and the average market price per share during the year.
There were no common stock equivalents outstanding during the
years ended December 31, 2001 and 2000. Common stock equivalents
are not included in the diluted earnings (loss) per share
calculation when their effect is antidilutive.
(o) Reclassification
Certain amounts presented in the 2000 and 1999 financial
statements have been reclassified to conform to the 2001
presentation.
(p) Pending accounting change
In June 2001, the Financial Accounting Standards Board issued
Statements of Financial Accounting Standards No. 141, "Business
Combinations" (SFAS No. 141) and No. 142, "Goodwill and Other
Intangibles SFAS No. 142). SFAS No. 141 requires that the
purchase method of accounting be used for all business
combinations initiated after June 30, 2001. The statement also
establishes
26
SOUTHERN SECURITY LIFE INSURANCE COMPANY
Notes to Financial Statements (continued)
specific criteria for recognition of intangible assets separately
from goodwill and requires unallocated negative goodwill to be
written off immediately as an extraordinary gain. SFAS No. 142
primarily addresses the accounting for goodwill and intangible
assets subsequent to their acquisition. The statement requires
that goodwill and indefinite lived intangible assets no longer be
amortized and be tested for impairment at least annually. The
amortization period of intangible assets with finite lives will
no longer be limited to forty years.
In August 2001, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 144, "Accounting
for the Impairment of Long-Lived Assets". This Statement
addresses financial accounting and reporting for the impairment
of long-lived assets and for long-lived assets to be disposed of.
This Statement supersedes FASB Statement 121 and APB Opinion No.
30. However, this Statement retains certain fundamental
provisions of Statement 121, namely; recognition and measurement
of the impairment of long-lived assets to be held and used, and
measurement of long- lived assets to be disposed of by sale. The
Statement also retains the requirement of Opinion 30 to report
discontinued operations separately from continuing operations.
This Statement also Amends ARB No. 51 to eliminate the exception
of consolidation for a temporarily controlled subsidiary. The
provisions of this statement are effective for financial
statements issued for fiscal years beginning after December 15,
2001.
In June 2001, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 143, "Accounting
for Asset Retirement Obligations". This Statement addresses
financial accounting and reporting for obligations associated
with the retirement of tangible long-lived assets and the
associated asset retirement costs. This Statement is effective
for financial statements issued for fiscal years beginning after
June 15, 2002.
The adoption of these statements is not expected to have a
significant impact on the Company's financial statements.
The Company adopted Statement of Financial Accounting Standards
No. 140, Accounting for Transfers and Servicing of Financing
Assets and Extinguishments of Liabilities - a replacement of FASB
Statement No. 125 (FAS 140) on April 1, 2001. This standard
revises the standards for accounting for securitizations and
other transfers of financial assets and collateral and requires
certain disclosures, but carries over most of FAS 125's
provisions without reconsideration. This Statement is effective
for recognition and reclassification of collateral and for
disclosures relative to securitization transactions and
collateral for fiscal years ending after December 15, 2000. The
adoption of FAS 140 did not have a material impact on the
Company's financial position or results of operations.
2. Basis of financial statements
-----------------------------
The more significant U.S. 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 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
reasonable 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 No. 97, rather than
on the statutory rates for mortality and interest.
27
SOUTHERN SECURITY LIFE INSURANCE COMPANY
Notes to Financial Statements (continued)
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 U.S. 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.
A reconciliation of net income (loss) for the years ended December 31,
2001, 2000, 1999 and shareholders' equity as of December 31, 2001 and
2000 between the amounts reported on a statutory basis and the related
amounts presented on the basis of U.S. generally accepted accounting
principles is as follows:
Net Income (loss) Shareholders'
Years ended Equity
December 31, December 31,
------------ --------------
2001 2000 1999 2001 2000
---- ---- ---- ---- ----
As reported
on a statutory
basis $ (429,143) $ 80,477 $ 533,233 $ 8,459,703 $ 8,405,211
------------ ------------ ------------ ------------ ------------
Adjustments:
Deferred policy
acquisition
costs, net (298,428) 408,805 (709,737) 12,974,390 13,211,413
Future policy
benefits, un-
earned premiums
and policy-
holders' funds 1,191,046 (203,129) 1,097,132 (5,201,550) (6,355,753)
Deferred
income taxes (159,189) 15,008 382,364 (710,787) (500,605)
Asset valuation
reserve -- -- -- 592,535 347,134
Interest main-
tenance reserve (34,017) (36,063) (35,191) 465,082 499,099
Non-admitted
assets (100,000) -- -- 1,190,406 1,412,229
Unrealized gains
-SFAS 115 -- -- -- 664,326 666,899
Capital and
surplus note -- -- -- (1,000,000) (1,000,000)
Other adjustments,
net (99,293) (104,838) (635,843) (530,835) (487,092)
------------ ------------ ------------ ------------ ------------
Net difference 500,119 79,783 98,725 8,443,567 7,793,324
------------ ------------ ------------ ------------ ------------
As reported on a
GAAP basis $ 70,976 $ 160,260 $ 631,958 $ 16,903,270 $ 16,198,535
============ ============ ============ ============ ============
28
SOUTHERN SECURITY LIFE INSURANCE COMPANY
Notes to Financial Statements (continued)
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 2001 without
prior approval is approximately $97,000. 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,
2001.
3. Investments
(a) Equity securities and fixed maturities
Equity securities consist of $372,183 and $358,932 of common stock at
fair value at December 31, 2001 and 2000 respectively.
Unrealized (depreciation) appreciation in investments in equity
securities for the years ended December 31, 2001, 2000, and 1999 is
$24,632, $(121,203) and $112,598, 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, 2001:
Held-to-maturity:
U.S. Treasury securities
and obligations of U.S.
government corporations
and agencies (guaranteed) $ 500,000 $ 1,560 $ -- $ 501,560
Corporate securities 2,092,104 97,916 29,771 2,160,249
Mortgage-backed securities 564,546 24,539 -- 589,085
----------- ----------- ----------- -----------
3,156,650 124,015 29,771 3,250,894
----------- ----------- ----------- -----------
Available-for-sale:
U.S. Treasury securities
and obligations of U.S.
government corporations
and agencies (guaranteed) 595,585 58,415 -- 654,000
Corporate securities 19,864,248 846,483 -- 20,710,731
Mortgage-backed securities -- -- -- --
----------- ----------- ----------- -----------
20,459,833 904,898 -- 21,364,731
----------- ----------- ----------- -----------
$23,616,483 $ 1,028,913 $ 29,771 $24,615,625
=========== =========== =========== ===========
29
SOUTHERN SECURITY LIFE INSURANCE COMPANY
Notes to Financial Statements (continued)
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
-------- --------- ---------- ---------
December 31, 2000:
Held-to-maturity:
U.S. Treasury
securities and obligations
of U.S. government
corporations and
agencies (guaranteed) $ 2,001,985 $ 13,327 $ -- $ 2,015,312
Corporate securities 2,587,861 64,419 188,876 2,463,404
Mortgage-backed
securities 784,358 9,958 -- 794,316
----------- ----------- ----------- -----------
5,374,204 87,704 188,876 5,273,032
----------- ----------- ----------- -----------
Available-for-sale:
U.S. Treasury
securities and obligations
of U.S. government
corporations and
agencies (guaranteed) 3,367,086 45,003 648 3,411,441
Corporate securities 19,987,436 91,913 188,214 19,891,135
Mortgage-backed
securities 64,836 71 -- 64,907
----------- ----------- ----------- -----------
23,419,358 136,987 188,862 23,367,483
----------- ----------- ----------- -----------
$28,793,562 $ 224,691 $ 377,738 $28,640,515
=========== =========== =========== ===========
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, 2001, 2000, 1999 is $1,152,189, $678,644, and $(1,747,058)
respectively.
The amortized cost and estimated fair value of fixed maturities at December
31, 2001, 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 2002 $ 750,000 $ 752,435
Due in 2003 through 2006 379,251 406,099
Due in 2007 through 2011 957,321 953,958
Due after 2011 505,532 549,317
Mortgage-backed securities 564,546 589,085
----------- -----------
$ 3,156,650 $ 3,250,894
=========== ===========
Fixed maturity securities available-for-sale:
Due in 2002 $ 3,321,893 $ 3,359,944
Due in 2003 through 2006 13,341,257 14,001,917
Due in 2007 through 2011 3,698,902 3,896,995
Due after 2011 97,781 105,875
Mortgage-backed securities -- --
----------- -----------
$20,459,833 $21,364,731
=========== ===========
30
SOUTHERN SECURITY LIFE INSURANCE COMPANY
Notes to Financial Statements (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:
2001 2000 1999
---------- ---------- ----------
Proceeds from sale of
equity securities $ 794,356 $ -- $ --
---------- ---------- ----------
Proceeds from sale of
fixed maturities
available-for-sale $2,814,816 $1,225,522 $2,739,662
---------- ---------- ----------
Realized gains (losses) Fixed maturities:
Gross realized gains $ -- $ -- $ --
Gross realized (losses) -- -- --
Equity securities:
Gross realized gains -- -- --
Gross realized (losses) -- -- --
---------- ---------- ----------
$ -- $ -- $ --
========== ========== ==========
Certain of the fixed maturity securities classified as available-for-sale
and held-to-maturity were called during the year ended December 31, 2001,
2000, 1999 resulting in the following realized gains and losses:
2001 2000 1999
---- ---- ----
Held-to-maturity:
Gross realized gains $ -- $ -- $ --
Available-for-sale:
Gross realized gains -- -- --
------ ----- -----
$ -- $ -- $ --
====== ===== =====
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, 2001 and 2000, other than investments issued or guaranteed
by the United States government are as follows:
2001 Carrying Amount
---- ---------------
Federal Express $2,036,560
Dean Witter Discover 4,252,500
Philip Morris Inc. 5,813,260
2000
Federal Express $2,072,820
Dean Witter Discover 4,105,788
Philip Morris, Inc. 5,469,305
(b) Concentrations of credit risk
At December 31, 2001 and 2000, the Company owned $482,000 and $0,
respectively, of less-than-investment grade corporate debt securities.
The Company also invests in subsidized and unsubsidized student loans
totaling $95,819 and $61,576 at December 31, 2001 and 2000,
respectively, which are guaranteed by the U.S. government. Subsequent
to December 31, 2001, all of these loans were sold at their unpaid
principal balance.
31
SOUTHERN SECURITY LIFE INSURANCE COMPANY
Notes to Financial Statements (continued)
(c) Investment income
Net investment income for the years ended December 31, 2001, 2000, and
1999 consists of the following:
2001 2000 1999
---- ---- ----
Interest:
Fixed maturities $1,790,992 $2,014,883 $2,123,671
Policy and student
loans 468,904 505,319 579,774
Short-term
investments 1,105,434 937,077 859,699
Mortgage loans 206,212 190,068 25,759
Rental income 304,879 278,302 319,758
Dividends on equity
securities common
stock, including
mutual fund -- 33,412 15,610
---------- ---------- ----------
3,876,421 3,959,061 3,924,271
Less investment
expenses 9,455 23,454 14,898
---------- ---------- ----------
$3,866,966 $3,935,607 $3,909,373
========== ========== ==========
(d) Investments on deposit
In order to comply with statutory regulations, investments were on
deposit with the Insurance Departments of certain states as follows:
2001 2000 1999
---- ---- ----
Florida $1,707,042 $1,708,735 $1,708,530
Alabama 100,737 100,199 100,702
South Carolina 302,210 300,595 302,106
Georgia 252,933 250,496 251,755
Indiana 202,347 200,000 199,855
---------- ---------- ----------
$2,565,269 $2,560,025 $2,562,948
========== ========== ==========
Certain of these assets, totaling approximately $850,000 for each of
the years ended December 31, 2001 and 2000, are restricted for the
future benefit of policyholders in a particular state.
4. Deferred policy acquisition costs
---------------------------------
Deferred policy acquisition costs at December 31, 2001, 2000, 1999
consist of the following:
2001 2000 1999
---- ---- ----
Deferred policy acquisition
costs at beginning
of year $ 13,211,413 $ 12,874,219 $ 13,583,956
Policy acquisition costs deferred:
Commissions 1,249,453 1,384,782 1,223,187
Underwriting & issue costs 269,070 398,622 440,200
Other 380,448 422,721 421,051
Change in unrealized
appreciation
(depreciation) 61,405 (71,611) 235,048
------------ ------------ ------------
1,960,376 2,134,514 2,319,486
Amortization of
deferred policy
acquisition costs (2,197,399) (1,797,320) (3,029,223)
------------ ------------ ------------
Deferred policy
acquisition costs
at end of year $ 12,974,390 $ 13,211,413 $ 12,874,219
============ ============ ============
32
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,
2001 2000
------------ ------------
Land $ 982,027 $ 982,027
Building and improvements 2,397,325 2,348,973
Furniture and equipment 956,533 945,345
----------- -----------
4,335,885 4,276,345
Less accumulated depreciation (1,844,823) (1,733,961)
----------- -----------
$ 2,491,062 $ 2,542,384
=========== ===========
Depreciation expense for the years ended December 31, 2001, 2000, 1999
totaled $129,330, $115,425, and $135,145, respectively.
6. Future policy benefits
At December 31, 2001 and 2000, future policy benefits, exclusive of
universal life and flexible term annuities consist of the following:
December 31, December 31,
2001 2000
----------- -----------
Life insurance $2,600,757 $2,677,841
Annuities 193,744 235,032
Accident & health
insurance 107,098 53,067
---------- ----------
Total life & health
future policy benefits $2,901,599 $2,965,940
========== ==========
Life insurance in-force aggregated approximately $1.4 billion and $1.2
billion at December 31, 2001, and 2000, respectively. 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 1996-2001, 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 1.25%.
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, 2001, 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
33
SOUTHERN SECURITY LIFE INSURANCE COMPANY
Notes to Financial Statements (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 $278,828, $275,288, and $424,255 included in reinsurance
premiums ceded, and received recoveries of $624,314, $131,886 and $162,871,
included in annuity, death and other benefits for the years ended December
31, 2001, 2000, 1999, 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, 2001, 2000, 1999, the Company ceded
premiums to MEGA of $365,247, $419,353 and $424,592, included in
reinsurance ceded, and received recoveries of $494,683, $478,485 and
$576,194, included in annuity, death and other benefits, respectively. The
funds held related to reinsurance treaties of $1,379,640 and $1,417,216
represent the 18% share of policy loans ceded to the reinsurer at December
31, 2001 and 2000, respectively.
8. Notes payable
As of December 31, 2001, 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 Life Insurance Company. The note qualifies as
shareholders' equity for statutory accounting purposes in accordance with
Section 628.401 of the Florida Statutes. At December 31, 2001, 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 2001, 2000, 1999 aggregated $97,000, $105,000, and
$90,000 respectively.
10. Income taxes
The Company's income tax liability at December 31 is summarized as follows:
2001 2000
---- ----
Current $ -- $ 57,471
Deferred 895,437 500,605
-------- --------
Total $895,437 $558,076
======== ========
34
SOUTHERN SECURITY LIFE INSURANCE COMPANY
Notes to Financial Statements (continued)
Total income taxes including taxes on the change in the value of
investments for the years ended December 31, 2001, 2000, and 1999 were as
follows:
2001 2000 1999
---- ---- ----
Tax expense (benefit)
in operations $ 16,865 $ 38,105 $ 150,168
Tax on unrealized
appreciation
(depreciation) of
investments 372,208 235,481 (532,532)
--------- --------- ---------
$ 389,073 $ 273,586 $(382,364)
========= ========= =========
Income tax expense (benefit) for the years ended December 31, 2001, 2000,
1999 is summarized as follows:
2001 2000 1999
---- ---- ----
Current:
Federal $ (5,759) $ 40,812 $ 123,268
State -- 6,719 15,891
--------- --------- ---------
(5,759) 47,531 139,159
--------- --------- ---------
Deferred:
Federal 20,691 (7,073) 9,693
State 1,933 (2,353) 1,316
--------- --------- ---------
22,624 (9,426) 11,009
--------- --------- ---------
$ 16,865 $ 38,105 $ 150,168
========= ========= =========
Income tax expense (benefit) for the years ended December 31, 2001, 2000,
1999 differs from "expected" tax (computed by applying the U.S. federal
income tax rate to pretax income) as a result of the following:
2001 2000 1999
---- ---- ----
Computed "expected" tax expense
(benefit) $ 29,866 $ 67,444 $ 265,923
Increase (reduction) in income
taxes resulting from:
Small life insurance
company deduction (7,162) (3,485) (139,195)
Changes in the valuation
allowance for deferred
tax assets, allocated to
income tax expense (7,115) (27,338) 17,590
State taxes, net of federal
income tax benefit 1,276 1,484 5,850
--------- --------- ---------
$ 16,865 $ 38,105 $ 150,168
========= ========= =========
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:
35
SOUTHERN SECURITY LIFE INSURANCE COMPANY
Notes to Financial Statements (continued)
a. The Policyholders' Surplus exceeds a prescribed maximum, or;
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, 2001, 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 2001, 2000, 1999, AMT exceeded regular tax
by $-0-, $19,854, and $27,338, respectively. At December 31, 2001, the AMT
tax credit available to reduce future regular tax totaled $262,528.
The tax effect of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at
December 31, 2001 and 2000 are presented below:
2001 2000
---------- ---------
Deferred tax assets:
Unearned revenue, due to deferral of
"front-end" fee $ 1,829,505 $ 1,939,023
Policy liabilities and accruals,
principally due to adjustments
to reserves for tax purposes 1,683,457 2,003,251
Deferred policy acquisition costs
related to unrealized appreciation
(depreciation) 128,365 137,601
Alternative minimum tax credit
carry forwards 269,643 262,528
----------- -----------
Total gross deferred tax assets 3,910,970 4,342,403
Less valuation allowance (269,643) (262,528)
----------- -----------
Net deferred tax assets 3,641,327 4,079,875
----------- -----------
Deferred tax liabilities:
Deferred policy acquisition costs (4,469,612) (4,565,655)
Other 294,104 (22,576)
Unrealized (appreciation)
depreciation of securities (361,256) 7,751
----------- -----------
Total gross deferred tax liabilities (4,536,764) (4,580,480)
----------- -----------
Net deferred tax (liability) $ (895,437) $ (500,605)
=========== ===========
The net change in the total valuation allowance for the years ended
December 31, 2001 and 2000 was an increase of $7,115 and $27,338,
respectively.
36
SOUTHERN SECURITY LIFE INSURANCE COMPANY
Notes to Financial Statements (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, 2001.
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 $122,787, $180,941
and $175,409, in 2001, 2000, and 1999, respectively. These amounts are
included as components of acquisition costs deferred and related
amortization. Insuradyne incurred insurance-related expenses aggregating
$77, $1,147, and $495 in 2001, 2000, 1999, 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 these administrative services.
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 interest income from SNMC based upon how long the loans were
outstanding. At December 31, 2001 and 2000 the Company had outstanding loan
purchases of $13,860,534 and $7,814,813, respectively. Included in
investment income is $984,872 and $732,691 for the years ended December 31,
2001 and 2000, respectively.
The Company received for the years ended December 31, 2001 and 2000,
$132,141 and $182,248 respectively, 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 years ended December 31, 2001 and 2000,
$77,394 and $123,393 respectively, in interest income from Security
National for short-term loans of which $344,308 and $0 were outstanding as
of December 31, 2001 and 2000, respectively.
37
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:
2001 2000 1999
---- ---- ----
Numerator for basic and diluted
Earnings per share:
Net income $ 70,976 $ 160,260 $ 631,958
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 -- -- --
Dilutive potential common shares -- -- --
Denominator for diluted
earnings per share weighted
average shares and assumed
conversions 1,907,989 1,907,989 1,907,989
Basic earnings per share $.04 $.08 $.33
Diluted earnings per share $.04 $.08 $.33
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. There were no awards granted in 2001 and 2000.
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.
38
SOUTHERN SECURITY LIFE INSURANCE COMPANY
Notes to Financial Statements (continued)
The following table presents the carrying amounts and estimated fair values
of financial instruments held at December 31, 2001 and 2000. The fair value
of a financial instrument is the amount at which the instrument could be
exchanged in a current transaction between willing parties.
2001 2000
---------------------- -----------------------
Carrying Estimated Carrying Estimated
amount fair value amount fair value
-------- ---------- -------- ----------
Financial assets:
Fixed maturities
held-to-maturity
(see note 3) $ 3,156,650 $ 3,250,894 $ 5,374,204 $ 5,273,032
Fixed maturities
available-for-
sale (see note 3) 21,364,731 21,364,731 23,367,483 23,367,483
Equity securities
available-for-sale 372,183 372,183 358,932 358,932
Mortgage loans 2,268,292 2,268,292 2,298,163 2,298,163
Policy and student loans 8,181,223 8,181,223 8,220,736 8,220,736
Short-term investments 13,860,534 13,860,534 7,814,813 7,814,813
Cash and cash equivalents 1,969,055 1,969,055 2,513,668 2,513,668
Financial liabilities:
Policy liabilities-
policyholders'
account balances $47,601,259 $44,808,386 $48,722,138 $45,680,048
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.
39
Schedule I
SOUTHERN SECURITY LIFE INSURANCE COMPANY
Summary of Investments Other Than Investments in Related Parties
December 31, 2001
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 500,000 $ 500,000 $ 501,560 $ 500,000
Public utilities -- -- -- --
Industrial and miscellaneous 2,205,539 2,166,044 2,243,181 2,166,044
Special revenue and special assessment
of agencies and authorities of
governments and political subdivisions 490,239 490,606 506,153 490,606
----------- ----------- ----------- -----------
Total fixed maturities held for investment 3,195,778 3,156,650 3,250,894 3,156,650
Fixed maturities available-for-sale:
U.S. Government and government
agencies and authorities 600,000 595,585 654,000 654,000
Public utilities 655,000 673,398 702,717 702,717
Industrial and miscellaneous 18,860,000 19,190,850 20,008,014 20,008,014
Special revenue and special assessment
of agencies and authorities of
governments and political subdivisions -- -- -- --
----------- ----------- ----------- -----------
Total fixed maturities available for sale 20,115,000 20,459,833 21,364,731 21,364,731
----------- ----------- ----------- -----------
23,310,778 23,616,483 24,615,625 24,521,381
=========== ----------- =========== -----------
Equity securities:
Common, including investments
in mutual fund 43,067 316,293 372,183 372,183
=========== ===========
Mortgage loans 2,268,292 2,268,292
Policy loans 8,085,404 8,085,404
Student loans 95,819 95,819
Short-term investments 13,860,534 13,860,534
----------- -----------
Total investments $48,242,825 $49,203,613
=========== ===========
See accompanying auditors' report.
40
Schedule III
SOUTHERN SECURITY LIFE INSURANCE COMPANY
Supplementary Insurance Information
December 31, 2001, 2000, 1999
Future policy Other Benefits Amortization
Deferred benefits, Policy- policy claims of deferred
policy losses claims holders' claims & Net losses & policy Other
acquisition and loss account Unearned benefits Premium investmen settlement acquisition operating
cost expenses balances premiums payable revenue income expenses costs expenses
----------- ---------- -------- -------- -------- ------- ------ -------- ----- --------
2001 Life
and
annuities $12,974,390 2,901,599 47,601,259 4,694,563 1,147,403 6,736,027 3,866,966 4,482,588 2,197,399 3,835,165
=========== =========== =========== =========== =========== =========== ========== =========== =========== =========
2000 Life
and
annuities $13,211,413 2,965,940 48,722,138 4,948,989 580,196 6,698,869 3,935,607 5,109,411 1,797,320 3,529,381
=========== =========== =========== =========== =========== =========== ========== =========== =========== =========
1999 Life
and
annuities $12,874,219 1,648,976 50,377,101 5,323,954 540,407 6,901,546 3,909,373 4,453,564 3,029,223 3,261,134
=========== =========== =========== =========== =========== =========== ========== =========== =========== =========
See accompanying auditors' report.
41
Schedule IV
SOUTHERN SECURITY LIFE INSURANCE COMPANY
Reinsurance
December 31, 2001, 2000, 1999
Percentage
Ceded to Assumed of amount
other from other assumed
Direct amount companies companies Net amount to net
------------- --------- --------- ---------- ------
December 31, 2001:
Life insurance in force $ 750,557,000 179,242,000 817,437,000 1,388,752,000 59%
============= ============= ============= ============= =============
Premiums:
Life insurance $ 6,579,409 635,733 649,916 6,593,592 10%
Accident & health insurance 150,777 8,342 -- 142,435 --
------------- ------------- ------------- ------------- -------------
Total Premiums $ 6,730,186 644,075 649,916 6,736,027 10%
============= ============= ============= ============= =============
December 31, 2000:
Life insurance in force $ 811,233,000 210,365,000 558,575,000 1,159,443,000 48%
============= ============= ============= ============= =============
Premiums:
Life insurance $ 6,641,835 668,323 557,352 6,530,864 9%
Accident & health insurance 194,323 26,318 -- 168,005 --
------------- ------------- ------------- ------------- -------------
Total Premiums $ 6,836,158 694,641 557,352 6,698,869 8%
============= ============= ============= ============= =============
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%
============= ============= ============= ============= =============
42
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure.
- ----------------------------------------------------------
None
PART III
Item 10. Directors and executive officers of the Company.
- ---------------------------------------------------------
The Company's Board of Directors consists of eight persons, four 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 81 December 1998 Chairman of the Board,
President and Chief
Executive Officer
Scott M. Quist 48 December 1998 First Vice President, General
Counsel, Chief Operating
Officer and Director
G. Robert Quist 50 April 1999 Vice President, Secretary and
Director
J. Lynn Beckstead, Jr. 48 March 2002 Vice President and Director
Charles L. Crittenden 82 December 1998 Director
Robert G. Hunter 42 December 1998 Director
H. Craig Moody 48 December 1998 Director
Norman G. Wilbur 63 December 1998 Director
Stephen M. Sill 56 March 2002 Vice President, Treasurer and
Chief Financial Officer
Committees of the Board of Directors include an executive committee, on which
George Quist, Scott Quist, and Moody serve; an audit committee, on which
Crittenden, Moody, and Wilbur serve; and a compensation committee, on which
Crittenden, Wilbur and George Quist serve.
The following is a description of the business experience of each of the
directors and executive officers.
George R. Quist has been Chairman of the Board, President and Chief Executive
Officer of the Company since December 1998. Mr. Quist has also served as
Chairman of the Board, President and Chief Executive Officer of Security
National Financial Corporation 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.
Scott M. Quist has been First Vice President, General Counsel and a director of
the Company since December 1998 and its Chief Operating Officer since October
2001. Mr. Quist has also served as First Vice President, General Counsel and a
director of Security National Financial Corporation since May 1986 and its Chief
Operating Officer since October 2001. 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 immediate past president of the National Alliance of Life
Companies, a trade association of over 200 life companies.
G. Robert Quist has been a director of the Company since April 1999. Mr. Quist
has also served as Vice President and Secretary of Security National Financial
Corporation since March 15, 2002. He has served as President and a director of
Big Willow Water Company since 1987 and as a director of Associated Investors
Company of Hawaii since 1987. He has also served as a director and
Secretary-Treasurer of the Utah Cemetery Association since 1987.
43
J. Lynn Beckstead Jr. has been a Vice President and a director of the Company
since March 15, 2002. Mr. Beckstead has also served as Vice President and
director of Security National Financial Corporation since March 15, 2002. In
addition he is President of Security National Mortgage Company, an affiliate of
the Company, and has served in this position since July 1993. From 1980 to 1993,
Mr. Beckstead was Vice President and a director of Republic Mortgage
Corporation. From 1983 to 1990, Mr. Beckstead was Vice President and director of
Richards Woodbury Mortgage Corporation. From 1980 to 1983, he was a principal
broker for Boardwalk Properties. From 1978 to 1980, Mr. Beckstead was a
residential loan officer for Medallion Mortgage Company. From 1977 to 1978, he
was a residential construction loan manager of Citizens Bank.
Charles L. Crittenden 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.
Robert G. Hunter, M.D. 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.
H. Craig Moody 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 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.
Stephen M. Sill has been Vice President, Treasurer and Chief Financial Officer
of the Company since March 15, 2002. He has been a Vice President, Treasurer and
Chief Financial Officer of Security National Financial Corporation since March
15, 2002. From 1998 to 2002, Mr. Sill was Vice President and Controller of the
Company. From 1997 to 2002, Mr. Sill was Vice President and Controller of
Security National Financial Corporation. From 1989 to 1993, he was Controller of
Flying J. From 1978 to 1989, Mr. Sill was Senior Vice President and Controller
of Surety Life Insurance Company. From 1975 to 1978, he was Vice President and
Controller of Sambo's Restaurant, Inc. From 1974 to 1975, Mr. Sill was Director
of Reporting of Northwest Pipeline Corporation. From 1970 to 1974, he was an
auditor with Arthur Andersen & Co. Mr. Sill is a director of the Insurance
Accounting and Systems Association (IASA), a national association of over 1,300
insurance companies and associate members.
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) 81 Chairman of the Board, President and
Chief Executive Officer
Scott M. Quist (1) 48 First Vice President, General Counsel
and Chief Operating Officer
G. Robert Quist (1) 50 Vice President and Secretary
Stephen M. Sill 56 Vice President, Treasurer and
Chief Financial Officer
(1) George R. Quist is the father of Scott M. Quist and G. Robert 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 2001 or 2000.
44
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.
45
Item 11. Executive compensation.
- --------------------------------
(a) Summary compensation. The following table sets forth, for each of the
last three fiscal years, the compensation received by George R. Quist, Chairman
of the Board, President and Chief Executive Officer of the Company, and all
other executive officers at December 31, 2001, whose salary and bonus for all
services in all capacities exceed $100,000 for the fiscal year ended December
31, 2001.
SUMMARY COMPENSATION TABLE
Long Term Compensation
Annual Compensation Awards Awards Payouts
(a) (b) (c) (d) (e) (f) (g) (h) (i)
Other Restricted Securities All other
Name and Annual Stock Underlying LTIP Compen-
Principal Compensation Awards Options/ Payouts sation
Position Year Salary($) Bonus($) ($) ($) SARs(#) ($) $
- -----------------------------------------------------------------------------------------------------------------------------
President
and Chief
Executive
Officer
George R. Quist(1) 2001 $0 $0 $0 $0 N/A N/A N/A
George R. Quist(1) 2000 $0 $0 $0 $0 N/A N/A N/A
George R. Quist(1) 1999 $0 $0 $0 $0 N/A N/A N/A
(1) 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 did not receive any
compensation in 1999, 2000 or 2001.
(d) Compensation committee interlocks and insider participation. The
Executive Committee of the Company's Board of Directors makes recommendation to
the board concerning the compensation of the Company's executive officers.
Subsequently, the board makes all final decisions concerning such compensation.
(e) Employee contracts. The Company does not have any employees contracts.
------------------
Item 12. Security ownership of certain beneficial owners and management.
The following table sets forth, as of December 31, 2001, 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. 1,095,496 57.4%
c/o Security National Life Ins. Co. Direct
5300 S 360 W, Suite 200
Salt Lake City, UT 84123
Common Security National Life Insurance Company 334,230 17.5%
Shares 5300 South 360 West, Suite 200 Direct
Salt Lake City, Utah 84123
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.
46
During 2001 and 2000, gross commissions in the amount of $122,787 and $180,941
respectively, were earned by Insuradyne Corporation. At December 31, 2001, the
Company owed $187,890 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, 2001.
The Company continues to be indebted to its parent, Security National Life
Insurance Company (SNLIC), 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 SNLIC, and owns 75% of the
outstanding shares of common stock of the Company. SNLIC is a wholly owned
subsidiary of SNFC. In addition, George R. Quist, the Company's President and
Chief Executive Officer is the President and Chief Executive Officer of SNFC;
Scott M. Quist, the Company's First Vice President, General Counsel and Chief
Operating Officer, is the First Vice President, General Counsel and Chief
Operating Officer of SNFC; G. Robert Quist, the Company's Vice President and
Secretary, is the Vice President and Secretary of SNFC; Stephen M. Sill, the
Company's Vice President, Treasurer and Chief Financial Officer, is the Vice
President, Treasurer and Chief Financial Officer of SNFC. Finally, the directors
of the Company, with the exception of G. Robert Quist, 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
its 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, 2001 and 2000, the Company had
outstanding loan purchases of $13,860,534 and $7,814,813, respectively. Included
in investment income is $984,872 and $732,691 for the years ended December 31,
2001 and 2000, respectively.
The Company received for the years ended December 31, 2001 and 2000, $132,141
and $182,248, respectively, 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, 2001 and 2000, $77,394 and
$123,393, respectively, in interest income from SNFC for short-term loans of
which none were outstanding as of December 31, 2001.
47
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, 2001, 2000 and 1999 - included in Part
II, Item 8:
Schedule I - Summary of Investments -
Other than Investments in Related
Parties................................................40
Schedule III - Supplementary Insurance
Information............................................41
Schedule IV - Reinsurance..............................42
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.
48
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, incorporated by
reference from Annual Report on Form 10-K for fiscal year ended
December 31, 1999.
10.F Loan Funding and Fee Agreement between the Company and Security
National Mortgage Company dated December 28, 1998, from Annual
Report on Form 10-K for fiscal year ended December 31, 1999.
11. Statement Re Computation of Net Income per common share
b) Reports on Form 8-K
-------------------
None
49
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 29, 2002 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 29, 2002
Board, President and
Chief Executive Officer
(Principal Executive
Officer)
Scott M. Quist First Vice President, March 29, 2002
General Counsel, Chief
Operating Officer and
Director
Stephen M. Sill Vice President and
Treasurer (Principal
Financial and Accounting
Officer) March 29, 2002
G. Robert Quist Vice President, Secretary
and Director March 29, 2002
J. Lynn Beckstead, Jr. Vice President and Director March 29, 2002
Charles L. Crittenden Director March 29, 2002
Robert G. Hunter Director March 29, 2002
H. Craig Moody Director March 29, 2002
Norman G. Wilbur Director March 29, 2002
50
SOUTHERN SECURITY LIFE INSURANCE COMPANY
EXHIBIT 11
COMPUTATION OF NET INCOME
PER COMMON SHARE
2001 2000 1999
---------- --------- ----------
Weighted Average
Shares Outstanding 1,907,989 1,907,989 1,907,989
Net Income (Loss) $ 70,976 $ 160,260 $ 631,958
Per Share Amount $ .04 $ .08 $ .33
51