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SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 (FEE REQUIRED)
For the fiscal year ended December 31, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
Commission File No. 2-35669
SOUTHERN SECURITY LIFE INSURANCE COMPANY
(Exact name of Company as specified in its charter)
Florida 59-1231733
(State or other jurisdiction (Employer Identification Number)
of incorporation or organization)
755 Rinehart Road, Lake Mary, Florida 32746
(Address of principal executive offices) (Zip Code)
Company's telephone number, including area code:(407) 321-7113
Securities registered pursuant to Section 12(b) of the Act:
Name of Each Exchange on
Title of Each Class Which Registered
None None
Securities registered pursuant to Section 12(g) of the Act:
None
(Title of Class)
Indicate by check mark whether the Company (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 Company
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. X
State the aggregate market value of the voting stock held by nonaffiliates of
the Company: $5,585,889 as of February 27, 1998.
The number of shares of the Company outstanding as April 1, 1997 is as follows:
Number Outstanding at
Title of Class April 1, 1998
Common Stock
Par value $1.00 per share 1,907,989
1
PART I
Item 1. Business.
Southern Security Life Insurance Company ("the Company") is a legal
reserve life insurance company authorized to transact business in the states of
Alabama, Florida, Georgia, Hawaii, Indiana, Illinois, Kentucky, Louisiana,
Michigan, Missouri, Oklahoma, South Carolina, Tennessee and Texas. It was
incorporated under Florida law in 1966 and was licensed and commenced business
in 1969. The Company obtained authorization in the states of Indiana and
Oklahoma in 1996 and will continue the process of seeking authorization,
directly or through acquisition, to transact business in additional states
during 1997. During 1997, approximately 45% of the premium income of the Company
was from business in force in its state of domicile. The Company's only industry
segment is the ordinary life, accident and health and annuity business.
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 43% and 60% of
the policies written by the Company in 1997 and 1996 respectively, were for the
universal life products.
During the first quarter 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. A lead
generation program was used to support this new product as it was introduced.
57% of the policies written in 1997 represent this new series. 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
2
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:
1997 1996 1995
==== ==== ====
Per- Per- Per-
Amount centage Amount centage Amount centage
Life
Insurance-
Ordinary
(1)(2) $8,386,972 94% 9,225,755 92% 10,220,659 93%
Individual
Annuities
(1) 70,809 1% 307,618 3% 195,473 2%
Life
Insurance-
Group
(SGLI) 476,455 5% 529,554 5% 518,597 5%
Other -
Accident &
Health 11,323 0% 1,274 0% 1,385 0%
----------- ---- ------------ ---- ----------- ----
$ 8,945,559 100% 10,064,201 100% 10,936,114 100%
=========== ==== ========== ==== ========== ====
(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 1996 and 1997 premium income for life insurance-ordinary are net of
reductions of $1,773,148 and $1,517,988, respectively, in ceded premium
paid to all reinsurers, including Mega Life.
(The remainder of this page is intentionally left blank)
3
The following table gives information [on a generally accepted
accounting principles basis] for the Company concerning operating ratios for the
periods indicated:
1997 1996 1995
---- ---- ----
Total Net Insurance
revenues $7,643,650 7,915,027 8,158,938
Benefit Costs:
Amount $4,307,013 3,818,562 4,061,096
Ratio to Net Premium
Income 56.4% 48.2% 49.8%
Acquisition Expenses:
Amount $3,542,617 3,364,738 3,069,742
Ratio to Net Premium
Income 46.3% 42.5% 37.6%
General Insurance Expenses:
Amount $3,382,255 3,246,552 2,735,280
Ratio to Net Premium
Income 44.3% 41% 33.5%
Income Before Income Taxes:
Amount $249,410 1,588,505 1,274,903
Ratio to Net Premium
Income 3.3% 20.1% 15.6%
Ratio to Total Income 2.1% 13.1% 11.4%
Ratio to Equity 1.5% 10.1% 8.6%
(The remainder of this page is intentionally left blank)
4
The following table provides information about the Company concerning
changes in life insurance in force (shown in thousands -000 omitted) during the
periods indicated (exclusive of acciden tal death benefits):
1997 1996 1995
---- ---- ----
Total life insurance in force
at beginning of period:
Ordinary Whole Life &
Endowment-Participating $441 584 583
Ordinary Whole Life &
Endowment-Non-Participating 1,157,624 1,289,250 1,459,149
Term 7,884 8,371 9,422
Reinsurance Assumed 537,701 507,552 531,502
------- ------- -------
Total $1,703,650 1,805,757 2,000,656
Additions (including re-
insurance assumed):
Ordinary Whole Life &
Endowment-Participating - 0 - - 0 - - 0 -
Ordinary Whole Life &
Endowment-Non-Participating 82,390 122,578 125,961
Term - 0 - - 0 - - 0 -
Reinsurance Assumed 19,021 64,071 8
------- ------- -------
Total $101,411 186,649 125,969
Terminations:
Death $2,010 1,756 2,204
Lapse and Expiry 57,435 73,919 89,868
Surrender 186,654 212,801 228,334
Other 152 280 463
------- ------- --------
Total $246,251 288,756 320,869
Life Insurance in force at end of period:
Ordinary Whole Life &
Endowment-Participating $381 441 583
Ordinary Whole Life &
Endowment-Non-Participating 1,019,179 1,157,624 1,289,250
Term 6,478 7,884 8,371
Reinsurance Assumed 532,772 537,701 507,552
------- ------- -------
Total $1,558,810 1,703,650 1,805,756
--------- --------- ---------
Reinsurance Ceded (337,901) (386,084) (448,382)
-------- -------- --------
Total after Reinsurance Ceded $1,220,909 1,317,566 1,357,374
========= ========= =========
Lapse Ratio (Reflecting termina-
tion by surrender and lapse;
ordinary life insurance only): 20.0% 20.5% 21.1%
5
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:
Mean Gross Net
Fiscal Investment Investment Investment Net
Year Assets (1) Income(2) Income (3) Yield (4)
- ----- ---------- ---------- ---------- ---------
1997 $51,094,803 3,565,206 3,545,311 6.94%
1996 $50,752,712 3,508,161 3,318,627 6.54%
1995 $46,899,142 3,225,630 2,998,875 6.39%
(1) Computed pursuant to valuations prescribed under generally accepted
accounting principles.
(2) Includes capital gains net of capital losses.
(3) Net of investment expense and before income taxes or extra ordinary
terms.
(4) Computed on an annualized basis. Represents ratio of net investment
income to mean invested assets.
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 295 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 the Company's parent, Consolidare Enterprises, Inc.
See "Certain Relationships and Related Transactions" in item 13, Part III of
this Report.
The Company presently employs 36 persons, none of whom are covered
under any collective bargaining agreements. The Company
6
feels it has good relations with its employees.
Section 624.408 of the Florida Statutes requires a stock life insurance
company to maintain minimum surplus on a statutory basis at the greater of
$1,500,000 or four percent (4%) of total liabilities. The Company's required
statutory minimum surplus calculated in accordance with this section is
approximately $1,900,000. 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, 1997 the Company had statutory capital and surplus of $9,316,923,
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.
7
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.
Based on calculations using the NAIC formula as of December 31, 1997,
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,
Illinois, Kentucky, Louisiana, Michigan, Missouri, 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 diver sification 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.
8
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.
The Company does not assume any reinsurance at the present time other
than its participation in SGLI.
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%.
9
Annuity reserves are based on the 1937 Standard Annuity Table, with interest on
policies computed at 3-1/2 or 4%. Reserves on the annuity portion of the
Company's deposit term policies are computed on the accumulation method.
Reserves for universal life policies, which comprise most of the Company's
insurance in force, have been valued by the California Method which was approved
by the Florida Department of Insurance. Reserves under this method are the
linear average of the policy account value and the policy cash surrender value
(account value less the surrender charge).
In 1994, the Florida Department of Insurance issued a new regulation
that required all companies who are not already using the CRVM method to phase
into that method over a period of five years. As required, the Company has filed
with the Department its plan to comply with the new regulation and implemented
the plan beginning January 1, 1995. This has resolved then pending discussions
with the Florida Insurance Department on the Company's reserving methods. The
CRVM reserving method applies only to the Company's statutory financial
statements. The 1997, 1996 and 1995 increase in the statutory reserve due to the
implementation of this regulation was approximately $52,400, $158,000 and
$404,000 respectively.
Estimation and provision for the cost of HIV-related claims covered
under life and accident and health insurance policies of the Company have been
made. The Company utilizes the services of KPMG Peat Marwick LLP, consulting
actuaries, in calculating such reserves.
In preparing financial statements in accordance with generally accepted
accounting principles, the cost of insurance and expense 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)
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, pre authorized 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
10
last three fiscal years on research and development activities. The business of
the Company is not seasonal in nature and is not dependent on the sources and
availability of raw materials. The business of the Company is not dependent upon
a single customer or a few customers, and no material portion of the Company's
business is subject to renegotiation of profits or termination at the election
of the Government.
Item 2. Properties.
The Company's corporate headquarters is located in a two story office
building in Lake Mary, Florida which is owned by the Company. The Company
occupies the entire second floor of the building. The remaining rentable space
is fully leased as of December 31, 1997.
Item 3. Pending Legal Proceedings.
Lawsuits against the Company may have arisen in the 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. The Company maintains insurance coverage for
unforeseen events and the insurance carriers, to the best of managements
knowledge, have no solvency issues.
Item 4. Submission of Matters to a Vote of Security Holders.
During the fourth quarter of the Company's fiscal year, no matter was
submitted to a vote of security holders.
11
PART II
Item 5. Market for the Company's Common Stock and Related
Stockholder Matters.
(a) Principal Market and Stock Price. The principal market on which the
Company's common stock is traded is the over-the-counter market. Trading
information with respect to the Company's shares is available through the
National Association of Securities Dealers Automated Quotation (NASDAQ) System
under the symbol SSLI.
The table below presents the high and low market prices for the
Company's common stock during the calendar quarters indicated, as quoted in the
NASDAQ system. The quotations represent prices between dealers in securities and
do not include retail markups, markdowns or commissions and do not necessarily
represent actual transactions.
QUARTER ENDED
- ----------------------------------------------------------------------------
1997 1996
- ----------------------------------------------------------------------------
Mar.31 Jun.30 Sep.30 Dec.31 Mar.31 Jun.30 Sep.30 Dec.31
Common
Shares:
High 7 3/4 9 1/4 8 1/4 8 5 5 5/8 7 1/2 7 7/8
Low 7 1/8 7 3/8 7 3/4 6 1/2 4 7/8 4 7/8 5 3/8 7 1/8
(b) Approximate Number of Holders of Common Stock. There were 1,440
holders of record of the Company's Common Stock at December 31, 1997.
(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) (i.e.
unassigned surplus) or (b) certain net operating profits and realized net
capital gains 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 1998
pursuant to such regulation is $183,000.
12
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.
(The remainder of this page is intentionally left blank)
13
YEARS ENDED DECEMBER 31,
1997 1996 1995 1994 1993
---------- --------- ----------- ----------- --------
Revenues:
Life insurance $7,643,650 7,915,027 8,158,938 9,299,789 10,738,921
Net investment
income 3,545,311 3,318,627 2,998,875 2,750,771 2,518,005
Realized Gain
(Loss)on
investments 506,795 869,502 60,237 60,732 138,985
------- ------- ------ ------ -------
Total Revenue 11,695,756 12,103,156 11,218,050 12,111,292 13,395,911
Benefits, Losses
& Expenses:
Insurance
living
benefits 2,459,638 2,420,021 2,636,851 2,815,194 2,848,888
Insurance death
benefits 1,847,375 1,398,541 1,424,245 1,300,063 1,871,590
Increase (decrease)
in policy
reserves 124,461 (5,201) (12,971) (67,036) (152,011)
Amortization of
deferred policy
acquisition
costs 3,542,617 3,364,738 3,069,742 3,242,706 5,216,871
Commissions and
general
expenses 3,382,255 3,246,552 2,735,280 3,186,386 2,814,921
Interest expense
with related
party 90,000 90,000 90,000 90,000 90,000
------ ------ ------ ------ ------
Total expenses 11,446,346 10,514,651 9,943,147 10,567,313 12,690,259
---------- ---------- --------- ---------- ----------
Income before
income taxes 249,410 1,588,505 1,274,903 1,543,979 705,652
------- --------- --------- --------- -------
Income taxes 54,200 196,000 160,000 530,000 1,000
------ ------- ------- ------- -----
NET INCOME $195,210 1,392,505 1,114,903 1,013,979 704,652
======== ========= ========= ========= =======
Weighted average
number of
shares
outstanding 1,907,989 1,907,989 1,907,989 1,907,989 1,844,694
--------- --------- --------- --------- ---------
Basic income per
common share $.10 .73 .58 .53 .38
---- --- --- --- ---
Diluted income per
common share $.10 .73 .58 .53 .38
---- --- --- --- ---
Shareholders'
Equity $16,132,018 15,661,588 14,826,610 12,644,525 12,238,101
=========== ========== ========== ========== ==========
Shareholders'
equity per
common
share $8.45 8.20 7.77 6.63 6.63
===== ==== ==== ==== ====
14
1997 1996 1995 1994 1993
---------- -------------- -------------- ------------- --------
Assets $82,142,465 81,809,360 81,872,350 77,185,070 81,211,540
----------- ---------- ---------- ---------- ----------
Life Insurance:
Insurance in
force $1,558,810,000 1,703,650,000 1,805,756,000 2,000,656,000 2,180,987,000
-------------- ------------- ------------- ------------- -------------
Individual
insurance
issued during
current
year $82,390,000 121,646,000 124,222,000 184,364,000 325,869,000
----------- ----------- ----------- ----------- -----------
Long term
obligation $1,000,000 1,000,000 1,000,000 1,000,000 1,000,000
---------- --------- --------- --------- ---------
Dividends
declared per
common share $0.00 0.00 0.00 0.00 0.00
----- ---- ---- ---- ----
(The remainder of this page is intentionally left blank)
15
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 one type of insurance
product, universal life. Universal life provides insurance coverage with
flexible premiums, within limits, which allow policyholders to accumulate cash
values. These accumulated cash values are credited with tax-deferred interest,
as adjusted by the Company on a periodic basis. Deducted from these cash
accumulations are administrative charges and mortality costs. Should a policy
surrender in its early years, the Company assesses a surrender fee against these
same cash accumulations, based on issue age of the insured, smoker verses
non-smoker status, sex of the insured and the duration of the policy at the time
of surrender.
Pursuant to the accounting methods prescribed by Statement of Financial
Accounting Standards No. 97 (SFAS 97), premiums received from policyholders on
universal life products are credited to policyholder account balances, a
liability, rather than income. Revenues on such products result from the
mortality and administrative fees charged to policyholder balances in addition
to surrender charges assessed at the time of surrender as explained above. Such
costs of insurance, expense charges, and surrender fees are recognized as
revenue as earned. In addition, the Company has adopted policy designs with the
characteristic of having higher expense charges during the first policy year
than in renewal years. Under SFAS 97, the excess of these charges are reported
as unearned revenue. The unearned revenue is then amortized into income over the
life of the policy using the same assumptions and factors used to amortize
capitalized acquisition costs. Interest credited to policyholder balances is
shown as a part of benefit expenses.
In accordance with generally accepted accounting principles, certain
costs directly associated with the issuance of new policies are deferred and
amortized over the lives of the policies. These costs are defined as deferred
policy acquisition costs and are shown in the asset section of the balance sheet
of the Company. Capitalized acquisition costs are amortized over the life of the
business at a constant rate, based on the present value of the estimated gross
profits expected to be realized over the life of the business. SFAS 97 requires
that estimates of expected gross profits used as a basis for amortization be
evaluated on a regular basis, and the total amortization to date be adjusted as
a charge or credit to earnings if actual experience or other evidence
16
suggests that earlier estimates be revised. Thus, variations in the amortization
of the deferred policy acquisition costs, from one period to the next, are a
normal aspect of universal life insurance business and are generally attributed
to the recognition of current and emerging experience in accordance with the
principles of SFAS 97.
Annuity products, of which the Company currently has a minor amount, are
recorded in similar fashion to universal life products. Considerations received
by the Company are credited to the annuity account balances which are shown as a
liability in the balance sheet. Interest is credited to these accounts as well
and shown as an expense of the Company. Income is derived primarily from
surrender charges on this type product.
An additional source of income to the Company is investment revenue. The
Company invests those funds deposited by policy-holders of universal life and
annuity products in debt and equity securities in order to earn interest and
dividend income, a portion of which is credited back to the policyholders.
Interest rates and maturities of the Company's investment portfolio play a 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.
(The remainder of this page is intentionally left blank)
17
The following table sets forth certain percentages reflecting financial
data and results of operations (a) for 1997, 1996 and 1995 premium and
investment revenues and (b) for period to period increases and (decreases).
Relationships to
Total Revenues Period to Period
Years Ended December 31 (Increase or Decrease)
1997 1996 1995 97-96 96-95
------ ------ ------ ------- ------
Insurance Revenues 65% 65% 73% (3%) (3%)
Net Investment Income 35 35 27 7% 11%
Other Income
Total Revenues 100% 100% 100% (3%) 8%
Losses, claims and
loss adjustment
expenses 38% 31% 36% 16% 6%
Acquisition costs 30 28 27 5% 10%
Other operating
costs and
expenses 30 27 26 4% 18%
---- ---- ---- ---- ----
Total Expenses 98% 86% 89% 9% 6%
Income before income
taxes 2% 14% 11% (84%) 24%
Provision for income
taxes 0 2 1 (72%) 22%
--- --- ---- ---- ----
Net Income 2% 12% 10% (86%) 25%
= == == === ==
Results of Operations.
New business written was $82, $122 and $124 million in face value for
1997, 1996 and 1995, respectively. The Company's new market is known as the
final expense market. This product is a traditional endowment policy designed to
help offset the financial burdens associated with the death of a family member
and targets the needs of senior citizens. 57% of the policies written in 1997
represent this new product. Recruiting new field sales representatives is
directed at this new plan. Policies issued in this market are of a lesser face
value than those of the Universal Life market. That being the case, the face
amount of insurance appears to have declined, however the actual number of
policies issued increased. In 1996 and 1997, the Company issued approximately
2,700 new policies.
18
Premium and policy charges for 1997 was $7.5 million, 1996 was $7.7
million, 1995 at $7.9 million. While policy production was up for 1997 and 1996,
premium and policy charges went down.
Premium and policy charges for 1997 were $7.5 million. Several factors
have combined to create this decline. Continued lapsation in the universal life
book of business has resulted in reduced revenues in administrative and
mortality fees. New production has not increased as significantly as would be
needed to be beneficial and the new product currently being marketed has lower
premiums than those of the universal life product. Surrender fee income in 1997
was consistent with the amount of 1996. Surrender fee income is dependent upon
the duration and value of the policies lapsing. Should the policies be in their
early years, the fee is high, however, limited to the value in the policy which
is smaller in the early years. The older policies have lower surrender fees and
greater account values from which to collect those fees.
The balance of the decline in 1997, 1996 and 1995 premium and policy
charges is related to the unlocking, for current and future experience, of
unearned premium. Unearned premium essentially represents the excess first year
charges in the policy. With the advice and assistance of our consulting
actuaries, each year the Company reviews its current experience rates for
mortality, credited interest spreads, lapse rates, surrender fees and the like,
and adjusts its amortization of deferred acquisition costs and unearned premium
to the appropriate levels for both the current experience and anticipated future
experience. This is an ongoing refinement process.
Increased investment in debt securities coupled with reduced expenses
for student loan processing are responsible for the 6.94% net yield in 1997 and
6.54% net yield in 1996. The Company continues to review its investment
strategies to increase its earned interest rate. As a part of this process of
review and refinement, the Company sold its entire stock portfolio just prior to
year end 1996. This created a significant increase in realized gains for 1996.
The resulting funds were invested in a more aggressive stock market fund which
created an increased yield for the Company in 1997. Additional changes in the
Company's holdings are being planned for 1998.
Annuity, death and other benefits increased 16% in 1997. This expense
line is a combination of several expenses with death claims, annuity benefits
and surrender benefits comprising the most significant portion of the total
line. In 1997 each of these expenses increased with death claims representing
the largest increase. A significant increase or decrease in death claims in any
given year can have a marked impact on the results of operations in a small
company.
The amortization of deferred acquisition costs increased in
19
1997 by 5% as compared to a 10% increase in 1996. The amortization of deferred
acquisition costs is a continuous refinement process which relates to current
experience in connection with revenues, mortality gains and losses, credited
interest rate spreads, expense charges and surrender charges. The change in the
rate of premium liabilities is due to unlocking for current and future
experience based on the results of the changing experience encountered as
required under FAS 97.
Operating expenses for the Company were $3.4 million, $3.3 million and
$2.7 million for 1997, 1996 and 1995, respectively. New products and lead
programs are responsible for the increased operating costs of 1997 and 1996. The
lead generation program used to introduce and promote the new product was not
without cost. The Company also attempted some new marketing procedures in these
two years which added to the costs. The Company has reviewed its promotional
expenses and now that the new product has established a market, has cut back on
these expenses.
Reinsurance premiums ceded for 1997, 1996 and 1995 were $1,516,422,
$1,767,418 and $2,112,884 respectively. Policy benefits were reduced due to
reinsurance recoveries of $301,068, $709,643, and $405,345 for 1997, 1996 and
1995, respectively. Reinsurance commissions amounted to $281,434 for 1997 and
$308,179 and $397,253 for 1996 and 1995 respectively. In addition, under the
terms of the Company's treaty with Mega Life (formerly United Group Insurance
Company) expenses of $1,111,130 were transferred for 1997 and $956,143 and
$911,452 for 1996 and 1995 respectively.
Income, before income taxes, in 1997 was $249,410, inclusive of gain on
equity securities of $506,795, compared to $1,588,505, in 1996 and $1,274,903 in
1995. The 1997 income declined approximately $1,339,000 from the prior year as a
result of reduced total revenue of $407,000 with realized gain on investments
representing $363,000 of this amount. Total expenses increased $932,000 with
death claims representing $449,000 of this amount and the balance of $493,000
attributed to acquisition costs and operating expense of $324,000 and other
policy benefits of $169,000.
Liquidity and Capital Resources.
Statement of Financial Accounting Standards No. 115 ("SFAS 115"),
"Accounting for Certain Investments in Debt and Equity Securities" requires
investments in all debt securities and those equity securities with readily
determinable market values be 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.
20
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 are classified as trading securities. Trading
securities are carried at market value, with unrealized holding gains and losses
included in earnings. 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 market value, with unrealized holding gains
and losses reported as a separate component of stockholders' equity, net of tax
and a valuation allowance against deferred acquisition costs. Adoption of this
statement had no effect on the income of the Company.
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.
Student loans are a service the Company makes available to the public as
well as an investment. While the Company anticipates the seasonal demand for
student loan funds and the subsequent sale of such loans to the Student Loan
Marketing Association (SLMA), there are times when additional funds are required
to meet demand for student loans until such time as the sale thereof to SLMA can
be completed. In 1997 the Company renewed its $5,000,000 line of credit with
SLMA until 2007 in order to meet these seasonal borrowing requirements. The
Company made no draws against this line of credit throughout the seasonal period
for 1997 or 1996. The Company anticipates continued borrowings to be made
through this line of credit with SLMA to the extent that student loan borrowings
are required for 1998. SLMA offers a more competitive rate of interest on such
borrowings than the Company has been able to obtain through banks.
The Company began a new association with USA Group, CAP Program in 1996,
for the purpose of making more student loan funds available without increased
costs to the Company. This association aided in eliminating borrowings for 1997
and 1996.
Except as otherwise provided herein, management believes that cash flow
levels in future periods will be such that the Company will be able to continue
its prior growth patterns in writing life insurance policies, fund Federally
insured student loans and meet normal operating expenses.
The National Association of Insurance Commissioners, in order to enhance
the regulation of insurer solvency, issued a model law to implement risk-based
capital (RBC) requirements for life insurance companies, which are designed to
assess capital adequacy. Pursuant to the model law, insurers having less
statutory surplus than required by the RBC calculation will be subject to
varying degrees of regulatory action. While Florida, the Company's state
21
of domicile, had yet to adopt the provisions of the RBC model law, the Company
is monitoring its RBC results in anticipation of future adoption. At December
31, 1997, the Company had statutory surplus well in excess of any RBC action
level requirements.
The Company has no material commitments for capital expenditures throughout the
balance of the year 1998 as all rentable space on the first floor of its office
building is fully leased.
The Company is aware of potential problems all computer systems face with
respect to the year 2000, and has investigated various solutions. Present plans
call for the conversion to be completed by the end of 1998. It is estimated to
cost approximately $200,000, which would not have a material impact on the
Company.
Testing for hardware problems will be done during the second quarter of 1999,
although the Company is not expecting any problems which could not be solved
before December 31, 1999.
Item 8. Financial Statements and Supplementary Data.
22
SOUTHERN SECURITY LIFE INSURANCE COMPANY
Financial Statements and Schedules
December 31, 1997, 1996 and 1995
(With Independent Auditors' Report Thereon)
23
Independent Auditors' Report
Board of Directors
Southern Security Life Insurance Company:
We have audited the accompanying financial statements of Southern Security Life
Insurance Company as listed in the accompanying index under Item 14(a). In
connection with our audit of the financial statements, we have also audited the
amounts included in the financial statement schedules as listed in the
accompanying index under Item 14(a)2. 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 generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a 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 as of December 31, 1997 and 1996, and the results of its
operations and its cash flows for each of the years in the three year period
ended December 31, 1997, in conformity with generally accepted accounting
principles. Also in our opinion, the related financial statement schedules, when
considered in relation to the basic financial statements taken as a whole,
present fairly, in all material respects, the information set forth therein.
KPMG Peat Marwick LLP
Orlando, Florida
April 3, 1998
24
SOUTHERN SECURITY LIFE INSURANCE COMPANY
Balance Sheets
December 31, 1997 and 1996
Assets 1997 1996
------ ---- ----
Investment (note 3):
Fixed maturities held to maturity
(fair value, $10,631,003 and
$15,140,919 at December 31,
1997 and 1996, respectively) $10,501,712 14,974,962
Securities available for sale,
at fair value:
Fixed maturities (cost of
$30,880,390 at December 31,
1997 and $24,298,618 at
December 31, 1996) 31,483,324 24,476,239
Equity securities (cost, $800,000
and $0 at December 31, 1997 and
1996, respectively) 839,973 -
Policy and student loans 7,945,381 7,315,809
Short-term investments 100,000 4,539,106
Other invested assets - 13,100
---------- ----------
50,870,390 51,319,216
Cash and cash equivalents 2,448,994 206,056
Accrued investment income 637,460 687,699
Deferred policy acquisition costs
(note 4) 15,451,689 16,979,612
Policyholders' account balances on
deposit with reinsurer (note 7) 8,667,241 8,522,449
Reinsurance receivable (note 7) 359,688 379,692
Receivables:
Agent balances 590,368 588,290
Other 324,752 340,680
Refundable income taxes 121,680 -
Property and equipment, net,
at cost (note 5) 2,670,203 2,785,666
---------- ----------
$82,142,465 81,809,360
See accompanying notes to financial statements
25
SOUTHERN SECURITY LIFE INSURANCE COMPANY
Balance Sheets (continued)
December 31, 1997 and 1996
Liabilities and Shareholders' Equity 1997 1996
------------------------------------ ---- ----
Liabilities:
Policy liabilities and accruals
(notes 6 and 7): $1,409,031 985,720
Future policy benefits:
Policyholders' account balances 52,335,511 52,347,996
Unearned premiums 7,108,662 8,249,190
Other policy claims and benefits
payable 427,649 293,221
Other policyholders' funds, dividend
and endowment accumulations 59,686 59,596
Funds held by reinsurance treaties
with reinsurers (note 7) 1,339,927 1,193,366
Note payable to related party
(note 9) 1,000,000 1,000,000
Due to affiliated insurance
agency (note 11) 68,646 33,411
General expenses accrued 897,627 894,131
Unearned investment income 313,018 228,032
Other liabilities 100,990 204,845
Income taxes payable - 70,164
Deferred income taxes (note 10) 949,700 588,100
------- -------
66,010,447 66,147,772
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
Unrealized appreciation (depreciation)
on securities available for sale, net
of adjustment to deferred policy
acquisition costs of $215,867 and $187,196
net of deferred Federal income taxes
of $160,700 and ($675) at December 31,
1997 and 1996, respectively 266,340 (8,880)
Retained earnings 9,946,170 9,750,960
---------- ---------
16,132,018 15,661,588
Commitments and contingencies
(notes 7 and 14) - -
-------- ------
$82,142,465 81,809,360
26
SOUTHERN SECURITY LIFE INSURANCE COMPANY
Statements of Income
Years ended December 31, 1997, 1996, and 1995
1997 1996 1995
---- ---- ----
Revenues:
Premium and policy
charges $7,499,760 7,702,639 7,919,362
Less reinsurance ceded (914,071) (1,030,673) (1,201,432)
Surrender fee income 1,057,961 1,243,061 1,441,008
--------- --------- ---------
Net insurance revenue 7,643,650 7,915,027 8,158,938
Net investment income
(notes 3 & 8) 3,545,311 3,318,627 2,998,875
Realized gain on
investments (note 3) 506,795 869,502 60,237
-------- ------- ------
11,695,756 12,103,156 11,218,050
---------- ---------- ----------
Benefits, losses and expenses:
Annuity, death, surrender
and other benefits 4,307,013 3,818,562 4,061,096
Increase (decrease) in future
policy benefits 124,461 (5,201) (12,971)
Amortization of deferred
policy acquisition
costs (note 4) 3,542,617 3,364,738 3,069,742
Operating expenses
(note 11) 3,382,255 3,246,552 2,735,280
Interest expense with
related party (note 9) 90,000 90,000 90,000
------ ------ ------
11,446,346 10,514,651 9,943,147
---------- ---------- ---------
Income before income taxes 249,410 1,588,505 1,274,903
Income tax expense (note 10) 54,200 196,000 160,000
------ ------- -------
Net income $195,210 1,392,505 1,114,903
======== ========= =========
Basic net income per share of
common stock $.10 .73 .58
==== === ===
Diluted net income per share of
common stock $.10 .73 .58
==== === ===
See accompanying notes to financial statements.
27
SOUTHERN SECURITY LIFE INSURANCE COMPANY
Statements of Shareholders' Equity
Years ended December 31, 1997, 1996 and 1995
Unrealized
Appreciation
(depreciation)
Capital of securities
Common stock in excess available Retained
Shares Amount of par for sale Earnings
Balances,
December 31,
1994 1,907,989 $1,907,989 4,011,519 (518,535) 7,243,552
--------- ---------- --------- -------- ---------
Net income for
the year - - - - 1,114,903
Unrealized appre-
ciation of
securities avail-
able for sale - - - 1,067,182 -
------- ------- ------- --------- -----
Balances,
December 31,
1995 1,907,989 1,907,989 4,011,519 548,647 8,358,455
--------- --------- --------- ------- ---------
Capital Stock
issued
Net income for
the year - - - - 1,392,505
Unrealized depre-
ciation of
securities avail-
able for sale
investments - - - (557,527) -
------- ------- ------- -------- ----
Balances,
December 31,
1996 1,907,989 $1,907,989 4,011,519 (8,880) 9,750,960
--------- ---------- --------- ------ ---------
Capital Stock
issued
Net income for
the year - - - - 195,210
Unrealized depre-
ciation of
securities avail-
able for sale
investments - - - 275,220 -
------- ------- ------- ------- ----
Balances,
December 31,
1997 1,907,989 $1,907,989 4,011,519 266,340 9,946,170
========= ========== ========= ======= =========
See accompanying notes to financial statements.
28
SOUTHERN SECURITY LIFE INSURANCE COMPANY
Statements of Cash Flows
Years ended December 31, 1997, 1996 and 1995
1997 1996 1995
---- ---- ----
Cash flows provided by (used in)
operating activities:
Net income $195,210 1,392,505 1,114,903
Adjustments to reconcile net cash
provided by (used in) operating
activities:
Depreciation and amortization 232,471 169,681 182,971
Net realized (gains) on
investments (506,795) (869,502) (60,237)
Loss on disposal of property,
plant & equipment 100 124 918
Deferred income taxes 198,100 16,900 (221,000)
Amortization of deferred
policy acquisition costs 3,542,617 3,364,738 3,069,742
Acquisition costs deferred (2,069,778) (2,018,043) (2,779,393)
Change in assets and liabilities
affecting cash provided by
operations:
Accrued investment income 50,239 (48,890) (33,958)
Other invested assets 13,100 - -
Due from affiliated insurance
agency (2,078) - 10,419
Accounts receivable (105,752) (265,682) 305,725
Reinsurance Receivable 20,004 134,649 (191,157)
Other policy claims and
future benefits payable 557,739 36,488 (96,568)
Policyholders' Account balances 2,065,521 2,332,863 2,388,047
Funds held under reinsurance 146,561 215,950 276,715
Unearned premiums (1,114,188) (962,941) (427,955)
Dividend and endowment
accumulations 90 2,152 2,069
Payable to affiliated insurance
agent 35,235 (209,957) 18,155
Income taxes payable (70,164) 53,814 16,350
Other liabilities (15,373) (134,983) (361,184)
------- -------- --------
Net cash provided by operating
activities 3,172,859 3,209,866 3,214,562
--------- --------- ---------
(continued)
29
SOUTHERN SECURITY LIFE INSURANCE COMPANY
Statements of Cash Flows (continued)
Years ended December 31, 1997, 1996 and 1995
1997 1996 1995
---- ---- ----
Cash flows from (used in) investing activities:
Purchase of investments:
Purchase of investments held to maturity - (1,965,240) (3,492,860)
Purchase of investments available
for sale (32,704,906) (8,085,785) (3,754,242)
Purchase of equity securities (3,316,249) - -
Proceeds from maturity of held to
maturity securities 4,488,354 2,165,750 1,135,203
Proceeds from maturity of available
for sale securities - 635,533 141,150
Proceeds from sale of available for
sale securities (equity and fixed
maturity) 29,049,745 6,367,780 2,664,089
Net change in short term investments 4,439,106 (3,040,006) 376,658
Net change in policy and student loans (629,572) 2,655,845 (1,104,685)
Net change in other investments 2,178 7,605 8,476
Acquisition of property and equipment (35,779) (60,559) (204,142)
------- ------- --------
Net cash provided by (used in)
investing activities 1,292,877 (1,319,077) (4,230,353)
--------- ----------- ----------
Cash flows from financing activities:
Receipts from universal life and
certain annuity policies credited
to policyholder account balances 4,042,137 5,213,760 5,609,910
Return of policyholder account
balances on universal life and
certain annuity policies (6,264,935) (5,904,692) (5,334,176)
Proceeds from short-term borrowings - 2,500,000 3,250,000
Repayment of short-term borrowings - (3,900,553) (2,741,270)
---------- ---------- ----------
Net cash provided by (used in)
financing activities (2,222,798) (2,091,485) 784,464
----------- ---------- ----------
Increase (decrease) in cash and
cash equivalents 2,242,938 (200,696) (231,327)
Cash and cash equivalents at
beginning of year 206,056 406,752 638,079
------- ------- -------
Cash and cash equivalents at
end of year $2,448,994 206,056 406,752
========== ======= =======
(continued)
30
SOUTHERN SECURITY LIFE INSURANCE COMPANY
Statements of Cash Flows (continued)
Years ended December 31, 1997, 1996 and 1995
1997 1996 1995
---- ---- ----
Supplemental schedule of cash flow Information:
Interest paid during the year $90,000 102,094 114,935
====== ======= =======
Income taxes paid during the year $115,000 130,500 249,000
======= ======= =======
Change in market value adjustments-
investments available for sale:
Fixed maturities $425,313 (557,065) 2,109,314
Equity securities 39,973 (418,345) 406,612
Change in deferred acquisition costs (55,084) 181,196 (1,669,168)
Change in premium deposit funds 26,340 (95,241) 871,220
Deferred income tax asset (liability) (163,500) 333,800 (651,000)
Other 2,178 (1,872) 204
----- ------ ----
Net change in unrealized appreciation
(depreciation) $275,220 (557,527) 1,067,182
======= ======== =========
See accompanying notes to financial statements.
31
SOUTHERN SECURITY LIFE INSURANCE COMPANY
Notes to Financial Statements
December 31, 1997, 1996 and 1995
1. Nature of business and summary of significant accounting policies:
(a) Nature of Business
The primary business purpose of Southern Security Life Insurance
Company (the "Company") is the issuance of long duration universal
life insurance contracts. Prior to 1986, the Company's business
included traditional whole life and annuity contracts. The majority
of the Company's business is conducted in the states of Florida
(43%), Georgia (13%) and Texas (14%). None of the remaining eleven
states in which the Company is licensed to conduct business account
for over 10% of the Company's total business.
Certain executive officers and directors of the Company are
shareholders of approximately 60% of the issued and outstanding
common shares of Consolidare Enterprises, Inc. Consolidare
Enterprises, Inc. owns approximately 57% of the Company's voting
securities at December 31, 1997.
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.
32
SOUTHERN SECURITY LIFE INSURANCE COMPANY
Notes to Financial Statements (continued)
1. Nature of business and summary of significant accounting
policies, continued
(a) Nature of Business
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 or may cause disintermediation. The Company
mitigates this risk by charging fees for nonconformance with certain
policy provisions, by offering products that transfer this risk to
the purchaser, and/or by attempting to match the maturity schedule
of its assets with the expected payouts of its liabilities. To the
extent that liabilities come due more quickly than assets mature, an
insurer would have to sell assets prior to maturity and potentially
recognize a gain or loss.
(b) Basis of Financial Statements
The financial statements have been prepared on the basis of
generally accepted accounting principles ("GAAP"), which vary from
reporting practices prescribed or permitted by regulatory
authorities.
(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
33
SOUTHERN SECURITY LIFE INSURANCE COMPANY
Notes to Financial Statements (continued)
1. Nature of business and summary of significant accounting
policies, continued
(d) Investments
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 are classified as trading
securities. Trading securities are carried at fair value, with
unrealized holding gains and losses included in earnings. 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 as a separate component of
stockholders' equity, net of tax and a valuation allowance against
deferred acquisition costs. At December 31, 1997 and 1996, the
Company did not have any investments categorized as trading
securities.
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 credited
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.
Policy loans and student loans are carried at the unpaid principal
balance, less any amounts deemed to be uncol-lectible. 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.
34
SOUTHERN SECURITY LIFE INSURANCE COMPANY
Notes to Financial Statements (continued)
1. Nature of business and summary of significant accounting
policies, continued
(e) Cash and Cash Equivalents
For purposes of the statements of cash flows, the Company considers
all highly liquid debt instruments purchased with an original
maturity of one month 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. Deferred policy acquisition
costs applicable to non-universal 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 receipt of 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 at a constant rate
based on the present value of the estimated gross profit amounts
expected to be realized over the life of the policies. 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 several tests concerning the
recoverability of deferred acquisition costs. These methods include
those typically used by many companies in the life insurance
industry. Further, the Company conducts a sensitivity analysis of
its assumptions that are used to estimate the future expected gross
profits, which management has used to determine the future
recoverability of the deferred acquisition costs.
(g) Depreciation
Depreciation is being provided on the straight-line method over the
estimated useful lives of the assets.
35
SOUTHERN SECURITY LIFE INSURANCE COMPANY
Notes To Financial Statements (continued)
1. Nature of business and summary of significant accounting
policies, continued
(h) Future Policy Benefits
The liability for future policy benefits 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.
(I) Recognition of Premium Revenue and Related Costs
Premiums are recognized as revenue as follows:
Universal life policies - premiums received from policy-holders 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.
(j) 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.
36
SOUTHERN SECURITY LIFE INSURANCE COMPANY
Notes to Financial Statements (continued)
1. Nature of business and summary of significant accounting
policies, continued
(k) Earnings Per Share
In 1997, the Financial Accounting Standards Board issued
Statement No. 128, Earnings per Share. Statement No. 128
replaced the calculation of primary and fully diluted
earnings per share with basic and diluted earnings per
share. Unlike primary earnings per share, basic earnings
per share excludes any dilutive effects of options,
warrants and convertible securities. Diluted earnings per
share is very similar to the previously reported fully
diluted earnings per share. All earnings per share amounts
for all periods presented are restated to conform to
Statement No. 128 requirements.
(l) Reclassification
Certain amounts presented in the 1996 and 1995 financial statements
have been restated to conform to the 1997 presentation.
2. Basis of Financial Statements
The more significant generally accepted accounting principles applied in
the preparation of financial statements that differ from life insurance
statutory accounting practices prescribed or permitted by regulatory
authorities (which are primarily designed to demonstrate solvency) are as
follows:
a. Costs of acquiring new business are deferred and amortized, rather
than being charged to operations as incurred.
b. The liability for future policy benefits and expenses is based on
conservative estimates of expected mortality, morbidity, interest,
withdrawals and future maintenance and settlement expenses, rather
than on statutory rates for mortality and interest.
c. The liability for policyholder funds associated with universal life
and certain annuity contracts are based on the provisions of
Statement of Financial Accounting Standards Statement No. 97, rather
than on the statutory rates for mortality and interest.
d. Investments in securities are reported as described in Note
37
SOUTHERN SECURITY LIFE INSURANCE COMPANY
Notes to Financial Statements (continued)
2. Basis of financial statements, continued
d. 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. Expenses attributable to the public offering of the common shares
have been reclassified from retained earnings to capital in excess
of par.
I. Realized gains or losses on the sale or maturity of investments are
included in the statement of income and not recorded net of taxes
and amounts transferred to the interest maintenance reserve as
required by statutory accounting practices.
j. Certain proceeds from a note payable (note 9) that are treated as
shareholders' equity for statutory purposes are treated as a
liability under generally accepted accounting principles.
k. Reinsurance assets and liabilities are reported on a gross basis
rather than shown on a net basis as permitted by statutory
accounting practices.
A reconciliation of net income (loss) for the years ended December 31,
1997, 1996 and 1995 and shareholders' equity as of December 31, 1997 and
1996 between the amounts reported on a statutory basis and the related
amounts presented on the basis of generally accepted accounting principles
is as follows:
38
SOUTHERN SECURITY LIFE INSURANCE COMPANY
Notes to Financial Statements (continued)
2. Basis of financial statements, continued
Shareholders'
Net income equity
Years ended December 31, December 31,
1997 1996 1995 1997 1996
---- ---- ---- ---- ----
As reported
on a statutory
basis $45,398 1,022,183 232,180 9,316,923 9,283,928
------ ---------- ------- ---------- ---------
Adjustments:
Deferred policy
acquisition
costs, net (1,472,839) (1,346,695) (290,344) 15,451,689 16,979,611
Future policy
benefits, un-
earned premiums
and policy-
holders' funds 1,644,330 1,626,090 1,006,862 (8,915,443) (10,643,224)
Deferred
income taxes (198,100) (16,900) 221,000 (949,700) (588,100)
Asset valuation
reserve - - - 465,452 307,364
Interest main-
tenance reserve 129,109 (18,221) 24,909 338,845 209,736
Non-admitted
assets - - - 698,024 795,659
Unrealized gains
-SFAS 115 - - - 602,934 177,621
Capital and
surplus note - - - (1,000,000) (1,000,000)
Other adjustments,
net 47,312 126,048 (79,704) 123,294 138,993
------ ------- ------- ------- -------
Net difference 149,812 370,322 882,723 6,815,095 6,377,660
------- ------- ------- --------- ---------
As reported on a
GAAP basis $195,210 1,392,505 1,114,903 16,132,018 15,661,588
======= ========= ========= ========== ==========
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
39
SOUTHERN SECURITY LIFE INSURANCE COMPANY
Notes to Financial Statements (continued)
2. Basis of financial statements, continued
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 payable by
the Company during 1997 without prior approval is approximately $183,000.
Accordingly, GAAP excess earnings over a stat 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, 1997.
3. Investments
(a) Equity Securities and Fixed Maturities
Equity securities consist of $839,973 and $0 of common stock at December
31, 1997 and 1996 respectively.
Unrealized (depreciation) appreciation in investments in equity securities
for the years ended December 31, 1997, 1996, and 1995 is $39,973, $0 and
$406,611, respectively.
The amortized cost and estimated fair values of investments in debt
securities are as follows:
40
SOUTHERN SECURITY LIFE INSURANCE COMPANY
Notes to Financial Statements (continued)
3. Investments, continued
(a) Continued
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
December 31, 1997:
Held to maturity:
U.S. Treasury
securities and
obligations of U.S.
government corpora-
tions and agencies
(guaranteed) $2,516,052 53,948 - 2,570,000
Corporate securities 6,976,738 79,620 4,277 7,052,081
Special revenue and
special assessment
obligations and all non-
guaranteed obligations of
agencies and authorities
of governments and
their political
subdivisions 1,008,922 - - 1,008,922
--------- ------- ------ ---------
10,501,712 133,568 4,277 10,631,003
---------- ------- ----- ----------
Available for sale:
U.S. Treasury
securities and
obligations of U.S.
government corporations
and agencies (guaranteed) 9,301,191 173,517 - 9,474,708
Corporate securities 21,481,892 429,907 - 21,911,799
Special revenue and
special assessment
obligations and all non-
guaranteed obligations of
agencies and authorities
of governments and their
political subdivisions 97,307 - 490 96,817
------- ------- ----- -------
30,880,390 603,424 490 31,483,324
---------- ------- ---- ----------
$41,382,102 736,992 4,767 42,114,327
=========== ======== ===== ==========
41
SOUTHERN SECURITY LIFE INSURANCE COMPANY
Notes to Financial Statements (continued)
3. Investments, continued
(a) Continued
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
December 31, 1996:
Held to maturity:
U.S. Treasury securities
and obligations of U.S.
government corporations
and agencies (guaranteed) $4,503,477 61,523 - 4,565,000
Corporate securities 9,461,064 120,955 - 9,582,019
Special revenue and
special assessment
obligations and all non-
guaranteed obligations of
agencies and authorities
of governments and their
political subdivisions 1,010,421 - 16,521 993,900
--------- ------ ------ -------
14,974,962 182,478 16,521 15,140,919
---------- ------- ------ ----------
Available for sale:
U.S. Treasury securities
and obligations of U.S.
government corporations
and agencies (guaranteed) 20,383,080 180,672 - 20,563,752
Corporate securities 3,585,084 - 2,084 3,583,000
Special revenue and
special assessment
obligations and all non-
guaranteed obligations of
agencies and authorities
of governments and their
political subdivisions 330,454 - 967 329,487
------- ------- --- -------
24,298,618 180,672 3,051 24,476,239
---------- ------- ----- ----------
$39,273,580 363,150 19,572 39,617,158
=========== ======= ====== ==========
42
SOUTHERN SECURITY LIFE INSURANCE COMPANY
Notes to Financial Statements (continued)
3. Investments, continued
(a) Continued
Unrealized appreciation (depreciation) of fixed maturities for years
ending December 31, 1997, 1996 and 1995 is $388,847, ($720,253) and
$2,779,872 respectively.
The amortized cost and estimated fair value of fixed maturities at
December 31, 1997 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 one year or less $3,949,982 3,960 500
Due after one year through
five years 5,281,472 5,400,245
Due after five years through
ten years - -
Due after ten years 261,336 261,336
------- -------
9,492,790 9,622,081
Mortgage backed securities 1,008,922 1,008,922
--------- ---------
$10,501,712 10,631,003
Fixed maturity securities available-for-sale:
Due after one year through
5 years $9,130,069 9,229,142
Due after five years through
ten years 15,121,559 15,477,301
Due after ten years 6,531,455 6,680,064
--------- ---------
30,783,083 31,386,507
Mortgage backed securities 97,307 96,817
------- -------
$30,880,390 31,483,324
43
SOUTHERN SECURITY LIFE INSURANCE COMPANY
Notes to Financial Statements (continued)
3. Investments, continued
(a) Continued
Proceeds from sale of equity securities and fixed maturities
available for sale and related realized gains and losses are
summarized as follows:
1997 1996 1995
---------- ---------- -------
Proceeds from sale of
equity securities $2,873,980 2,885,010 854,339
---------- --------- -------
Proceeds from sale of
fixed maturities
available for sale $26,175,765 3,482,770 1,809,750
----------- --------- ---------
Fixed maturities:
Gross realized gains $278,904 15,013 145,136
Gross realized (losses) (150,045) (18,881) (119,908)
Equity securities:
Gross realized gains 357,731 930,919 55,543
Gross realized (losses) - (57,620) (20,540)
-------- ------- -------
$486,590 869,431 60,231
======= ======= ======
Certain of the fixed maturity securities classified as available for sale
and held to maturity were called during the year ended December 31, 1997,
1996 and 1995 resulting in the following realized gains and losses:
1997 1996 1995
---- ---- ----
Held to maturity:
Gross realized gains $20,205 71 6
Available for sale:
Gross realized gains 21,997 - -
------ - -
$42,202 71 6
======= == =
44
SOUTHERN SECURITY LIFE INSURANCE COMPANY
Notes to Financial Statements (continued)
3. Investments, continued
(a) Continued
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, 1997, other than
investments issued or guaranteed by the United States government
are as follows:
1997 Carrying Amount
Dean Witter Discover $2,114,643
Federal Express 2,260,000
Lehman Brothers Inc. 2,080,000
Philip Morris Inc. 3,535,000
There were no investments, aggregated by issuer, in excess of 10%
of shareholders' equity at December 31, 1996.
(b) Concentrations of credit risk
At December 31, 1997 and 1996, the Company did not hold any
unrated or less-than-investment grade corporate debt securities.
The Company also invests in subsidized and unsubsidized student
loans totaling $244,361 and $514,483 at December 31, 1997 and
1996, respectively, which are guaranteed by the U.S. government.
Subsequent to December 31, 1997, all of these loans were sold at
their unpaid principal balance.
45
SOUTHERN SECURITY LIFE INSURANCE COMPANY
Notes to Financial Statements (continued)
3. Investments, continued
(c) Investment Income
Net investment income for the years ended December 31, 1997, 1996,
and 1995 consists of the following:
1997 1996 1995
---- ---- ----
Interest:
Fixed maturities $2,918,006 2,581,198 2,319,914
Policy and student loans 401,621 526,820 483,382
Short-term investments 232,342 280,158 333,850
Dividends on equity securities
common stock, including mutual
fund 16,189 31,245 28,247
------ ------ ------
3,568,158 3,419,421 3,165,393
Less investment expenses 22,847 100,794 166,518
------ ------- -------
$3,545,311 3,318,627 2,998,875
========= ========= =========
(d) Investments on Deposit
In order to comply with statutory regulations, investments were on
deposit with the Insurance Departments of certain states as
follows:
1997 1996 1995
---- ---- ----
Florida $1,727,034 1,718,751 1,735,900
Alabama 100,000 100,000 100,000
South Carolina 304,816 306,028 304,696
Georgia 254,013 255,024 251,193
Indiana 199,317 199,752 -
------- -------- ---------
$2,585,180 2,579,555 2,391,789
========= ========= =========
Certain of these assets, totaling approximately $850,000 and
$650,000 for each of the years ended December 31, 1997 and 1996,
are restricted for the future benefit of policyholders in a
particular state.
46
SOUTHERN SECURITY LIFE INSURANCE COMPANY
Notes to Financial Statements (continued)
4. Deferred policy acquisition costs
Deferred policy acquisition costs at December 31, 1997, 1996 and 1995
consist of the following:
1997 1996 1995
---- ---- ----
Deferred policy acquisition
costs at beginning of year $16,979,612 18,145,111 20,104,624
Policy acquisition costs
deferred:
Commissions 1,204,604 1,030,875 1,418,644
Underwriting & issue costs 450,800 652,868 805,794
Other 414,374 334,300 554,955
Change in unrealized
appreciation (depreciation) (55,084) 181,196 (1,669,164)
------- ------- -----------
2,014,694 2,199,239 1,110,229
Amortization of deferred
policy acquisition costs (3,542,617) (3,364,738) (3,069,742)
---------- ---------- ----------
Deferred policy acquisition
costs at end of year $15,451,689 16,979,612 18,145,111
=========== ========== ==========
5. Property and equipment
Property and equipment consists of the following:
December December
1997 1996
Land $982,027 982,027
Building and improvements 2,169,975 2,173,955
Furniture and equipment 1,057,586 1,019,621
--------- ---------
4,209,588 4,175,603
Less accumulated depreciation 1,539,385 1,389,937
--------- ---------
$2,670,203 2,785,666
========= =========
Depreciation expense for the years ended December 31, 1997, 1996 and
1995 totaled $145,912, $151,950, and $150,213, respectively.
6. Future policy benefits
At December 31, 1997 and 1996, future policy benefits, exclusive of
universal life and flexible term annuities
47
SOUTHERN SECURITY LIFE INSURANCE COMPANY
Notes to Financial Statements (continued)
6. Future policy benefits, continued
consist of the following:
December December
1997 1996
Life insurance $1,103,462 672,913
Annuities 295,525 304,394
Accident & health
insurance 10,044 8,413
------ -----
Total life
insurance policies $1,409,031 985,720
========= =======
Life insurance in-force aggregated approximately $1.2 billion and $1.3
billion at December 31, 1997, and 1996, 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 table used in calculating benefit reserves is the 1965-1970
Basic Select and Ultimate for males.
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 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 based upon the Company's investment yield less 1 percent.
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, 1997, ordinary insurance coverage in excess of $75,000 is
48
SOUTHERN SECURITY LIFE INSURANCE COMPANY
Notes to Financial Statements (continued)
7. Reinsurance, continued
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 only in the
event that the reinsuring company might be unable to meet its obligations
under the reinsurance agreement in force, as the Company remains
primarily liable for such obligations. Under these contracts, the Company
has ceded premium of $432,486, $448,327, and $525,662 included in
reinsurance ceded, and received recoveries of $131,449, $608,355 and
$204,171 included in annuity, death and other benefits for the years
ended December 31, 1997, 1996 and 1995, 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, 1997, 1996 and 1995, the Company ceded
premiums to MEGA of $481,585, $582,346 and $675,770, included in
reinsurance ceded, and received recoveries of $503,159, $367,295 and
$459,090, included in annuity, death and other benefits, respectively.
The funds held by reinsurance treaties with reinsurer of $1,339,927 and
$1,193,366 represent the 18% share of policy loans ceded to the reinsurer
at December 31, 1997 and 1996, respectively.
8. Notes Payable
As of December 31, 1997, 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 note
49
SOUTHERN SECURITY LIFE INSURANCE COMPANY
Notes to Financial Statements (continued)
8. Notes Payable, continued
bears interest at a variable rate per annum payable monthly and expires on
September 18, 2007.
Interest expense relating to these notes payable during the three years
ended December 31, 1997, 1996 and 1995 totaled $0, $12,094, and $26,240,
respectively and is included in net investment income.
9. Note Payable to Related Party
Note payable to related party consists of amounts due on demand to
Consolidare Enterprises, Inc., the Company's majority shareholder. The
note proceeds were obtained in December, 1988 and the note qualifies as
shareholders' equity for statutory accounting purposes in accordance with
Section 628.401 of the Florida Statutes. At December 31, 1997, 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 approval in advance by the Florida Department of Insurance.
Interest expense relating to the balance of note payable to related party
during 1997, 1996 and 1995 aggregated $90,000, $90,000, and $90,000
respectively.
(The remainder of this page intentionally left blank)
50
SOUTHERN SECURITY LIFE INSURANCE COMPANY
Notes to Financial Statements (continued)
10. Income taxes
Total income taxes for the years ended December 31, 1997, 1996, and 1995
were as follows:
1997 1996 1995
---- ---- ----
Net income $54,200 196,000 160,000
Unrealized appreciation
(depreciation) of
investments 160,700 (675) 331,000
------- -------- --------
$214,900 195,325 491,000
======== ======== =======
Income taxes for the years ended December 31, 1997, 1996 and 1995 is
summarized as follows:
1997 1996 1995
---- ------- ------
Current:
Federal $(142,870) 167,700 370,800
State (1,030) 11,400 10,200
----- ------ ------
(143,900) 179,100 381,000
-------- -------- -------
Deferred:
Federal 169,100 14,450 (188,700)
State 29,000 2,450 (32,300)
------ ----- -------
198,100 16,900 (221,000)
------- ------- --------
$54,200 196,000 160,000
====== ======= =======
51
SOUTHERN SECURITY LIFE INSURANCE COMPANY
Notes to Financial Statements (continued)
10. Income taxes, continued
Income tax expense for the years ended December 31, 1997, 1996 and 1995
differs from "expected" tax (computed by applying the U.S. federal income
tax rate to pretax income as a result of the following:
1997 1996 1995
-------- -------- ------
Computed "expected" tax expense $84,800 540,100 446,200
Increase (reduction) in income
taxes resulting from:
Small life insurance
company deduction (76,000) (346,000) (340,200)
Changes in the valuation
allowance for deferred
tax assets, allocated to
income tax expense 11,100 64,900 62,600
(Over) under accrual of
prior year expense 6,100 (82,000) 11,000
State taxes, net of federal
income tax benefit 18,200 9,000 (14,600)
Other, net 10,000 10,000 (5,000)
------ ------ -----
$54,200 196,000 160,000
======= ======= =======
Under tax laws in effect prior to 1984, a portion of a life insurance
company's gain from operations was not currently taxed but was
accumulated in a memorandum "Policyholders' Surplus Account." As a result
of the Tax Reform Act of 1984, the balance of the Policyholders' Surplus
Account has been frozen as of December 31, 1983 and no additional amounts
will be accumulated in this account. However, distributions from the
account will continue to be taxed, as under previous law, if any of the
following conditions occur:
a. The Policyholders' Surplus exceeds a prescribed maximum,
or;
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.
52
SOUTHERN SECURITY LIFE INSURANCE COMPANY
Notes to Financial Statements (continued)
10. Income taxes, continued
At December 31, 1997, 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 1997, 1996 and 1995, AMT exceeded regular tax by
$11,100, $64,900, and $62,600, respectively. At December 31, 1997, the
AMT tax credit available to reduce future regular tax totaled $409,600.
The principal elements of deferred income taxes consist of the following:
1997 1996 1995
-------- --------- -------
Deferred policy acquisition costs $(467,000) (431,500) (155,500)
Future policy benefits 694,000 532,000 (23,000)
Other (28,900) (83,600) (42,500)
------- -------- ------
$198,100 16,900 (221,000)
======= ======== =======
The tax effect of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at
December 31, 1997 and 1996 are presented below:
1997 1996
---------- -------
Deferred tax assets:
Unearned premiums, due to deferral of
"front-end" fee $2,760,000 3,180,000
Policy liabilities and accruals,
principally due to adjustments
to reserves for tax purposes 1,540,000 1,814,000
Deferred policy acquisition costs
related to unrealized appreciation
(depreciation) 81,200 68,900
Other 120,000 141,900
53
SOUTHERN SECURITY LIFE INSURANCE COMPANY
Notes to Financial Statements (continued)
10. Income taxes, continued
1997 1996
---------- -------
Alternative minimum tax credit
carry forwards 409,600 398,500
------- -------
Total gross deferred tax assets 4,910,800 5,603,300
Less valuation allowance (409,600) (398,500)
-------- --------
Net deferred tax assets 4,501,200 5,204,800
--------- ---------
Deferred tax liabilities:
Deferred policy acquisition costs,
principally due to
deferrals (5,178,000) (5,645,000)
Other (31,000) (81,100)
Unrealized appreciation (241,900) (66,800)
-------- -------
Total gross deferred tax liabilities (5,450,900) (5,792,900)
---------- ---------
Net deferred tax (liability) $(949,700) (588,100)
======== ========
The net change in the total valuation allowance for the years ended
December 31, 1997, 1996, and 1995 was an increase of $11,100, $64,900
and $62,000, respectively.
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, 1997.
54
SOUTHERN SECURITY LIFE INSURANCE COMPANY
Notes to Financial Statements (continued)
11. Related party transactions
The Company's general agent, Insuradyne Corporation, is a wholly-owned
subsidiary of Consolidare Enterprises, Inc., which owns approximately
fifty-seven percent (57%) of the Company's outstanding stock. The
balances due (to) from affiliated insurance agency reflected in the
accompanying balance sheets principally represent unearned commission
advances paid to Insuradyne. The Company incurred commission expense to
Insuradyne aggregating $323,303, $344,904 and $422,121, in 1997, 1996,
and 1995, respectively. These amounts are included as components of
acquisition costs deferred and related amortization. Insuradyne incurred
insurance-related expenses aggregating $25,604, $31,703, and $35,271 in
1997, 1996 and 1995, respectively.
12. Earnings per share
The following table sets forth the computation of basic and diluted
earnings per share:
1997 1996 1995
---- ---- ----
Numerator for basic and
diluted Earnings per share:
Net income $195,210 1,392,505 1,114,903
Denominator:
Denominator for basic
earnings per share
weighted average shares 1,907,989 1,907,989 1,907,989
Effective dilutive
securities:
Agent stock options 1,214 0 0
Dilutive potential common shares 1,214 0 0
Denominator for diluted earnings
per share weighted average
shares and assumed
conversions 1,908,203 1,907,989 1,907,989
Basic earnings per share $0.10 0.73 0.58
Diluted earnings per share $0.10 0.73 0.58
55
SOUTHERN SECURITY LIFE INSURANCE COMPANY
Notes to Financial Statements (continued)
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 as of 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.
The first awards were granted in 1997 under this plan. The Company
incurred expenses of approximately $13,000 relating to the Company's
matching number of shares. If the agent, does not purchase the shares
within the designated period, then the agent forfeits their rights to
purchase the shares of common stock as well as the matching number of
shares to be contributed by the Company.
14. Disclosures About Fair Value of Financial Instruments
Statement of Financial Accounting Standards No. 107 Disclosures About
Fair Value of Financial Instruments (SFAS 107) requires the Company to
disclose estimated fair value information. The following methods and
assumptions were used by the Company in estimating fair values of
financial instruments as disclosed herein:
Cash and cash equivalents, short-term investments and policy and student
loans: The carrying amount reported in the balance sheet for these
instruments approximate their fair value.
Investment securities available-for-sale and held-to-maturity: Fair value
for fixed maturity and equity securities is based on quoted market prices
at the reporting date for those or similar investments.
Policyholders' account balances: The fair values for policyholder account
balances are based on their approximate surrender values.
The following table presents the carrying amounts and
56
SOUTHERN SECURITY LIFE INSURANCE COMPANY
Notes to Financial Statements (continued)
14. Disclosures About Fair Value of Financial Instruments
estimated fair values of financial instruments held at December 31, 1997
and 1996. The fair value of a financial instrument is the amount at which
the instrument could be exchanged in a current transaction between
willing parties.
(The remainder of this page intentionally left blank)
57
SOUTHERN SECURITY LIFE INSURANCE COMPANY
Notes to Financial Statements (continued)
14. Disclosures About Fair Value of Financial Instruments,
continued
1997 1996
---------------------- ------------
Carrying Estimated Carrying Estimated
amount fair value amount fair value
Financial assets:
Fixed maturities
held to maturity
(see note 3) $10,501,712 10,631,003 $14,974,962 15,140,919
Fixed maturities
Available for
sale (see note 3) 31,483,324 31,483,324 24,476,239 24,476,239
Equity securities
Available for sale 839,973 839,973 0 0
Policy and student
loans 7,945,381 7,945,381 7,315,809 7,315,809
Short-term invest-
ments 100,000 100,000 4,539,106 4,539,106
Cash and cash
equivalents 2,448,994 2,448,994 206,056 206,056
Financial liabilities:
Policy liabilities-
Policyholders'
account balances 52,335,511 46,514,475 52,347,996 45,274,432
15. Comprehensive Income
In June 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards (SFAS) No. 130, "Reporting
Comprehensive Income." This statement establishes standards for
reporting and display of comprehensive income and its components in a
full set of financial statements. The Company will be required to
reclassify items or other comprehensive income by nature in the
financial statements, and display the accumulated balance of other
comprehensive income separately from retained earnings and additional
paid-in capital in the equity section of the balance sheet. This will
have no impact on net income.
16. Legal proceedings:
Lawsuits against the Company have arisen in the normal
58
SOUTHERN SECURITY LIFE INSURANCE COMPANY
Notes to Financial Statements (continued)
16. Legal proceedings, continued
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.
17. Year 2000
The Company is aware of potential problems all computer systems face
with respect to the year 2000, and has investigated various solutions.
Present plans call for the conversion to be completed by the end of
1998. It is estimated to cost approximately $200,000, which would not
have a material impact on the Company.
Testing for hardware problems will be done during the second quarter of
1999, although the company is not expecting any problems which could not
be solved before December 31, 1999.
59
Schedule I
SOUTHERN SECURITY LIFE INSURANCE COMPANY
Summary of Investments Other Than Investments in Related Parties
December 31, 1997
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 2,500,000 $2,516,052 2,570,000 2,516,052
Public utilities 500,000 506,520 525,000 506,520
Industrial and miscellaneous 6,484,173 6,470,218 6,527,081 6,470,218
Special revenue and special assessment of agencies and
authorities of governments and political
subdivisions 1,000,000 1,008,922 1,008,922 1,008,922
--------- --------- --------- ---------
Total fixed maturities 10,484,173 10,501,712 10,631,003 10,501,712
---------- ---------- ---------- ----------
Fixed maturities available for sale:
U.S. Government and government agencies and authorities 11,700,000 9,301,191 9,474,708 9,474,708
Public utilities 855,000 899,891 917,950 917,950
Industrial and miscellaneous 19,940,000 20,582,001 20,993,849 20,993,849
Special revenue and special assessment of agencies and
authorities of governments and political
subdivisions 97,541 97,307 96,817 96,817
------- ------- ------- -------
32,592,541 30,880,390 31,483,324 31,483,324
---------- ---------- ---------- ----------
Total fixed maturities 43,076,714 $41,382,102 42,114,327 41,985,036
========== ---------- ========== ----------
Equity securities:
Common, including investments in Mutual fund 53,071 800,000 839,973 839,973
====== ------- ======= -------
Policy loans 7,701,020 7,701,020
--------- ---------
Student loans 244,361 244,361
------- -------
Short-term investments 100,000 100,000
--------- ---------
Other invested assets - -
------ ---
Total investments $50,227,483 $50,870,390
========== ==========
See accompanying auditors' report.
60
SOUTHERN SECURITY LIFE INSURANCE COMPANY
Financial Data Schedule
For the periods ending December 31, 1997, 1996 and 1995
YTD YTD YTD
December 31, December 31, December 31,
1997 1996 1995
----------- ----------- --------
Fixed maturities held for sale $31,843,324 24,276,239 21,812,096
Fixed maturities held to
maturity (carrying value) 10,501,712 14,974,962 15,165,395
Fixed maturities held to
maturity (market value) 10,631,003 15,140,919 15,494,540
Investment in equity
securities 839,973 - 1,715,386
Mortgage loans on real estate - - -
Investment in real estate - - -
Total investments 50,870,390 51,319,216 50,186,208
Cash and cash equivalents 2,448,994 206,056 406,752
Reinsurance recoverable on
paid losses 359,688 379,692 514,341
Deferred policy acquisition costs 15,451,689 16,979,612 18,145,111
Total assets 82,142,465 81,809,360 81,872,350
Policy liabilities-future
benefits, losses, claims 1,409,031 985,720 1,050,498
Policy liabilities-unearned
premiums 7,108,662 8,249,190 9,116,890
Policy liabilities-other claims
and benefits 427,649 293,221 191,955
Other policyholder funds 59,686 59,596 57,444
Notes payable, bonds, mortgages,
and similar debt 1,000,000 1,000,000 2,400,553
Preferred stocks mandatory
Redemption - - -
Preferred stocks non-
mandatory redemption - - -
Common stock 1,907,989 1,907,989 1,907,989
Other stockholders equity 4,011,519 4,011,519 4,011,519
Total liabilities and
stockholders equity 82,142,465 81,809,360 81,872,350
Premiums 7,643,650 7,915,019 8,158,938
Net investment income 3,545,311 3,318,627 2,998,875
Realized investment gains
and losses 506,795 869,502 60,237
Other income - - -
Benefits, claims, losses
and settlement expenses 4,307,013 3,812,463 4,048,125
Underwriting acquisition and
insurance expenses-
amortization of deferred
policy acquisition costs 3,542,617 3,364,738 3,069,742
61
SOUTHERN SECURITY LIFE INSURANCE COMPANY
Financial Data Schedule, continued
YTD YTD YTD
December 31, December 31, December 31,
1997 1996 1995
----------- ----------- --------
Underwriting acquisitions and
insurance expense other 3,382,255 3,246,552 2,735,280
Income or loss before taxes 249,410 1,588,505 1,274,903
Income tax expense 54,200 196,000 160,000
Income/Loss continuing
operations 195,210 1,392,505 1,114,903
Discontinued operations - - -
Extraordinary items - - -
Cumulative effect-changes in
accounting principals - - -
Net income 195,210 1,392,505 1,114,903
Earnings per share - basic $.10 .73 .58
Earnings per share - diluted $.10 .73 .58
62
Schedule III
SOUTHERN SECURITY LIFE INSURANCE COMPANY
Supplementary Insurance Information
December 31, 1997, 1996 and 1995
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 investment settlement acquisition operating
cost expenses balances premiums payable revenue income expenses costs expenses
1997 Life
and
annuities $15,451,689 1,409,031 52,335,511 7,108,662 427,649 7,643,650 3,545,311 4,431,474 3,542,617 3,382,255
=========== ========= ========== ========= ======= ========= ========= ========= ========= =========
1996 Life
and
annuities $16,979,612 985,720 52,347,996 8,249,190 293,221 7,915,019 3,318,627 3,813,361 3,364,738 3,246,552
=========== ======= ========== ========= ======= ========= ========= ========= ========= =========
1995 Life
and
annuities $18,145,111 1,050,498 50,624,276 9,116,890 191,955 8,158,938 2,998,875 4,048,125 3,069,742 2,735,280
=========== ========= ========== ========= ======= ========= ========= ========= ========= =========
See accompanying auditors' report.
63
Schedule IV
SOUTHERN SECURITY LIFE INSURANCE COMPANY
Reinsurance
December 31, 1997, 1996 and 1995
Percentage
Ceded to Assumed of amount
other from other assumed
Gross amount companies companies Net amount to net
December 31, 1997:
Life insurance in force $1,026,038,000 337,901,000 532,772,000 1,220,909,000 44%
============== =========== =========== ============= ===
Premiums:
Life insurance 8,055,672 914,071 490,726 7,632,327 6.4%
Accident & health insurance 11,323 - - 11,323 -
------ ----- ----- ------ -
Total Premiums $8,066,995 914,071 490,726 7,643,650 6.4%
========== ======= ======= ========= ====
December 31, 1996:
Life insurance in force $1,165,948,000 386,084,000 537,743,000 1,317,607,000 41%
============== =========== =========== ============= ===
Premiums:
Life insurance 8,415,790 1,030,673 528,636 7,913,753 6.7%
Accident & health insurance 1,274 - - 1,274 -
----- ------- ------- ----- -
Total Premiums $8,417,064 1,030,673 528,636 7,915,027 6.7%
========== ========= ======= ========= ====
December 31, 1995:
Life insurance in force $1,298,205,000 448,382,000 507,552,000 1,357,375,000 37%
============== =========== =========== ============= ===
Premiums:
Life insurance 8,829,073 1,201,432 529,912 8,157,553 7%
Accident & health insurance 1,385 - - 1,385 -
----- ----- ----- ----- -
Total Premiums $8,830,458 1,201,432 529,912 8,158,938 7%
========== ========= ======= ========= ==
Item 9. Change in and disagreements on Accounting and Financial
Disclosure.
Not applicable
65
PART III
Item 10. Directors and Executive Officers of the Company.
(a) Directors. The following table lists the names and ages of all directors of
the Company at December 31, 1997, states the date when service as a director of
the Company began, and lists all other positions or offices with the Company
presently held by each such person.
Director Other Positions &
Name Age Since Offices with Company
Samuel F. Brewer 62 May, 1978 Member, Audit Committee
A. Thomas Frank 73 June, 1986 Member, Executive Committee
Frank A. Hulet 78 May 1978 Chairman, Audit Committee
C. Wesley Johnson 78 May, 1978
Lewis E. Kassis 85 Jan., 1981
Robert L. Martin 56 June, 1979 Member, Audit Committee
Charles W. Mullenix 81 April, 1979 Member, Executive Committee
George Pihakis 72 May, 1978 President & Chief Executive
Officer, Member, Executive
Committee
Ferris Ritchey, Jr. 68 April, 1978 Chairman of the Board,
Chairman Executive Committee
John M. Roehm 44 July, 1996
David C. Thompson 60 April, 1978 Executive Vice President &
Chief Operating Officer,
Secretary, Treasurer
Lloyd C. Zobrist 70 May, 1978 Member, Executive Committee
All Directors serve until the next Annual Meeting of Share holders and
until their respective successors are duly elected and qualified. All of the
Directors named in the table above are stockholders of Consolidare Enterprises,
Inc., which purchased effective control of the Company on May 3, 1978. Except
for such affiliation with Consolidare Enterprises, Inc., there exists no
arrangement or understanding between any Director and any other person or
persons pursuant to which any of such Directors were selected as Directors of
the Company.
66
(b) Executive Officers. The following table lists the names and ages of the
executive officers of the Company, the positions with the Company presently held
by each such officer, and the period during which each has served as such:
Position Commencement
Name Age Held of Service
George Pihakis 72 President & Chief Executive June, 1979
Officer; Director
David C. Thompson 60 Executive Vice President and April, 1978
Chief Operating Officer;
Treasurer; Secretary; Director
Nikki Clark 50 Vice President; Director of July, 1992
Financial Services
Stephen Reck 56 Vice President; Chief Actuary July, 1995
The Company has an executive compensation agreement with George Pihakis,
President and Chief Executive Officer of the Company. The remaining term of the
agreement is automatically extended each year for an additional five year period
unless either party gives notice of termination. The agreement provides for
annual increases in Mr. Pihakis' compensation in such amounts as shall be
determined by the Board of Directors.
At a meeting of the Company's Board of Directors in January of 1993, the
base compensation payable to Mr. Pihakis under the agreement was raised to
$244,800.
Except as set forth herein, the officers of the Company have no definite
terms of office as such; they serve at the pleasure of the Board of Directors.
The Board of Directors customarily elects officers annually.
(c) Business Experience of Officers and Directors. The following is a brief
account of the business experience of each executive officer and Director of the
Company during the past five years or more:
Samuel F. Brewer - Since July of 1990, Mr. Brewer has been the owner of
Brewer Development Corporation, Inc., a food service company. From 1976 to
present, Mr. Brewer has been owner and President of Brewer-Costin Inc.
Insurance. From 1983 to 1989, Mr. Brewer served as the State Executive Director
of the Georgia office of the Agricultural Stabilization and Conservation
Services of the U.S. Department of Agriculture. Mr. Brewer is the brother-in-law
of Ferris S. Ritchey, Jr., a director of the Company.
67
Nikki Clark - Ms. Clark has been employed by the Company since 1988. Since
her employment by the Company, her duties have included responsibility for
policyholder services, data processing services, agent advances and commissions,
agent licensing matters and record keeping. In July of 1992, Ms. Clark was
elected to the office of Vice President and Director of Financial Services for
the Company. Ms. Clark is the daughter of Mr. George Pihakis, the President and
Chief Executive Officer of the Company.
A. Thomas Frank - Mr. Frank was the Chairman of the Board and the President
of Medidentic, Inc., a financial consulting firm for physicians, from 1959 -
1989. Mr. Frank retired from this position in 1989.
Frank A. Hulet - Mr. Hulet served as a consultant to Food- Mills, Inc.
d/b/a Jayhawk Manufacturing Company, a manufacturer of food processing machinery
located in Hutchinson, Kansas until he retired in 1992. From 1977 to 1983, Mr.
Hulet served as Secretary/ Treasurer and General Manager of Jayhawk
Manufacturing Company.
C. Wesley Johnson - For more than five years, Mr. Johnson had been manager
of the Sacramento Field Office of the Fort Worth Division of General Dynamics
Corporation, a diversified aerospace company. Mr. Johnson retired from this
position in 1984.
Lewis E. Kassis - Mr. Kassis has for many years been the Chairman of the
Board and part owner of Wholesale Cash & Carry (Grocers), Sacramento,
California. He is also a partner of Kassis Enterprises, Country Club Lanes,
Kassis Wholesale Co. and an officer of Kassis Building Co.
Robert L. Martin - Mr. Martin is a rancher and cattlebroker. He is the
owner of Robert Lee Martin Ranch and a partner in I. L. Martin Ranch, both of
which are located in Jacksboro, Texas.
Charles W. Mullenix - Dr. Mullenix is an ophthalmologist who has served for
more than five years as President of Charles W. Mullenix and Richard B. O'Grady,
S. C., Ophthalmologists, Glenview, Illinois.
George Pihakis - Mr. Pihakis has served as President and Chief Executive
Officer of the Company since June of 1978. He is also the President of
Insuradyne Corporation. Mr. Pihakis is the father of Ms. Nikki Clark, a Vice
President and the Director of Financial Services for the Company.
Stephen L. Reck - Mr. Reck has been an FSA, Fellow of the Society of
Actuaries, since 1972. He has been with Southern Security since 1993 serving as
the Chief Actuary. His primary responsibility has been developing new products
as the Company expands its marketing efforts to other distribution outlets.
Prior to joining Southern Security he was the President of Coastal States
68
Life Insurance Company. In July of 1995, Mr. Reck was elected to
the office of Vice President and Chief Actuary.
Ferris S. Ritchey, Jr. - Mr. Ritchey, an attorney, is the senior partner in
the law firm of Ritchey & Ritchey, P. A., a position which he has occupied for
more than five years. He is an officer of Bowlo-Mac, Inc., Super Bowl, Inc.,
Stonehenge, Inc., Vestavia Bowl, Inc., and P.R. Leasing Co., Inc. Mr. Ritchey is
the brother-in-law of Samuel F. Brewer, a Director of the Company.
John M. Roehm - Mr. Roehm, RPH, is a pharmacist and President of Fisher
Pharmacy in Defuniak Springs, FL. Mr. Roehm is the son of Charles J. Roehm who
served as a Director of Southern Security for many years.
David C. Thompson - Since April of 1978, Mr. Thompson has served as
Executive Vice President and Chief Operating Officer and Treasurer of the
Company. Since 1982, Mr. Thompson has served as Secretary of the Company. He
also serves as Vice President of Consolidare Enterprises and is Vice President
and Treasurer of Insuradyne Corporation. He is also the President of and a
stock- holder in BBQ Rib Ranch, Inc. Mr. Thompson is a certified public
accountant.
Lloyd C. Zobrist - Mr. Zobrist is a retired general contractor and real
estate developer from Morton, Illinois. He is a partner in Zobrist Development
Co., WRCL, Co., and Cross Creek Development Company and is Secretary/Treasurer
of N. Zobrist & Sons, Inc.
Except as otherwise noted above, no family relationships exist between any
of the Directors or executive officers of the Company.
No officer or Director of the Company presently holds a directorship in any
other company with a class of securities registered pursuant to Section 12 of
the Securities Exchange Act or subject to the requirements of Section 15(d) of
the Securities Exchange Act or any company registered as an investment company
under the Investment Company Act of 1940.
No person named as an officer or Director of the Company has, during the
past five years, filed a petition under the Bankruptcy Code, been convicted of a
crime, or been enjoined from participating in activities related to securities
or engaging in any type of business practice. Neither has any such person been
the subject of any order suspending his right to engage in any securities
related activity or finding any person so named to have violated any Federal or
state securities laws.
(d) Compliance with Section 16(a) of the Exchange Act. The Company has no
class of securities registered pursuant to Section 12 of the Exchange Act.
69
Item 11. Executive Compensation.
(a) Summary Compensation. The following summary compensation table is
provided with respect to the Company's Chief Executive Officer and its Executive
Vice President, who constitute all of the executive officers of the Company
whose total annual salary and bonus exceed $100,000:
SUMMARY COMPENSATION TABLE
Long Term Compensation
Annual Compensation | Awards Awards | Payouts |
| | |
(a) (b) (C) (d) (e) | (f) (g) | (h) | (I)
| |
Other | Securities| |All other
Name and Annual | Restricted Underlying| LTIP | Compen-
Principal Compensation | Stock AwardsOptions/ | Payouts | sation
Position Year Salary ($) Bonus ($) ($) | ($) SARs(#) | ($) | ($)
| | |
President | | |
and Chief | | |
Executive | | |
Officer | | |
| | |
George Pihakis 1997 $244,800 $0.00 $11,674(1) | $0.00 N/A | N/A | N/A
| | |
George Pihakis 1996 $244,800 $0.00 $11,374(1) | $0.00 N/A | N/A | N/A
| | |
George Pihakis 1995 $247,976 $0.00 $9,574(1) | $0.00 N/A | N/A | N/A
| | |
| | |
| | |
| | |
Executive Vice | | |
President | | |
| | |
David C. Thompson 1997 $121,275 $0.00 $14,043(2) | $0.00 N/A | N/A | N/A
| | |
David C. Thompson 1996 $121,275 $0.00 $13,685(2) | $0.00 N/A | N/A | N/A
| | |
David C. Thompson 1995 $114,634 $0.00 $11,770(2) | $0.00 N/A | N/A | N/A
| | |
| | |
| | |
(1) During 1997 this amount included $6,600 paid in the form of a
Director's fee, $550 paid in the form of an Executive Committee Fee,
and $4,524 paid in the form of a car allowance. During 1996 this
amount included $6,300 paid in the form of a Director's fee, $550 paid
in the form of an Executive Committee Fee, $4,524 paid in the form of
a car allowance. During 1995 this amount included $4,800 paid in the
form of a Director's fee, $250 paid in the form of an Executive
Committee Fee, and $4,524 paid in the form of a car allowance.
(2) During 1997 this amount included $6,600 paid in the form of a
Director's Fee, $550 paid in the form of an Executive Committee Fee,
$6,000 paid in the form of a car allowance, and $893 paid
70
in the form of dues at a social club used exclusively for business
purposes. During 1996 this amount included $6,300 paid in the form of
a Director's Fee, $550 paid in the form of an Executive Committee Fee,
$6,000 paid in the form of a car allowance, and $835 paid in the form
of dues at a social club used exclusively for business purposes.
During 1995 this amount included $4,800 paid in the form of a
Director's fee, $250 paid in the form of an Executive Committee fee,
$6,000 paid in the form of a car allowance and $720 paid in the form
of dues at a social club used exclusively for business purposes.
(b) Perquisites. Executive officers of the Company who are employees of the
Company are covered under a group life, group disability, and hospitalization
plan that does not discriminate in favor of officers and that is generally
available to all salaried employees. The Company does not have a pension,
retirement or other deferred compensation plan, or any other similar
arrangement.
(c) Director's Fees and Other Fees. Directors of the Company receive a
Director's fee of $6,600 per year for serving as Directors of the Company. Each
director of the Company also receives the sum of $275.00 for each committee
meeting attended, if such committee meeting is not in conjunction with a meeting
of the Company's Board of Directors held at the same time and place.
(d) Employment Contracts. The Company has an executive compensation agreement
with George Pihakis, President and Chief Executive Officer of the Company. The
remaining term of the agreement is automatically extended each year for an
additional five year period unless either party gives notice of termination. The
agreement provides for annual increases in Mr. Pihakis' compensation in such
amounts as shall be determined by the Board of Directors. The base compensation
payable to Mr. Pihakis under the agreement is $244,800.
(e) Compensation Committee Interlocks and Insider Participation. The Executive
Committee of the Company's Board of Directors makes recommendation to the Board
of Directors concerning the compensation of the Company's executive officers.
Subsequently, the Board of Directors makes all final decisions concerning such
compensation. The Company's Executive Committee consists of Charles W. Mullenix,
Ferris S. Ritchey, Jr., A. Thomas Frank, Lloyd C. Zobrist and George Pihakis,
President and Chief Executive Officer.
(f) Board Compensation Committee Report on Executive Compensation. In
determining what level and type of compensation was made available to the
Company's executive officers during 1997, the Executive Committee and Board of
Directors considered the overall performance of the Company and each officer's
contribution to that performance. Specifically, in determining the compensation
of
71
Mr. Pihakis, the Company's President and Chief Executive Officer, the Executive
Committee and Board of Directors considered his length of employment with the
Company, his experience in the industry, the financial condition of the Company,
payments received by other executive officers holding similar positions and
performing similar duties, and other subjective criteria.
72
Item 12. Security Ownership of Certain Beneficial Owners and
Management.
(a) The following table sets forth, as of December 31, 1997, 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 Consolidare Enterprises, Inc 1,095,496 57.4%
Shares c/o Southern Security Life Direct
Insurance Company
755 Rinehart Road
Lake Mary, FL 32746
Common Capital Indemnity Corp., 142,872 7.5%
Shares George A. Fait Direct
4610 University Ave, Madison, WI
Executive officers and directors of the Company are sharehold ers of
Consolidare Enterprises, Inc., which was the owner of approximately 57% of the
Company's voting securities at December 31, 1997. At December 31, 1997,
approximately 60.8% of the issued and outstanding common shares of Consolidare
Enterprises, Inc. was owned by directors and executive officers of Company. The
following table sets forth information as to the common shares of Company's
parent, Consolidare Enterprises, Inc., beneficially owned by all directors and
executive officers of the Company at December 31, 1997.
Name Number of Shares Percent of Class
Samuel F. Brewer (10) 95,966 2.84%
A. Thomas Frank(1) 75,640 2.24%
Frank A. Hulet(2) 129,180 3.83%
C. Wesley Johnson(3) 109,999 3.26%
Lewis Kassis(4) 293,152 8.68%
Robert L. Martin(5) 122,987 3.64%
Charles W. Mullenix(6) 315,548 9.35%
George Pihakis(7) 167,446 4.96%
73
Name Number of Shares Percent of Class
Ferris S. Ritchey, Jr. 326,870 9.68%
John M. Roehm 194,298 5.75%
David C. Thompson(8) 69,043 2.04%
Lloyd C. Zobrist(9) 153,550 4.55%
All Directors &
Officers 2,053,679 60.8%
(1) Includes 70,645 shares registered in the name of Margaret Jeanne Frank,
his wife.
(2) Shares registered in the name of Frank and his wife Virginia Hulet as
trustee's of the Frank A. & Virginia Hulet Revocable Trust.
(3) Shares registered in the name of Johnson Family Trust.
(4) Shares registered in the name of Lewis and Helen Kassis Trust.
(5) Shares attributed to Mr. Martin are registered in the name of his wife,
Virginia A. Martin.
(6) 240,000 shares attributed to Mr. Mullenix are registered to the Mullenix
Family Partnership. 75,548 shares are registered in the name of Mr.
Mullenix and his wife, Mary Jane Mullenix.
(7) Shares attributed to Mr. Pihakis are registered in the name of his wife,
Dolores Pihakis. Mr. Pihakis disclaims any beneficial ownership of such
shares.
(8) Shares registered in the name of David C. Thompson and his wife,
Patricia M.
(9) 141,799 Shares registered in the name of WRCL Company, of which Mr.
Zobrist is a principal, and 11,751 shares are registered to Lloyd C.
Zobrist, individually.
(10) Shares registered in the name of Samuel F. and his wife, Anna T. Brewer.
In addition to common stock, Consolidare Enterprises, Inc. has
outstanding one additional class of securities, 14.25% Convertible Subordinated
Debentures which are convertible into common shares of Consolidare.
74
Item 13. Certain Relationships and Related Transactions.
Insuradyne Corporation, a wholly-owned subsidiary of Consolidare
Enterprises, Inc., serves as general agent for the Company, pursuant to a
general agency agreement, which is terminable by either party with 30 days
notice. In such capacity, Insuradyne receives a commission on the first year
commissionable premium on certain of the Company's policies as well as a small
renewal commission on certain other policies. In accordance with the Florida
Insurance Code, a copy of the Company's General Agency Agreement with Insuradyne
Corporation was filed with and approved by the Florida Department of Insurance.
Management of the Company believes that the terms of its General Agency
Agreement with Insuradyne are as favorable to the Company as terms which could
be obtained from independent third parties. During 1997, gross com missions in
the amount of $323,303 were earned by Insuradyne Corporation. At December 31,
1997, the Company owed $68,646 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, 1997.
The Company continues to be indebted to its parent, Consolidare
Enterprises, Inc., 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.
On December 31, 1997, approximately 60.8% of the issued and outstanding
stock of Consolidare Enterprises, Inc. was owned by the directors and executive
officers of the Company. See item 12 Security Ownership of Certain Beneficial
Owners and Management.
Ferris S. Ritchey, Jr., a Director and a member of the Executive
Committee, is a member of the law firm of Ritchey & Ritchey, P.A., which serves
as legal counsel to the Company on certain matters.
75
PART IV
Item 14. Financial Statements, Exhibits filed and Reports on Form 8-K.
(a) 1. Financial Statements Page Number
The following financial statements of Southern Security
Life Insurance Company are included in Part II,
Item 8:
Independent Auditors' Report............ 24
Balance Sheets - December 31,
1997 and 1996........................... 25
Statements of Income - years ended
December 31, 1997, 1996 and 1995........ 27
Statements of Shareholders' Equity - years
ended December 31, 1997, 1996 and 1995.. 28
Statements of Cash Flows - years ended
December 31, 1997, 1996 and 1995........ 29
Notes to Financial Statements........... 32
2. Supplemental Schedules.
Required Financial Data - for the years ended December 31,
1997, 1996 and 1995 included in Part II, Item 8:
Schedule I - Summary of Investments -
Other than Investments in Related
Parties................................. 60
Financial Data Schedule................. 61
Schedule III - Supplementary Insurance
Information............................. 63
Schedule IV - Reinsurance............... 64
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.
76
3. Exhibits
Exhibit Number Page Number
3. Articles of Incorporation, as amended, and By-Laws, as
amended (without exhibits) dated September 1994,
incorporated by reference herein from From Exhibit 3(1) of
the Annual Report of the Company filed on Form 10-K for
the
fiscal year ended December 31, 1994..... 89
10. Executive Compensation Agreement between the Company and
George Pihakis (without exhibits) incorporated by
reference herein from Exhibit 10(B) of the Annual Report
of the Company filed on Form 10-K for the fiscal year
ended December 31, 1984................. 90
10.A Revolving Financing Agreement between
the Company and the Student Loan
Marketing Association, dated as of
September 19, 1996...................... 91
10.B Reinsurance Agreement between the Company and United Group
Insurance Company, dated as of December 31, 1992
incorporated by reference herein from Exhibit 10(B) of the
Annual Report of the Company filed on Form 10-K for the
fiscal
year ended December 31, 1992............ 92
10.C Agency Agreement between the Company and Insuradyne
Corporation incorporated by reference herein from Exhibit
10(C) of the Annual Report of the Company filed on Form
10-K for the fiscal year ended
December 31, 1993....................... 93
11. Statement Re Computation of Net Income per
common share............................ 94
20. Definitive proxy materials for the
Annual Meeting of Shareholders held
July 26, 1997.......................... 95
(b) Reports on Form 8-K
None.
77
SIGNATURES
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
By: /s/George Pihakis
George Pihakis
President, Chief Executive
Officer and Director
By: /s/David C. Thompson
David C. Thompson
Executive Vice President
Secretary, Treasurer,
Chief Operating Officer and
Director
Date: April 15, 1998
78
Pursuant to the requirements of the Securities Exchange Act of 1934, this Report
has been signed below by the following Director of the Company on the date
indicated.
SOUTHERN SECURITY LIFE INSURANCE COMPANY
By: /s/Samuel F. Brewer
Samuel F. Brewer (Director)
April 15, 1998
79
Pursuant to the requirements of the Securities Exchange Act of 1934, this Report
has been signed below by the following Director of the Company on the date
indicated.
SOUTHERN SECURITY LIFE INSURANCE COMPANY
By: /s/Alfred T. Frank
Alfred T. Frank (Director)
April 15, 1998
80
Pursuant to the requirements of the Securities Exchange Act of 1934, this Report
has been signed below by the following Director of the Company on the date
indicated.
SOUTHERN SECURITY LIFE INSURANCE COMPANY
By: /s/Frank A. Hulet
Frank A. Hulet (Director)
April 15, 1998
81
Pursuant to the requirements of the Securities Exchange Act of 1934, this Report
has been signed below by the following Director of the Company on the date
indicated.
SOUTHERN SECURITY LIFE INSURANCE COMPANY
By: /s/C. Wesley Johnson
C. Wesley Johnson (Director)
April 15, 1998
82
Pursuant to the requirements of the Securities Exchange Act of 1934, this Report
has been signed below by the following Director of the Company on the date
indicated.
SOUTHERN SECURITY LIFE INSURANCE COMPANY
By: /s/Lewis Kassis
Lewis Kassis (Director)
April 15, 1998
83
Pursuant to the requirements of the Securities Exchange Act of 1934, this Report
has been signed below by the following Director of the Company on the date
indicated.
SOUTHERN SECURITY LIFE INSURANCE COMPANY
By: /s/Robert Lee Martin
Robert Lee Martin (Director)
April 15, 1998
84
Pursuant to the requirements of the Securities Exchange Act of 1934, this Report
has been signed below by the following Director of the Company on the date
indicated.
SOUTHERN SECURITY LIFE INSURANCE COMPANY
By: /s/Dr. Charles W. Mullenix
Dr. Charles W. Mullenix (Director)
April 15, 1998
85
Pursuant to the requirements of the Securities Exchange Act of 1934, this Report
has been signed below by the following Director of the Company on the date
indicated.
SOUTHERN SECURITY LIFE INSURANCE COMPANY
By: /s/Ferris S. Ritchey, Jr.
Ferris S. Ritchey, Jr. (Director)
April 15, 1998
86
Pursuant to the requirements of the Securities Exchange Act of 1934, this Report
has been signed below by the following Director of the Company on the date
indicated.
SOUTHERN SECURITY LIFE INSURANCE COMPANY
By: /s/John M. Roehm
John M. Roehm (Director)
April 15, 1998
87
Pursuant to the requirements of the Securities Exchange Act of 1934, this Report
has been signed below by the following Director of the Company on the date
indicated.
SOUTHERN SECURITY LIFE INSURANCE COMPANY
By: /s/Lloyd C. Zobrist
Lloyd C. Zobrist (Director)
April 15, 1998
88
SOUTHERN SECURITY LIFE INSURANCE COMPANY
EXHIBIT 3
EXHIBITS FILED WITH ANNUAL REPORT ON FORM 10-K
FOR THE YEAR ENDED DECEMBER 31, 1994
89
SOUTHERN SECURITY LIFE INSURANCE COMPANY
EXHIBIT 10
EXHIBITS FILED WITH ANNUAL REPORT ON FORM 10-K
FOR THE YEAR ENDED DECEMBER 31, 1984
90
SOUTHERN SECURITY LIFE INSURANCE COMPANY
EXHIBIT 10.A
REVOLVING FINANCING AGREEMENT BETWEEN
THE COMPANY AND THE STUDENT LOAN
MARKETING ASSOCIATION
91
SOUTHERN SECURITY LIFE INSURANCE COMPANY
EXHIBIT 10.B
REINSURANCE AGREEMENT
BETWEEN THE COMPANY AND
UNITED GROUP INSURANCE COMPANY
EXHIBIT FILED WITH ANNUAL REPORT ON
FORM 10-K FOR THE YEAR ENDED
DECEMBER 31, 1992
92
SOUTHERN SECURITY LIFE INSURANCE COMPANY
EXHIBIT 10.C
AGENCY AGREEMENT BETWEEN THE
COMPANY AND INSURADYNE CORPORATION
EXHIBIT FILED WITH ANNUAL REPORT ON
FORM 10-K FOR THE YEAR ENDED
DECEMBER 31, 1993
93
SOUTHERN SECURITY LIFE INSURANCE COMPANY
EXHIBIT 11
COMPUTATION OF NET INCOME
PER COMMON SHARE
1997 1996 1995
---------- -------- ------
Weighted Average
Shares Outstanding 1,907,989 1,907,989 1,907,989
Net Income $195,210 $1,392,505 $1,114,903
Per Share Amount $.10 $.73 $.58
94
SOUTHERN SECURITY LIFE INSURANCE COMPANY
EXHIBIT 20
DEFINITIVE PROXY MATERIALS FOR THE ANNUAL MEETING
95