10-K 1 0001.txt SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 Form 10-K [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 2000, or [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Transition Period from to Commission File Number 2-35669 Southern Security Life Insurance Company ____________________________________________________ (Exact name of registrant as specified in its Charter) FLORIDA 59-1231733 ___________________________________ _________________________ (State or other jurisdiction (I.R.S. Employer of incorporation or organization) Identification Number) 755 Rinehart Road, Lake Mary, Florida 32746 _____________________________________________ _________________________ (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (407) 321-7113 Securities registered pursuant to Section 12(b) of the Act: Name of each exchange Title of each Class on which registered ____________________ ______________________ None None Securities registered pursuant to Section 12(g) of the Act: Name of each exchange Title of each Class on which registered ___________________ _______________________ None None Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to the filing requirements for the past 90 days. X Yes No Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Company's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] The aggregate market value of the voting stock held by non-affiliates of the Registrant as of March 28, 2001 was approximately $5,962,000. As of March 28, 2001, registrant had issued and outstanding 1,907,989 shares of Common Stock. DOCUMENTS INCORPORATED BY REFERENCE Portions of the definitive Proxy Statement for the Registrant's 2001 Annual Meeting of Stockholders' are incorporated by reference into Part III hereof. PART I Item 1. Business. Southern Security Life Insurance Company (the "Company") is a legal reserve life insurance company authorized to transact business in the states of Alabama, Florida, Georgia, Hawaii, Indiana, Illinois, Kentucky, Louisiana, Michigan, Missouri, Oklahoma, South Carolina, Tennessee and Texas. It was incorporated under Florida law in 1966 and was licensed and commenced business in 1969. The Company will continue the process of seeking authorization to transact business in additional states during 2001. During 2000 approximately 41% of the premium income of the Company was from business in force in Florida, its state of domicile. The Company's only industry segment is the ordinary life, accident and health and annuity business. Effective December 17, 1998, Security National Financial Corporation ("SNFC"), an SEC registrant, acquired 100% of the assets of Consolidare Enterprises, Inc. ("Consolidare") which owned 57.4% of the outstanding shares of the Company. During March 1999, SNFC changed Consolidare's name to SSLIC Holding Company, Inc. The Company at present writes universal life policies with various companion riders as well as a traditional life product. In the past it has written various forms of ordinary life insurance policies and annuity contracts. The Company's accident and health insurance business has never been a significant portion of the Company's business. It does not presently write industrial life or group life insurance other than through its participation as a reinsurer in the Servicemen's Group Life Insurance Program ("SGLI"). In 1996, the Company introduced a new whole life product designed to appeal to the final expense market. The Company introduced its first universal life product in 1986 and currently has two principal universal life products in force. These universal life products offer flexibility to the client as well as tax advantages, both currently and upon the death of the insured. These products allow the Company to better compete in the current market environment. In excess of 15% of the first year premiums collected by the Company in 2000 and 1999, respectively, were universal life products. During 1996, the Company introduced a new series of products designed for the seniors market. This new series targets the needs of senior citizens especially as they plan for their final expenses. These new policies are traditional endowment type policies. Because they are written to a senior market they are designed to accommodate adverse health conditions. Because of the size of the policies they are usually issued with only limited underwriting. The coverage size of the policy is roughly equivalent to the insured's anticipated funeral costs. This new series represented 85% of the first year premiums collected in 2000 and 1999. New field sales representatives are being actively recruited to market the product. The Company is continuing to support its traditional universal life marketing as well. The Company established a lead generation program which has been coupled with a recruiting program for new sales agents to help rebuild the market. This has helped to increase opportunities to expand sales of its universal life products which are designed to provide an insurance program as well as a savings vehicle through the cash values of the policy. The following table provides information (on a statutory basis) concerning the amount and percentage of premium income resulting from the principal lines of insurance written by the Company during the periods indicated: 2000 1999 1998 ____ ____ ____ Per- Per- Per- Amount centage Amount centage Amount centage _______ _______ ______ _______ ______ _______ Life Insurance- Ordinary (1)(2) $7,568,550 91% $8,103,864 92% $7,602,811 91% Individual Annuities (1) 89,623 1% 46,348 1% 90,289 1% Life Insurance- Group (SGLI) 497,070 6% 438,124 5% 460,029 6% Other - Accident & Health 169,203 2% 205,872 2% 158,882 2% $8,324,446 100% $8,794,208 100% $8,312,011 100% (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 2000, 1999, and 1998 premium income for life insurance-ordinary are net of reductions of $923,648, $1,236,735, and $1,329,814, respectively, in ceded premium paid to all reinsurers, including Mega Life. The following table gives information on a generally accepted accounting principles basis concerning operating ratios of the Company for the periods indicated: 2000 1999 1998 ------ ---- ---- Total Net Insurance Revenues $6,698,869 $6,901,546 $7,228,227 Benefit Costs Paid or Provided: Amount $5,109,411 $4,453,564 $4,346,820 Ratio to Net Insurance Revenue 76.3% 64.5% 60.1% Amortization of Deferred Policy Acquisition Expenses: Amount $1,797,320 $3,029,223 $3,484,689 Ratio to Net Insurance Revenue 26.8% 43.9% 48.2% General Insurance Expenses: Amount $3,529,381 $3,261,134 $4,134,686 Ratio to Net Insurance Revenue 52.7% 47.3% 57.2% Income (Loss) Before Income Taxes: Amount $ 198,365 $ 782,126 $ (625,640) Ratio to Net Insurance Revenue 3.0% 11.3% (8.7%) Ratio to Total Revenue and Investment Income 1.9% 6.8% (5.5%) Ratio to Equity 1.2% 5.0% (4.0%) The following table provides information about the Company concerning changes in life insurance in force during the periods indicated (exclusive of acciden- tal death benefits): 2000 1999 1998 (In thousands except lapse ratios) Total life insurance in force at beginning of period: Ordinary Whole Life & Endowment-Participating $ 238 $ 532 $ 381 Ordinary Whole Life & Endowment-Non-Participating 892,962 913,683 1,019,179 Term 3,646 4,799 6,478 Reinsurance Assumed 558,571 548,515 532,772 ---------- ---------- ---------- Total $1,455,417 $1,467,529 $1,558,810 Additions (including re- insurance assumed): Ordinary Whole Life & Endowment-Participating $ -- $ -- $ -- Ordinary Whole Life & Endowment-Non-Participating 60,589 66,591 68,935 Term -- -- -- Reinsurance Assumed 4,121 22,402 21,617 ---------- ---------- ---------- Total $ 64,710 $ 88,993 $ 90,552 Terminations: Death 2,313 2,172 $ 1,605 Lapse and Expiry 22,398 31,418 48,034 Surrender 125,086 67,515 132,184 Other 522 -- 10 ---------- ---------- ---------- Total $ 150,319 $ 101,105 $ 181,833 Life Insurance in force at end of period: Ordinary Whole Life & Endowment-Participating $ 30 $ 238 $ 532 Ordinary Whole Life & Endowment-Non-Participating 732,433 892,962 913,683 Term 78,770 3,646 4,799 Reinsurance Assumed 558,575 558,571 548,515 ---------- ---------- ---------- Total $1,369,808 $1,455,417 $1,467,529 Reinsurance Ceded (210,365) (250,691) (297,913) ---------- ---------- ---------- Total after Reinsurance Ceded $1,159,443 $1,204,726 $1,169,616 ========== ========== ========== Lapse Ratio (Reflecting termina- tion by surrender and lapse; ordinary life insurance only): 16.1% 9.1% 17.4% The Company invests and reinvests portions of its funds in securities which are permitted investments under the laws of the State of Florida, and part of its revenue is derived from this source. Generally, securities comprising permitted investments include obligations of Federal, state and local governments; corporate bonds and preferred and common stocks; real estate mortgages and certain leases. The following table summarizes certain information regarding the Company's investment activities: Average Gross Net Fiscal Investment Investment Investment Net Year Assets (1) Income(2) Income (3) Yield (4) ------ ---------- ---------- ----------- --------- 2000 $50,444,329 $3,959,061 $3,935,607 7.80% 1999 $50,221,950 $3,924,271 $3,909,373 7.78% 1998 $52,227,057 $3,599,547 $3,587,147 6.87% (1) Computed by summing the beginning and ending investment balances and dividing by 2. (2) Excludes investment gains and losses. (3) Net of investment expense and before income taxes. (4) Computed on an annualized basis. Represents ratio of net investment income to average invested assets. The Company continues its activities as a qualified lender under the Federal Family Educational Loan Program. Through this program the Company makes various types of student and parent loans available. All student loans made by the Company are guaranteed by the Federal Government. As it has in the past, the Company sells these student loans on a periodic basis to the Student Loan Marketing Association ("SLMA") thereby keeping these funds liquid. The Company presently sells its policies on a general agency basis through a field force consisting of approximately 937 agents. All such agents are licensed as agents of, and sell for, the Company and are independent contractors who are paid exclusively on a commission basis for sales of the Company's policies. Some of the Company's agents are part-time insurance agents. Most of the Company's agents are associated with Insuradyne Corporation, a wholly-owned subsidiary of Security National Financial Corporation. See "Certain Relationships and Related Transactions" in item 13, Part III of this Report. Effective January 1, 1999, the Company entered into an Administrative Services Agreement with its ultimate parent Security National Financial Corporation (Security National). Under the terms of the Administrative Services Agreement, all of the Company's employees became employees of Security National. Administrative functions previously performed by the Company are now being furnished to the Company under this Agreement. The Company will pay to Security National $250,000 per month or $3 million per year for the Administrative services. Section 624.408 of the Florida Statutes requires a stock life insurance company to maintain minimum surplus on a statutory basis at the greater of $1,500,000 or four percent (4%) of total liabilities. The Company's required statutory minimum surplus calculated in accordance with this section is approximately $1,858,000. 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, 2000, the Company had statutory capital and surplus of $8,405,211, well in excess of the required minimum. The Risk-Based Capital for Life and/or Health Insurers Model Act (the "Model Act") was adopted by the National Association of Insurance Commissioners (NAIC) in 1992. The main purpose of the Model Act is to provide a tool for insurance regulators to evaluate the capital resources of insurers as related to the specific risks which they have incurred and is used to determine whether there is a need for possible corrective action. The Model Act or similar regulations may have been or may be enacted by the various states. The Model Act provides for four different levels of regulatory action, each of which may be triggered if an insurer's Total Adjusted Capital is less than a corresponding "level" of Risk-Based Capital ("RBC"). The "Company Action Level" is triggered if an insurer's Total Adjusted Capital is less than 200% of its "Authorized Control Level RBC" (as defined in the Model Act), or less than 250% of its Authorized Control Level RBC and the insurer has a negative trend ("the Company Action Level"). At the Company Action Level, the insurer must submit a comprehensive plan to the regulatory authority of its state of domicile which discusses proposed corrective actions to improve its capital position. The "Regulatory Action Level" is triggered if an insurer's Total Adjusted Capital is less than 150% of its Authorized Control Level RBC. At the Regulatory Action Level, the regulatory authority will perform a special examination of the insurer and issue an order specifying corrective actions that must be followed. The "Authorized Control Level" is triggered if an insurer's Total Adjusted Capital is less than 100% of its Authorized Control Level RBC, and at that level the regulatory authority is authorized (although not mandated) to take regulatory control of the insurer. The "Mandatory Control Level" is triggered if an insurer's Total Adjusted Capital is less than 70% of its Authorized Control level RBC, and at that level the regulatory authority must take regulatory control of the insurer. Regulatory control may lead to rehabilitation or liquidation of an insurer. Based on calculations using the NAIC formula as of December 31, 2000, the Company was well in excess of all four of the control levels listed. The industry in which the Company is engaged is highly competitive. There are in excess of 850 life insurance companies licensed in Florida, where a substantial amount of the Company's premium income is produced, and there are comparable numbers of insurance companies licensed in Alabama, Georgia, Hawaii, Indiana, Illinois, Kentucky, Louisiana, Michigan, Missouri, Oklahoma, South Carolina, Tennessee and Texas. Many of the Company's competitors have been in business for longer periods of time, have substantially greater financial resources, larger sales organizations, and have broader diversification of risks. A large number of the Company's competitors engage in business in many states and advertise nationally while the Company conducts its business on a regional basis. The Company is not a significant factor in the life insurance business in any state where the Company does business. The states of Alabama, Florida, Georgia, Hawaii, Illinois, Indiana, Kentucky, Louisiana, Michigan, Missouri, Oklahoma, South Carolina, Tennessee and Texas require that insurers secure and retain a license or a certificate of authority based on compliance with established standards of solvency and demonstration of managerial competence. The Company, like other life insurers, is subject to extensive regulation and supervision by state insurance regulatory authorities. Such regulation relates generally to such matters as minimum capitalization, the nature of and limitations on investments, the licensing of insurers and their agents, deposits of securities for the benefit and protection of policyholders, the approval of policy forms and premium rates, periodic examination of the affairs of insurance companies, the requirement of filing annual reports on a specified form and the provision for various reserves and accounting standards. The Company reinsures or places a portion of its insured risks with other insurers. Reinsurance reduces the amount of risk retained on any particular policy and, correspondingly, reduces the risk of loss to the Company, thus giving it greater financial stability. Reinsurance also enables the Company to write more policies and policies in larger amounts than it would otherwise consider prudent. On the other hand, reinsurance potentially reduces earnings, since a portion of the premiums received must be paid to the insurers assuming the reinsured portion of the risk. The Company currently cedes its new reinsurance to Businessmen's Assurance Company ("BMA") and the Reinsurance Company of Hannover, both of which are unaffiliated reinsurers. Under the terms of the reinsurance agreements, the Company cedes all risks in excess of the Company's current retention limits. The Company currently retains a maximum of $75,000 on any one life and lesser amounts on substandard risks. Reinsurance for policy amounts in excess of the Company's retention limits is ceded on a renewable term basis, under which the amount reinsured normally decreases annually by the amount of increase in the policy reserve. In addition, the Company has coinsurance agreements with several insurers, under which premiums are shared based upon the share of the risk assumed. The Company remains directly liable to policyholders for the full amount of all insurance directly written by it, even though all or a portion of the risk is reinsured. Reinsurers, however, are obligated to reimburse the Company for the reinsured portion of any claims paid. Consequently, if any reinsurer becomes insolvent or is otherwise unable to make such reimbursement, the Company would suffer an unexpected loss. The Company has no reason to believe that any of its reinsurers will be unable to perform their obligations under existing reinsurance agreements. On December 31, 1992, the Company entered into a Coinsurance Reinsurance Agreement with United Group Insurance Company ("UGIC"), now Mega Life. In this agreement, UGIC agreed to indemnify and the Company agreed to transfer risk to UGIC in the amount of 18% of all universal life premium paying polices which were in force on December 31, 1992. Mega Life is an A rated company with A.M. Best and is an authorized reinsurer in the State of Florida. As a result of the 1992 agreement, the Company will continue to pay reinsurance premiums to Mega Life while receiving ceding commissions. As a part of the coinsurance agreement, Mega Life agreed to share in the expenses of death claims, surrenders, commissions, taxes and the funding of policy loans. The Company does not assume any reinsurance at the present time other than its minor participation in Servicemembers' Group Life Insurance and other small blocks of business. For reporting to state regulatory authorities the Company is required to establish policy benefit and other reserves which are calculated in accordance with statutory requirements and standards of actuarial practice and established at amounts which, with additions from premiums to be received and assumed interest on policy reserves compounded annually, are believed to be sufficient to meet policy obligations as they mature. Life reserves for the Company are based upon the Commissioner's 1958 and 1980 Standard Ordinary Table of Mortality, with interest on policies computed at 3, 3-1/2, 4 or 4-1/2%. Annuity reserves are based on the 1937 Standard Annuity Table, with interest on policies computed at 3-1/2 or 4%. Reserves on the annuity portion of the Company's deposit term policies are computed on the accumulation method. Reserves for universal life policies, which comprise most of the Company's insurance in force, have been valued by using the CRVM method. In preparing financial statements in accordance with generally accepted accounting principles, the cost of insurance, expense charges and surrender charges on universal life products are recognized as revenue. For "Annuity Contracts" with flexible terms, amounts received from policyholders are not recognized as revenue but are recorded as deposits in a manner similar to interest-bearing instruments. Accumulations on these universal life and annuity contracts are held as "Policyholders' Account Balances." For all other policies (primarily whole-life) premiums are recorded as revenue and reserves are calculated using the net level premium method. Accumulation values for these types of policies are held as benefit reserves. See "Future Policy Benefits" in Note 1 of the Notes to Financial Statements included in this report. The Company maintains its own policy files, prepares its own policy forms (with the assistance of its consulting actuaries), selects risks, calculates premiums, prepares premium notices, preauthorized checks and commission statements, and maintains all of its accounting records. The Company is not affected by Federal, state or local provisions relating to discharge of materials into the environment. The Company has not spent a material amount of money during the last three fiscal years on research and development activities. The business of the Company is not seasonal in nature and is not dependent on the sources and availability of raw materials. The business of the Company is not dependent upon a single customer or a few customers, and no material portion of the Company's business is subject to renegotiation of profits or termination at the election of the Government. Item 2. Properties. -------------------- The Company's corporate headquarters is located in a two story office building in Lake Mary, Florida, which is owned by the Company. The Company occupies approximately one-half of the second floor of the building. Approximately 38% of the remaining rentable space is leased as of December 31, 2000. Item 3. Legal Proceedings. --------------------------- An action was brought against the Company in July 1999 by Dorothy Ruth Campbell in the Circuit Court of Escambia County, Alabama. The action arises out of a denial of coverage under a $10,000 insurance policy. The claims are for breach of contract, bad faith and fraudulent misrepresentation. In the action, Campbell seeks compensatory and punitive damages plus interest. The Company has filed its response to the complaint and intends to vigorously defend the matter. An action was brought against the Company in late 1999 by Larry Boyd in the Circuit Court of Jefferson County, Alabama. The action involves the alleged purchase by Boyd and his deceased wife of two college funds with respective death benefits of $58,454 and $58,556 for Boyd's two sons. The allegations in the complaint include an alleged representation by the Company through its sales agent that when Boyd's sons, the insureds, reached college age they would receive monthly payments for college. Boyd further contends that he does not have the college funds promised to him, and suffered mental anguish and emotional distress. The claims are based on fraud, misrepresentation and negligence by the Company in hiring, training and supervising the sales agent. Boyd seeks compensatory and punitive damages, plus costs. The complaint was responded to and discovery is in progress. The Company intents to vigorously defend the action. An action was brought against the Company in February 2001 by Willow Newberry in the County Court at Law No. 1, Grayson County, Texas. The action involves the denial of coverage under a $10,000 insurance policy. The complaint seeks recovery of the policy amount, statutory penalties, exemplary damages, attorney's fees and prejudgment and post judgment interest. The Company is in the process of evaluating the case and preparing an answer to the complaint. The Company intends to vigorously defend the case. The Company is not a party to any other legal proceedings outside the ordinary course of the Company's business or to any other legal proceedings which, if adversely determined, would have a material adverse effect on the Company or its business. Item 4. Submission of Matters to a Vote of Security Holders. ------------------------------------------------------------------------------- During the fourth quarter of the Company's fiscal year, no matter was submitted to a vote of security holders. PART II Item 5. Market for the Company's Common Stock and Related Stockholder Matters. ------------------------------------------------------------------------------- (a) Principal Market and Stock Price. The principal market on which the Company's common stock is traded is the over-the-counter market. Trading information with respect to the Company's shares is available through the National Association of Securities Dealers Automated Quotation (NASDAQ) System under the symbol SSLI. The table below presents the high and low market prices for the Company's common stock during the calendar quarters indicated, as quoted in the NASDAQ system. The quotations represent prices between dealers in securities and do not include retail markups, markdowns or commissions and do not necessarily represent actual transactions. QUARTER ENDED ------------------------------------------------------------------------------- 2000 1999 ------------------------------------------------------------------------------- Mar.31 Jun.30 Sep.30 Dec.31 Mar.31 Jun.30 Sep.30 Dec.31 ------ ------ ------ ------ ------ ------ ------ ------ Common Shares: High 5.00 5.00 4.69 4.38 3.81 4.22 4.75 4.94 Low 4.66 4.00 4.00 3.50 3.75 4.22 4.75 4.94 (b) Approximate Number of Holders of Common Stock. There were 1,299 holders of record of the Company's Common Stock at December 31, 2000. (c) Dividends. The Company has paid no cash dividends to stockholders during the past two years, and it is not anticipated that any cash dividends will be paid at any time in the foreseeable future. The payment of dividends by the Company is subject to the regulation of the State of Florida Department of Insurance. Under such regulation an insurance company may pay dividends, without prior approval of the State of Florida Department of Insurance, equal to or less than the greater of (a) 10% of its accumulated capital gains (losses) and accumulated operating income (losses) (i.e. unassigned surplus) or (b) certain net operating profits (losses) and realized capital gains (losses) of the Company, as defined in the applicable insurance statutes. In no case can such dividends be paid if the Company will have less than 115% of the minimum required statutory surplus as to policyholders after the dividend is paid. The maximum amount which the Company could pay as a dividend during 2001 pursuant to such regulation is approximately $92,200. Item 6. Selected Financial Data ----------------------------------- The following table presents selected financial data (on a GAAP basis) concerning the Company and its financial results during the periods indicated.
YEARS ENDED DECEMBER 31, ------------------------ 2000 1999 1998 1997 1996 --------- ------- ------- -------- ------- Revenues: Life insurance premiums and policy charge $ 6,698,869 $ 6,901,546 $7,228,227 $7,643,650 $7,915,027 Net investment income 3,935,607 3,909,373 3,587,147 3,545,311 3,318,627 Realized Gain (loss) on investments -- -- 525,181 506,795 869,502 Other revenue, net -- 715,128 -- -- -- ----------- ----------- ----------- ------------ ------------ Total Revenue 10,634,476 11,526,047 11,340,555 11,695,756 12,103,156 Benefits, Losses & Expenses: Insurance living benefits 2,243,331 2,614,754 2,483,197 2,459,638 2,420,021 Insurance death benefits 1,549,116 1,917,134 1,529,294 1,847,375 1,398,541 Increase (decrease) in policy reserves 1,316,964 (78,324) 334,329 124,461 (5,201) Amortization of deferred policy acquisition costs 1,797,320 3,029,223 3,484,689 3,542,617 3,364,738 Commissions and general expenses 3,529,381 3,261,134 4,134,686 3,472,255 3,336,552 ----------- ----------- ----------- ----------- ------------ Total expenses 10,436,112 10,743,921 11,966,195 11,446,346 10,514,651 Income (loss) before income taxes 198,365 782,126 (625,640) 249,410 1,588,505 Income tax expense (benefit) 38,105 150,168 (241 907) 54,200 196,000 ------------ ------------ ------------- ------------- ------------ NET INCOME (LOSS) $ 160,260 $ 631,958 $ (383,733) $ 195,210 $ 1,392,505 -=========== ============ ============= ============= ============ Weighted average number of shares outstanding (basic and diluted) 1,907,989 1,907,989 1,907,989 1,907,989 1,907,989 ----------- ----------- ------------- ------------- ------------ Basic income (loss) per common share $0.08 $.33 $(.20) $.10 $.73 ----- ---- ----- ---- ---- Diluted income (loss) per common share $0.08 $.33 $(.20) $.10 $.73 ----- ---- ----- ---- ---- Shareholders' Equity $ 16,198,535 $ 15,637,320 $ 15,912,106 $ 16,132,018 $ 15,661,588 ============= ============ ============= ============== ============ Shareholders' equity per common share $8.49 $8.20 $8.34 $8.45 $8.20 ===== ===== ===== ===== ===== Assets $ 77,125,931 $ 77,208,941 $ 81,205,193 $ 82,142,465 $ 81,809,360 ------------- ------------ -------------- -------------- ----------- Life Insurance: Insurance in force $1,369,808,000 $1,455,417,000 $1,467,529,000 $1,558,810,000 $1,703,650,000 -------------- -------------- -------------- -------------- -------------- Individual insurance issued during current year $ 64,710,000 $ 66,591,000 $ 68,935,000 $ 82,390,000 $ 121,646,000 ------------ -------------- -------------- -------------- -------------- 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 ===== ===== ===== ===== =====
Item 7. Management's discussion and analysis of financial condition and results of operation. Overview. This analysis of the results of operations and financial condition of Southern Security Life should be read in conjunction with the Selected Financial Data and Financial Statements and Notes to the Financial Statements included in this report. In recent years, the Company has primarily issued two types of insurance products: universal life and final expense products. Universal life provides insurance coverage with flexible premiums, within limits, which allow policyholders to accumulate cash values. The accumulated cash values are credited with tax-deferred interest, as adjusted by the Company on a periodic basis. Deducted from the cash accumulations are administrative charges and mortality costs. Should a policy surrender in its early years, the Company assesses a surrender fee against the cash value accumulations based on a graded formula. Final expense products are traditional endowment type insurance policies written for the senior market. Because the products are written to a senior market they are designed to accommodate adverse health conditions. Because of the size of the policies, the products are usually issued with only limited underwriting. The coverage size of the policy is roughly equivalent to the insured's anticipated funeral costs. An additional source of income to the Company is investment income. The Company invests those funds deposited by policyholders of universal life and annuity products in debt and equity securities, mortgage loans, and warehouse mortgage loans on a short-term basis before selling the loans to investors in accordance with the requirements and laws governing life insurance companies, in order to earn interest and dividend income, a portion of which is credited back to the policyholders. Interest rates and maturities of the Company's investment portfolio play an important part in determining the interest rates credited to policyholders. Product profitability is affected by several different factors, such as mortality experience (actual versus expected), interest rate spreads (excess interest earned over interest credited to policyholders) and controlling policy acquisition costs and other costs of operation. The results of any one reporting period may be significantly affected by the level of death claims or other policyholder benefits incurred due to the Company's relatively small size. Results of Operations 2000 Compared to 1999 Total revenues decreased by $892,000, or 7.7%, to $10,634,000 for fiscal year 2000 from $11,526,000 for fiscal year 1999. Contributing to this decrease in total revenues was a $203,000 decrease in net insurance revenues and a $715,000 increase in other revenue. Net insurance revenues decreased by $203,000, or 2.9%, to $6,699,000 for fiscal year 2000, from $6,902,000 for fiscal year 1999. This decrease was primarily the result of a change in the sales mix of the Company's insurance products. Since March 1998, the sales of the Company's funeral plan products have been greater than the universal life products. The universal life products were for greater face amounts than the funeral plan products. Consequently, the insurance revenues from final expense products were less than those from universal life products. Net investment income increased by $26,000, or .7%, to $3,936,000 for fiscal year 2000 from $3,909,000 for fiscal year 1999. Investment yield slightly increased for the fiscal year 2000 from 7.78% in 1999 to 7.8% in 2000. There was no other revenue for fiscal year 2000, as compared to $715,000 in other revenue in 1999. The amount of other revenue was the result of a settlement from insurance claims filed for the recovery of the costs to litigate a case against a former officer of the Company. Benefits and claims increased by $655,000, or 14.7%, to $5,109,000 for fiscal year 2000, from $4,454,000 for the comparable period in 1999. The increase was primarily due to an increase in traditional life reserves as a result of additional policies in force of traditional life products. The amortization of deferred policy acquisition costs decreased by $1,232,000 or 40.7%, to $1,797,000, for fiscal year 2000, from $3,029,000 for the comparable period in 1999. The decrease in amortization expense was primarily due to adjusting the amortization rate to the Company's current assumptions. Operating expenses increased by $269,000, or 8.3% to $3,530,000 for fiscal year 2000 from $3,261,000 for the same period in 1999. The increase was primarily due to increased marketing and home office building expenses. 1999 Compared to 1998 Total revenues increased by $186,000, or 1.6%, to $11,526,000 for fiscal year 1999 from $11,340,000 for fiscal year 1998. Contributing to this increase in total revenues was a $322,000 increase in net investment income and a $715,000 increase in other revenue. Net insurance revenues decreased by $326,000, or 4.5%, to $6,902,000 for fiscal year 1999, from $7,228,000 for fiscal year 1998. This decrease was primarily the result of a change in the sales mix of the Company's insurance products. Since March 1998, the sales of the Company's funeral plan products have been greater than the universal life products. The universal life products were for greater face amounts than the funeral plan products. Consequently, the insurance revenues from final expense products were less than those from universal life products. Net investment income increased by $322,000, or 9.0%, to $3,909,000 for fiscal year 1999 from $3,587,000 for fiscal year 1998. The increase was primarily due to a rental income being paid to the Company from Security National Financial Corporation, the Company's ultimate parent under the terms of the Administrative Services Agreement entered into by the Company on January 1, 1999. See Note 11 to the Notes to Financial Statements included in this report. In addition the Company was able to increase its yield by investing in mortgage loans. Realized gains on investments decreased from $525,000 in fiscal year 1998 to no gains in fiscal year 1999. The gains in 1998 were the result of the Company trading its available-for-sale securities. The Company did not engage in the trading of any of its available-for-sale securities in 1999. Other revenue totaled $715,000 for fiscal year 1999, as compared to no other revenue for the same period in 1998. This amount was the result of a settlement from insurance claims filed for the recovery of the costs to litigate a case against a former officer of the Company. Benefits and claims increased by $107,000, or 2.5%, to $4,454,000 for fiscal year 1999, from $4,347,000 for the comparable period in 1998. The increase was primarily due to additional death claims. The amortization of deferred policy acquisition costs decreased by $456,000, or 13.1%, to $3,029,000, for fiscal year 1999, from $3,485,000 for the comparable period in 1998. The decrease in amortization expenses was primarily due to the reduction in net insurance revenues. Operating expenses decreased by $874,000, or 21.1% to $3,261,000 for fiscal year 1999 from $4,135,000 for the same period in 1998. This reduction was primarily due to the lump sum payment to the Company's former President in December 1998 in connection with the acquisition of Company's parent company. Liquidity and Capital Resources. The Company attempts to match the duration of invested assets with its policyholder liabilities. The Company may sell investments other than those held- to-maturity in the portfolio to help in this timing; however, to date, that has not been necessary. The Company purchases short-term investments on a temporary basis to meet the expectations of short-term requirements of the Company's products. The Company's investment philosophy is intended to provide a rate of return which will persist during the expected duration of policyholder liabilities regardless of future interest rate movements. The Company's investment policy is to invest predominantly in fixed maturity securities, mortgage loans, and warehouse mortgage loans on a short-term basis before selling the loans to investors in accordance with the requirements and laws governing life insurance companies. Bonds owned by the Company amounted to $28,742,000 as of December 31, 2000 as compared to $27,930,000 as of December 31, 1999. This represents 60.6% and 59.8% of the total investments as of December 31, 2000 and December 31, 1999, respectively. Generally, all bonds owned by the Company are rated by the National Association of Insurance Commissioners. Under this rating system, there are nine categories used for rating bonds. At December 31, 2000, and at December 31, 1999, the Company did not have investments in bonds in rating categories three through nine, which are considered non-investment grade. If market conditions were to cause interest rates to change, the market value of the fixed income portfolio (approximately $30.939 million) could change by the following amounts based on the respective basis point swing (the change in market values were calculated using a modeling technique): (in millions of dollars) -200bps -100bps +100bps +200bps ----------------------- -------- ------- -------- ------- Change in Market Value $2.023 $.974 $(.905) $(1.748) The Company has no other financial instruments which would be materially susceptible to market risk. The Company's insurance operations have historically provided adequate positive cash flow enabling the Company to continue to meet operational needs as well as increase its investment-grade securities to provide ample protection for policyholders. The Company has classified certain of its fixed income securities as available for sale, with the remainder classified as held to maturity. However, in accordance with Company policy, any such securities purchased in the future will be classified as held to maturity. Business conditions, however, may develop in the future which may indicate a need for a higher level of liquidity in the investment portfolio. In that event the Company believes it could sell short- term investment grade securities before liquidating higher-yielding longer term securities. The Company is subject to risk based capital guidelines established by statutory regulators requiring minimum capital levels based on the perceived risk of assets, liabilities, disintermediation, and business risk. At December 31, 2000 and December 31, 1999, the Company exceeded the regulatory criteria. Lapse rates measure the amount of insurance terminated during a particular period. The Company's lapse rate for life insurance in 2000 was 16.1% as compared to a rate of 9.1% for 1999. Effective December 17, 1998, the Company entered into an Administrative Services Agreement with Security National Financial Corporation ("SNFC"). Under the terms of the agreement, SNFC has agreed to provide the Company with certain defined administrative and financial services, including accounting services, financial reports and statements, actuarial, policyholder services, underwriting, data processing, legal, building management, marketing advisory services and investment services. In consideration for the services to be provided by SNFC, the Company shall pay SNFC an administrative services fee of $250,000 per month, provided, however, that such fee shall be reduced to zero for so long as the capital and surplus of the Company is less than or equal to $6,000,000, unless the Company and SNFC otherwise agree in writing and such agreement is approved by the Florida Department of Insurance. The administrative services fee may be increased, beginning on January 1, 2001, to reflect increases in the Consumer Price Index, over the index amount as of January 1, 2000. The Administrative Services Agreement shall remain in effect for an initial term expiring on December 16, 2003. The term of the agreement may be automatically extended for additional one-year terms unless either the Company or SNFC shall deliver a written notice on or before September 30, of any year stating to the other its desire not to extend the term of the agreement. However, in no event can the agreement be terminated prior to December 16, 2003. It is anticipated that the Company will realize a reduced level of general and administrative costs in the future as a result of the Administrative Services Agreement. Student loans are a service the Company has historically made available to the public as well as an investment. While the Company anticipates the seasonal demand for student loan funds and the subsequent sale of such loans to the Student Loan Marketing Association (SLMA), there are times when additional funds are required to meet demand for student loans until such time as the sale thereof to SLMA can be completed. In 1997 the Company renewed its $5,000,000 line of credit with SLMA until 2007 in order to meet these seasonal borrowing requirements. The Company made no draws against this line of credit through December 31, 2000. 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 2000 and 1999. The Company has leased approximately 38% of the available space in its principal office building and does not anticipate significant capital expenditures to the rental space. The Private Securities Litigation Reform Act of 1995 (the "Act") provides a "safe harbor" for forward-looking statements to encourage companies to provide prospective information about their businesses without fear of litigation so long as those statements are identified as forward-looking and are accompanied by meaningful cautionary statements identifying important factors that could cause actual results to differ materially from those projected in such statements. The company desires to take advantage of the "safe harbor" provisions of the Act. This Annual Report of Form 10-K contains forward-looking statements, together with related data and projections, about the Company's projected financial results and its future plans and strategies. However, actual results and needs of the Company may vary materially from forward-looking statements and projections made from time to time by the Company on the basis of management's then-current expectations. The business in which the Company is engaged involves changing and competitive markets, which may involve a high degree of risk, and there can be no assurance that forward-looking statements and projections will prove accurate. Factors that may cause the Company's actual results to differ materially from those contemplated or projected, forecast, estimated or budgeted in such forward looking statements include among others, the following possibilities: (i) heightened competition, including the intensification of price competition, the entry of new competitors, and the introduction of new products by new and existing competitors; (ii) adverse state and federal legislation or regulation, including decreases in rates, limitations on premium levels, increases in minimum capital and reserve requirements, benefit mandates and tax treatment of insurance products; (iii) fluctuations in interest rates causing a reduction of investment income or increase in interest expense and in the market value of interest rate sensitive investment; (iv) failure to obtain new customer, retain existing customers or reductions in policies in force by existing customers; (v) higher service, administrative, or general expense due to the need for additional advertising, marketing, administrative or management information systems expenditures; (vi) loss or retirement of key executives or employees; (vii) increases in medical costs; (viii) changes in the Company's liquidity due to changes in asset and liability matching; (ix) restrictions on insurance underwriting based on genetic testing and other criteria; (x) adverse changes in the ratings obtained by independent rating agencies; (xi) failure to maintain adequate reinsurance; (xii) possible claims relating to sales practices for insurance products and claim denials and (xiii) adverse trends in morality and morbidity. SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities, was issued in June 1998 and amended by SFAS No. 138, issued in June 2000. The requirements of SFAS No. 133, as amended, will be effective for the Company in the first quarter of the fiscal year beginning January 1, 2001. The standard establishes accounting and reporting standards for derivative instruments embedded in other contracts and for hedging activities. Under the standard, certain contracts that were not formerly considered derivatives may now meet the definition of a derivative. The Company has determined SFAS 133 to have no impact on the Company's financial position and results of operations because the Company has no derivative activity. SFAS No. 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities, was issued in September 2000. SFAS No. 140 is a replacement of SFAS No. 125, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities. Most of the provisions of SFAS No. 125 were carried forward to SFAS No. 140 without reconsideration by the Financial Accounting Standards Board (FASB), and some were changed only in minor ways. In issuing SFAS No. 140, the FASB included issues and decisions that had been addressed and determined since the original publication of SFAS No. 125. SFAS No. 140 is effective for transfers after March 31, 2001. Management does not expect the adoption of SFAS No. 140 to have a significant impact on the financial position or results of operations of the Company. Item 8. Financial Statements and Supplementary Data. ----------------------------------------------------- The following financial statements of Southern Security Life Insurance Company are included in Part II, Item 8: Page Number Independent Auditors' Report............. . . . . . . . . . . . . . . . 16 Balance Sheet-December 31, 2000 and 1999. . . . . . . . . . . . . . . . 17 Statement of Operations - years ended December 31, 2000, 1999 and 1998......... . . . . . . . . . . . . . . . 19 Statement of Shareholders' Equity-years ended December 31, 2000, 1999 and 1998... . . . . . . . . . . . . . . . 20 Statement of Cash Flows - years ended December 31, 2000, 1999 and 1998......... . . . . . . . . . . . . . . . 21 Notes to Financial Statements............ . . . . . . . . . . . . . . . 23 Report of Independent Auditors Board of Directors & Shareholders Southern Security Life Insurance Company: We have audited the accompanying balance sheet of Southern Security Life Insurance Company as of December 31, 2000 and 1999 and the related statements of operations, shareholders' equity, and cash flows for the years then ended. In connection with our audit of the financial statements, we have also audited the amounts included in the financial statement schedules as listed in the accompanying index under Item 14(a). These financial statements and financial statement schedules are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and financial statement schedules based on our 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 at December 31, 2000 and 1999, and the results of its operations and its cash flows for the two years then ended in conformity with generally accepted accounting principles. Also in our opinion, the related financial statement schedules, when considered in relation to the basic financial statements taken as a whole, present fairly, in all material respects, the information set forth therein. Tanner + Co. Salt Lake City, Utah March 23, 2001 SOUTHERN SECURITY LIFE INSURANCE COMPANY Balance Sheet December 31, 2000 and 1999 Assets 2000 1999 Investments (note 3): Fixed maturities held-to-maturity (fair value, $5,273,032 and $3,985,336 at December 31, 2000 and 1999, respectively) $5,374,204 $3,978,871 Securities available-for-sale, at fair value: Fixed maturities (cost of $23,419,358 at December 31, 2000 and $24,789,267 at December 31, 1999) 23,367,483 23,951,111 Equity securities (cost, $327,674 and $225,980 at December 31, 2000 and 1999, respectively) 358,932 378,440 Mortgage loans 2,298,163 1,497,688 Policy and student loans 8,220,736 8,458,972 Short-term investments (note 11) 7,814,813 8,595,093 ----------- ----------- 47,434,331 46,860,175 Cash and cash equivalents 2,513,668 4,080,484 Accrued investment income 610,474 582,908 Deferred policy acquisition costs (note 4) 13,211,413 12,874,219 Policyholders' account balances on deposit with reinsurer (note 7) 7,434,750 7,806,866 Reinsurance receivable (note 7) 324,793 373,459 Receivables: Agent balances 1,208,378 1,215,756 Other 279,567 193,506 Refundable income taxes -- 34,951 Property and equipment, net, at cost (note 5) 2,542,384 2,435,565 Investment in affiliate at cost 1,566,173 751,052 ----------- ----------- $77,125,931 $77,208,941 =========== =========== See accompanying notes to financial statements. SOUTHERN SECURITY LIFE INSURANCE COMPANY Balance Sheet (continued) December 31, 2000 and 1999 Liabilities and Shareholders' Equity 2000 1999 ------------------------------------- Liabilities: Policy liabilities and accruals (notes 6 and 7): $ 2,965,940 $ 1,648,976 Future policy benefits: Policyholders' account balances 48,722,138 50,377,101 Unearned revenue 4,948,989 5,323,954 Other policy claims and benefits payable 580,196 540,407 Other policyholders' funds, dividend and endowment accumulations 72,890 69,789 Funds held related to reinsurance treaties (note 7) 1,417,216 1,475,512 Note payable to related party (note 9) 1,000,000 1,000,000 Due to affiliated insurance agency (note 11) 151,689 195,785 General expenses accrued 157,944 137,884 Unearned investment income 323,830 324,750 Other liabilities 28,488 63,753 Income taxes (note 10) 558,076 413,710 ----------- ----------- 60,927,396 61,571,621 ----------- ----------- Shareholders' equity (notes 2,3 and 12): Common stock, $1 par, authorized 3,000,000 shares; issued and out- standing, 1,907,989 shares 1,907,989 1,907,989 Capital in excess of par 4,011,519 4,011,519 Accumulated other comprehensive income (loss) (75,628) (476,583) Retained earnings 10,354,655 10,194,395 ----------- ----------- 16,198,535 15,637,320 Commitments and contingencies (notes 7 and 15) -- -- ----------- ----------- $77,125,931 $77,208,941 =========== =========== SOUTHERN SECURITY LIFE INSURANCE COMPANY Statement of Operations Years ended December 31, 2000, 1999, and 1998 2000 1999 1998 Revenues: Net insurance revenues $ 6,698,869 $ 6,901,546 $ 7,228,227 Net investment income (notes 3 and 11) 3,935,607 3,909,373 3,587,147 Realized gain on investments (note 3) -- -- 525,181 Other revenue, net -- 715,128 -- ----------- ------------ ----------- 10,634,476 11,526,047 11,340,555 ----------- ------------ ----------- Benefits, claims and expenses: Benefits and claims 5,109,411 4,453,564 4,346,820 Amortization of deferred policy acquisition costs (note 4) 1,797,320 3,029,223 3,484,689 Operating expenses (notes 9 and 11) 3,529,381 3,261,134 4,134,686 ----------- ----------- ----------- 10,436,112 10,743,921 11,966,195 ----------- ----------- ----------- Income(Loss) before income taxes 198,365 782,126 (625,640) Income tax expense (benefit) (note 10) 38,105 150,168 (241,907) ----------- ----------- ----------- Net income(loss) $ 160,260 $ 631,958 $ (383,733) =========== =========== =========== Basic and diluted net income (loss) per share of common stock (note 12) $0.08 $.33 $(.20) ===== ==== ===== See accompanying notes to financial statements. SOUTHERN SECURITY LIFE INSURANCE COMPANY Statement of Shareholders' Equity Years ended December 31, 2000, 1999, 1998
Accumulated Capital other Common Stock in excess comprehensive Retained Shares Amount of par income earnings Total --------- -------- ---------- -------------- --------- ------------- Balances, December 31, 1997 1,907,989 $1,907,989 $4,011,519 $ 266,340 $ 9,946,170 $16,132,018 ---------- Comprehensive Income (Loss): Net loss for the year -- -- -- -- (383,733) (383,733) Unrealized appreciation of securities available for sale -- -- -- 163,821 -- 163,821 Total comprehensive loss (219,912) Balances, December 31, 1998 1,907,989 1,907,989 4,011,519 430,161 9,562,437 15,912,106 Comprehensive Income (loss): Net gain for the year -- -- -- -- 631,958 631,958 Unrealized depreciation of securities available for sale -- -- -- (906,744) -- (906,744) Total comprehensive loss (274,786) Balances, December 31, 1999 1,907,989 1,907,989 4,011,519 (476,583) 10,194,395 15,637,320 Comprehensive Income (loss): Net gain for the year -- -- -- -- 160,260 160,260 Unrealized depreciation of securities available for sale -- -- -- 400,955 -- 400,955 Total comprehensive gain 561,215 Balances, December 31, 2000 1,907,989 $1,907,989 $4,011,519 $(75,628) $10,354,655 $16,198,535 See accompanying notes to financial statements.
SOUTHERN SECURITY LIFE INSURANCE COMPANY Statement of Cash Flows Years ended December 31, 2000, 1999, 1998 2000 1999 1998 ------ ------ ------ Cash flows provided by (used in) operating activities: Net income (loss) $ 160,260 $ 631,958 $ (383,733) Adjustments to reconcile net cash provided by (used in) operating activities: Depreciation and amortization 260,956 286,514 301,970 Net realized (gains) on investments -- -- (525,182) Loss on disposal of property, plant & equipment 1,886 15,180 2,956 Deferred income taxes (9,426) 11,009 175,274 Amortization of deferred policy acquisition costs 1,797,320 3,029,223 3,484,689 Acquisition costs deferred (2,206,125) (2,084,438) (1,911,282) Change in assets and liabilities affecting cash provided by operations: Accrued investment income (27,566) (18,790) 73,342 Accounts receivable (78,683) (63,291) (344,122) Reinsurance receivable 48,666 (67,201) 53,430 Other policy claims and future benefits payable 1,356,753 (78,706) 431,409 Policyholders' account balances 2,080,769 2,585,204 2,356,804 Funds held under reinsurance (58,296) 56,155 79,430 Unearned premiums (331,998) (840,474) (1,160,706) Dividend and endowment accumulations 3,101 5,051 5,052 Payable to affiliated insurance agent (44,096) 172,914 (45,775) Income taxes payable (46,738) 139,159 -- Other liabilities (16,125) (651,872) (133,376) ----------- ----------- ----------- Net cash provided by operating activities $ 2,890,658 $ 3,127,595 $ 2,460,180 ----------- ----------- ----------- Cash flows from (used in) investing activities: Purchase of investments: Purchase of investments held-to-maturity $ (2,606,749) $ (477,150) $ -- Purchase of investments available-for-sale -- -- (6,180,178) Purchase of equity securities (916,815) (766,662) (610,370) Proceeds from maturity of held-to maturity securities 1,210,272 1,446,315 5,536,006 Proceeds from maturity of available-for-sale securities 1,225,522 2,739,662 299,281 Proceeds from sale of available- for-sale securities (equity and fixed maturity) -- -- 10,675,217 Purchase of mortgage loan (825,000) (1,500,000) -- Repayment of mortgage loans 24,525 2,312 -- Net change in short-term investments 780,280 2,839,890 (11,334,983) Net change in policy and student loans 238,236 3,466 (517,057) Acquisition of property and equipment (224,129) (635) (71,356) ----------- ----------- ----------- Net cash provided by (used in) investing activities $(1,093,858) $ 4,287,198 $(2,203,440) =========== =========== =========== SOUTHERN SECURITY LIFE INSURANCE COMPANY Statement of Cash Flows Years ended December 31, 2000, 1999, 1998 2000 1999 1998 ------- ------ Cash flows from financing activities: Receipts from universal life and certain annuity policies credited to policyholder account balances 5,765,790 6,662,558 7,524,375 Return of policyholder account balances on universal life and certain annuity policies (9,129,406) (10,679,256) (9,547,720) Net cash used in financing activities $(3,363,616) $ (4,016,698)$(2,023,345) Increase (decrease) in cash and cash equivalents (1,566,816) 3,398,095 (1,766,605) Cash and cash equivalents at beginning of year 4,080,484 682,389 2,448,994 ----------- ------------ ---------- Cash and cash equivalents at end of year $ 2,513,668 $ 4,080,484 $ 682,389 =========== ============ =========== Supplemental schedule of cash flow information: Interest paid during the year $ 105,000 $ 90,000 $ 90,000 =========== ============ =========== Income taxes paid during the year $ 94,365 $ -- $ 45,500 =========== =========== =========== Change in market value adjustments- investments available-for-sale: Fixed maturities $ 786,282 $(1,645,893) $ 204,802 Equity securities (121,202) 112,598 (111) Change in deferred acquisition costs (71,611) 235,048 (294,326) Change in premium deposit funds 42,967 (141,029) 79,440 Deferred income tax asset (liability) (235,481) 532,532 174,016 ----------- ----------- ---------- Accumulated comprehensive income Net change in unrealized appreciation (depreciation) $ 400,955 $ (906,744) $ 163,821 =========== =========== =========== See accompanying notes to financial statements. SOUTHERN SECURITY LIFE INSURANCE COMPANY Notes to Financial Statements December 31, 2000, 1999, 1998 1. Nature of business and summary of significant accounting policies: ----------------------------------------------------------------- (a) Nature of business The primary business of Southern Security Life Insurance Company (the "Company") is the issuance of long duration universal life insurance contracts. The majority of the Company's business is conducted in the states of Alabama (11%), Florida (41%), Georgia (11%), and Texas (11%). None of the remaining ten states in which the Company is licensed to conduct business account for over 10% of the Company's total business. Prior to December 17, 1998, certain executive officers and directors of the Company were shareholders of approximately 60 percent of the shares of SSLIC Holding Company, Inc., (formerly Consolidare Enterprises, Inc.). SSLIC Holding Company, Inc. owns 71.5% of the Company's voting securities at December 31, 2000. Effective December 17, 1998, 100% of the common stock of SSLIC Holding Company, Inc. was acquired by Security National Financial Corporation ("SNFC"). Accordingly, from December 17, 1998, the Company is a 71.5% owned, indirect subsidiary of SNFC. The following is a description of the most significant risks facing life and health insurers and how the Company mitigates those risks: Legal/regulatory risk is the risk that changes in the legal or regulatory environment in which an insurer operates will create additional expenses not anticipated by the insurer in pricing its products. That is, regulatory initiatives designed to reduce insurer profits, new legal theories or insurance company insolvencies through guaranty fund assessments may create costs for the insurer beyond those recorded in the consolidated financial statements. The Company seeks to mitigate this risk through geographic marketing of their insurance products. Credit risk is the risk that issuers of securities owned by the Company will default or that other parties, including reinsurers, which owe the Company money, will not pay. The Company attempts to mitigate this risk by adhering to a conservative investment strategy, by maintaining sound reinsurance and by providing for any amounts deemed uncollectible. Interest rate risk is the risk that interest rates will change and cause a decrease in the value of an insurer's investments. This change in rates may cause certain interest-sensitive products to become uncompetitive, may cause disintermediation, or may cause the Company to not achieve its target interest margins between interest earned on invested assets and interest required to be credited to policyholder account balances. The Company mitigates this risk by charging fees for nonconformance with certain policy provisions, by offering products that transfer this risk to the purchaser, and/or by attempting to match the maturity schedule of its assets with the expected payouts of its liabilities. To the extent that liabilities come due more quickly than assets mature, an insurer would have to sell assets prior to maturity and potentially recognize a gain or loss. (b) Basis of financial statements The financial statements have been prepared on the basis of generally accepted accounting principles ("GAAP"), which vary from reporting practices prescribed or permitted by regulatory authorities. The accompanying financial statements have been prepared using the historic cost basis of accounting and do not reflect any adjustments related to allocation of the purchase price of the Company's parent, SSLIC Holding (Formerly Consolidare) by Security National Financial Corporation at December 17, 1998. SOUTHERN SECURITY LIFE INSURANCE COMPANY Notes to Financial Statements (continued) 1. Nature of business and summary of significant accounting policies, continued ---------------------------------------------------------------------------- (c) Use of estimates In preparing the financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities. Actual results could differ significantly from those estimates. The estimates susceptible to significant change are those used in determining the liability for future policy benefits and claims, deferred income taxes and deferred policy acquisition costs. Although some variability is inherent in these estimates, management believes that the amounts provided are adequate. (d) Investments Investments in all debt securities and those equity securities with readily determinable market values are classified into one of three categories: held- to-maturity, trading or available-for-sale. Classification of investments is based upon management's current intent. Debt securities which management has a positive intent and ability to hold until maturity are classified as securities held-to-maturity and are carried at amortized cost. Unrealized holding gains and losses on securities held-to-maturity are not reflected in the financial statements. Debt and equity securities that are purchased for short-term resale would be classified as trading securities. Trading securities would be carried at fair value, with unrealized holding gains and losses included in earnings; the Company has no securities classified as trading securities. All other debt and equity securities not included in the above two categories are classified as securities available-for-sale. Securities available-for-sale are carried at fair value, with unrealized holding gains and losses reported in accumulated other comprehensive income which is included in stockholders' equity after adjustment for deferred income taxes and deferred acquisition costs related to universal life products. The Company's carrying value for investments in the held-to-maturity and available-for-sale categories is reduced to its estimated realizable value if a decline in the market value is deemed other than temporary. Such reductions in carrying values are recognized as realized losses and charged to income. Interest on fixed maturities and short-term investments is recognized to income as it accrues on the principal amounts outstanding adjusted for amortization of premiums and discounts computed by the scientific method which approximates the effective yield method. Realized gains and losses on disposition of investments are included in net income. The cost of investments sold is determined on the specific identification method. Dividends are recorded as income on the ex-dividend dates. Mortgage loans on real estate and mortgage loans held as short term investments are reported at the unpaid principal balances, adjusted for amortization of premium or accretion of discount, less allowance for possible losses. Policy loans and student loans are carried at the unpaid principal balance, less any amounts deemed to be uncollectible. The Company's policy is that policy loans are not made for amounts in excess of the cash surrender value of the related policy. Accordingly, policy loans are fully collateralized by the related liability for future policy benefits for traditional insurance policies and by the policyholders' account balance for interest sensitive policies. SOUTHERN SECURITY LIFE INSURANCE COMPANY Notes to Financial Statements (continued) 1. Nature of business and summary of significant accounting policies, continued: ---------------------------------------------------------------------------- (e) Cash and cash equivalents For purposes of the statements of cash flows, the Company considers all highly liquid debt instruments purchased with an original maturity of three months or less to be cash equivalents. (f) Deferred policy acquisition costs The costs of acquiring new business, net of the effects of reinsurance, principally commissions and those home office expenses that tend to vary with and are primarily related to the production of new business, have been deferred to the extent recoverable from future profit margins. Deferred policy acquisition costs applicable to traditional life policies are being amortized over the premium-paying period of the related policies in a manner that will charge each year's operations in direct proportion to the estimated premium revenue over the life of the policies. Premium revenue estimates are made using the same interest, mortality and withdrawal assumptions as are used for computing liabilities for future policy benefits. Acquisition costs relating to universal life policies are being amortized in relation to the incidence of expected gross profits over the life of the policies. Gross profits for universal life contracts consist of revenue representing policy charges for the cost of insurance, administration of the contracts and surrender charges plus investment income less expenses for interest credited to policyholder account balances, policy administrative expenses and expected benefit payments in excess of policy account balances. Deferred policy acquisition costs are adjusted to reflect the impact of unrealized gains and losses on fixed maturity securities available for sale. The Company has performed tests concerning the recoverability of deferred acquisition costs. These methods include those typically used by many companies in the life insurance industry. Further, the Company conducts a sensitivity analysis of its assumptions that are used to estimate the future expected gross profits, which management has used to determine the future recoverability of the deferred acquisition costs. (g) Property and Equipment Property and equipment are recorded at cost, less accumulated depreciation. Depreciation and amortization on capital leases and property and equipment are determined using the straight-line method over the estimated useful lives of the assets or terms of the lease. Expenditures for maintenance and repairs are expensed when incurred and betterments are capitalized. Gains and losses on sale of property and equipment are reflected in operations. (h) Investment in affiliate The Company holds investments in its parent company's common stock. This reciprocal stockholding is accounted for based on the treasury stock approach. The value of the investment is recorded at cost and will be classified as treasury stock upon consolidation with its parent company. (i) Future policy benefits The liability for future policy benefits for traditional life policies has been provided on a net level premium basis based upon estimated investment yields, withdrawals, mortality and other assumptions that were appropriate at the time the policies were issued. Such estimates are based upon industry data and the Company's past experience as adjusted to provide for possible adverse deviation from the estimates. (j) Policyholder account balance Insurance reserves for universal life policies are determined following the retrospective deposit method and consist of policy values that accrue to the benefit of the policyholder, unreduced by surrender charges. SOUTHERN SECURITY LIFE INSURANCE COMPANY Notes to Financial Statements (continued) 1. Nature of business and summary of significant accounting policies, continued: ---------------------------------------------------------------------------- (k) Recognition of premium revenue and related costs Premiums are recognized as revenue as follows: Universal life policies - premiums received from policyholders are reported as deposits. Cost of insurance, policy administration and surrender charges which are charged against the policyholder account balance during the period, are recognized as revenue as earned. Amounts assessed against the policyholder account balance that represent compensation to the Company for services to be provided in future periods are reported as unearned revenue and recognized in income using the same assumptions and factors used to amortize acquisition costs capitalized. Annuity contracts with flexible terms - premiums received from policyholders are reported as deposits. All other policies - recognized as revenue over the premium paying period. (l) Income taxes Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. (m) Impairment of Long-Lived Assets The Company reviews its long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of the assets may not be recoverable through undiscounted future cash flows. If it is determined that an impairment loss has occurred based on expected cash flows, such loss is recognized in the statement of operations. (n) Earnings (Loss) Per Common Share The computation of basic earnings (loss) per common share is based on the weighted average number of shares outstanding during each year. The computation of diluted earnings per common share is based on the weighted average number of shares outstanding during the year, plus the common stock equivalents that would arise from the exercise of stock options outstanding, using the treasury stock method and the average market price per share during the year. There were no common stock equivalents outstanding during the years ended December 31, 2000 and 1999. Common stock equivalents are not included in the diluted earnings (loss) per share calculation when their effect is antidilutive. (o) Reclassification Certain amounts presented in the 1999 and 1998 financial statements have been reclassified to conform to the 2000 presentation. (p) Pending accounting change SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities, was issued in June 1998 and amended by SFAS No. 138, issued in June 2000. The requirements of SFAS No. 133, as amended, will be effective for the Company in the first quarter of the fiscal year beginning January 1, 2001. The standard establishes accounting and reporting standards for derivative SOUTHERN SECURITY LIFE INSURANCE COMPANY Notes to Financial Statements (continued) 1. Nature of business and summary of significant accounting policies, continued: ---------------------------------------------------------------------------- (p) Pending accounting change (continued) instruments embedded in other contracts and for hedging activities. Under the standard, certain contracts that were not formerly considered derivatives may now meet the definition of a derivative. The Company has determined SFAS 133 to have no impact on the Company's financial position and results of operations because the Company has no derivative activity. SFAS No. 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities, was issued in September 2000. SFAS No. 140 is a replacement of SFAS No. 125, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities. Most of the provisions of SFAS No. 125 were carried forward to SFAS No. 140 without reconsideration by the Financial Accounting Standards Board (FASB), and some were changed only in minor ways. In issuing SFAS No. 140, the FASB included issues and decisions that had been addressed and determined since the original publication of SFAS No. 125. SFAS No. 140 is effective for transfers after March 31, 2001. Management does not expect the adoption of SFAS No. 140 to have a significant impact on the financial position or results of operations of the Company. 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 are as follows: a. Costs of acquiring new business are deferred and amortized, rather than being charged to operations as incurred. b. The liability for future policy benefits and expenses is based on reasonable estimates of expected mortality, morbidity, interest, withdrawals and future maintenance and settlement expenses, rather than on statutory rates for mortality and interest. c. The liability for policyholder funds associated with universal life and certain annuity contracts are based on the provisions of Statement of Financial Accounting Standards No. 97, rather than on the statutory rates for mortality and interest. d. Investments in securities are reported as described in Note 1.(d), rather than in accordance with valuations established by the National Association of Insurance Commissioners ("NAIC"). Pursuant to NAIC valuations, bonds eligible for amortization are reported at amortized value; other securities are carried at values prescribed by or deemed acceptable by NAIC. e. Deferred income taxes, if applicable, are recognized for future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. f. The statutory liabilities for the asset valuation reserve and interest maintenance reserve have not been provided in the financial statements. g. Certain assets, principally receivables from agents and equipment, are reported as assets rather than being charged directly to surplus. h. Costs attributable to the public offering of the common shares have been reclassified from accumulated surplus to capital in excess of par. i. Realized gains or losses on the sale or maturity of investments are included in the statement of income and not recorded net of taxes and amounts transferred to the interest maintenance reserve as required by statutory accounting practices. SOUTHERN SECURITY LIFE INSURANCE COMPANY Notes to Financial Statements (continued) 2. Basis of financial statements, continued ---------------------------------------- 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, 2000, 1999, 1998 and shareholders' equity as of December 31, 2000 and 1999 between the amounts reported on a statutory basis and the related amounts presented on the basis of generally accepted accounting principles is as follows:
Net Income (loss) Shareholders' Years ended Equity December 31, December 31, ----------------- --------------- 2000 1999 1998 2000 1999 --------- ------- ------- -------- ------- As reported on a statutory basis $ 80,477 $ 533,233 $ (486,823) $ 8,405,211 $ 8,976,516 Adjustments: Deferred policy acquisition costs, net 408,805 (709,737) (1,867,733) 13,211,413 12,874,219 Future policy benefits, un- earned premiums and policy- holders' funds (203,129) 1,097,132 1,719,926 (6,355,753) (6,195,591) Deferred income taxes 15,008 382,364 153,626 (500,605) (413,710) Asset valuation reserve -- -- -- 347,134 542,585 Interest main- tenance reserve (36,063) (35,191) 231,507 499,099 535,161 Non-admitted assets -- -- -- 1,412,229 1,078,348 Unrealized gains -SFAS 115 -- -- -- 666,899 (899,956) Capital and surplus note -- -- -- (1,000,000) (1,000,000) Other adjustments, net (104,838) (635,843) (134,236) (487,092) 139,748 --------- ---------- ---------- ------------ ----------- Net difference 79,783 98,725 103,090 7,793,324 6,660,804 --------- ---------- ---------- ----------- ----------- As reported on a GAAP basis $ 160,260 $ 631,958 $ (383,733) $16,198,535 $15,637,320 ========= ========== ========== =========== ===========
Under applicable laws and regulations, the Company is required to maintain minimum surplus as to policyholders, determined in accordance with regulatory accounting practices, in the aggregate amount of approximately $1,900,000. The payment of dividends by the Company is subject to the regulation of the State of Florida Department of Insurance. The Insurance Commissioner's approval is not required if the dividend is equal to or less than the greater of: (a) 10% of the Company's surplus as to policyholders' derived from realized net operating profits on its business and net realized capital gains; or (b) the Company's entire net operating profits and realized net capital gains derived during the immediately preceding calendar year, if the Company will have surplus as to policyholders equal to or exceeding 115% of the minimum required statutory surplus as to policyholders after the dividend is declared and paid. As a result of such restrictions, the maximum dividend which may be paid by the Company during 2000 without prior approval is approximately $92,000. Accordingly, GAAP excess earnings over a statutory basis are not available for dividends. SOUTHERN SECURITY LIFE INSURANCE COMPANY Notes to Financial Statements (continued) 2. Basis of financial statements, continued ---------------------------------------- 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, 2000. The National Association of Insurance Commissioners has adopted the Codification of Statutory Accounting Principles ("Codification"). Codification changes current statutory accountintg rules in several areas and is effective January 1, 2001. Although the Company has not estimated the potential effect, it does not believe Codificaiton will have a material effect on the financial position, results of operation, or liquidity of the Company. 3. Investments ----------- (a) Equity securities and fixed maturities Equity securities consist of $358,932 and $378,440 of common stock at fair value at December 31, 2000 and 1999 respectively. Unrealized (depreciation) appreciation in investments in equity securities for the years ended December 31, 2000, 1999, and 1998 is $(121,203), $112,598 and $(111), respectively. The amortized cost and estimated fair values of investments in debt securities are as follows: Gross Gross Estimated Amortized Unrealized Unrealized Fair Cost Gains Losses Value --------- ---------- ---------- --------- December 31, 2000: Held-to-maturity: U.S. Treasury securities and obligations of U.S. government corporations and agencies (guaranteed) $ 2,001,985 $ 13,327 $ -- $ 2,015,312 Corporate securities 2,587,861 64,419 188,876 2,463,404 Mortgage-backed securities 784,358 9,958 -- 794,316 ----------- -------- --------- ----------- 5,374,204 87,704 188,876 5,273,032 ----------- -------- --------- ----------- Available-for-sale: U.S. Treasury securities and obligations of U.S. government corporations and agencies (guaranteed) 3,367,086 45,003 648 3,411,441 Corporate securities 19,987,436 91,913 188,214 19,891,135 Mortgage-backed securities 64,836 71 -- 64,907 ----------- -------- -------- ----------- 23,419,358 136,987 188,862 23,367,483 ----------- -------- -------- ----------- $28,793,562 $224,691 $377,738 $28,640,515 =========== ======== ========= =========== SOUTHERN SECURITY LIFE INSURANCE COMPANY Notes to Financial Statements (continued) 3. Investments, continued ---------------------- (a) Equity securities and fixed maturities, continued Gross Gross Estimated Amortized Unrealized Unrealized Fair Cost Gains Losses Value ---------- ---------- ---------- ---------- December 31, 1999: Held-to-maturity: U.S. Treasury securities and obligations of U.S. government corporations and agencies (guaranteed) $ 1,007,021 $ 15,789 $ -- $ 1,022,810 Corporate securities 1,977,976 2,151 8,952 1,971,175 Mortgage-backed securities 993,874 11,355 13,878 991,351 ----------- --------- -------- ----------- 3,978,871 29,295 22,830 3,985,336 ----------- --------- -------- ----------- Available-for-sale: U.S. Treasury securities and obligations of U.S. government corporations and agencies (guaranteed) 4,596,187 4,599 21,561 4,579,225 Corporate securities 20,102,739 -- 820,966 19,281,773 Mortgage-backed securities 90,341 -- 228 90,113 ----------- -------- --------- ----------- 24,789,267 4,599 842,755 23,951,111 ----------- -------- --------- ----------- $28,768,138 $ 33,894 $ 865,585 $27,936,447 =========== ======== ========= =========== Fair values reflected in available-for-sale and held-to-maturity categories are based on NAIC values, versus values associated with normal market pricing services. The estimated difference for both categories was immaterial for all years presented. Unrealized appreciation (depreciation) of fixed maturities for years ending December 31, 2000, 1999, 1998 is $678,644, $(1,747,058) and $183,142 respectively. The amortized cost and estimated fair value of fixed maturities at December 31, 2000, 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 2001 $ 1,502,062 $1,504,375 Due in 2002 through 2005 -- -- Due in 2006 through 2010 1,331,825 1,176,383 Due after 2010 1,755,960 1,797,958 ----------- ------------ 4,589,847 4,478,716 Mortgage-backed securities 784,357 794,316 ----------- ----------- $ 5,374,204 $ 5,273,032 =========== =========== Fixed maturity securities available-for-sale: Due in 2001 $ 2,771,882 $ 2,772,970 Due in 2002 through 2005 14,075,954 14,014,590 Due in 2006 through 2010 6,408,951 6,406,860 Due after 2010 97,735 108,156 ----------- ----------- 23,354,522 23,302,576 Mortgage-backed securities 64,836 64,907 ----------- ----------- $23,419,358 $23,367,483 =========== =========== SOUTHERN SECURITY LIFE INSURANCE COMPANY Notes to Financial Statements (continued) 3. Investments, continued ---------------------- (a) Equity securities and fixed maturities, continued Proceeds from the sale of equity securities and fixed maturities available for sale and the related realized gains and losses are summarized as follows: 2000 1999 1998 --------- ------- -------- Proceeds from sale of equity securities $ -- $ -- $ 1,405,248 ---------- ---------- ------------ Proceeds from sale of fixed maturities available-for-sale $1,200,000 $2,739,662 $9,569,250 ---------- ---------- ---------- Realized gains (losses) Fixed maturities: Gross realized gains -- -- $ 319,934 Gross realized (losses) -- -- -- Equity securities: Gross realized gains -- -- 205,247 Gross realized (losses) -- -- -- ----------- --------- ------------ $ -- $ -- $ 525,181 =========== ========== ============= Certain of the fixed maturity securities classified as available-for-sale and held-to-maturity were called during the year ended December 31, 2000, 1999, 1998 resulting in the following realized gains and losses: 2000 1999 1998 ------ ------ ------ Held-to-maturity: Gross realized gains $ -- $ -- $ -- Available-for-sale: Gross realized gains -- -- 1,740 -------- ------- ------ $ -- $ -- $1,740 ======== ======== ======= 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, 2000 and 1999, other than investments issued or guaranteed by the United States government are as follows: 2000 Carrying Amount Federal Express $2,072,820 Dean Witter Discover 4,105,788 Philip Morris Inc. 5,469,305 1999 Federal Express $2,100,000 Dean Witter Discover 3,964,767 Philip Morris, Inc. 5,260,000 (b) Concentrations of credit risk At December 31, 2000 and 1999, 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 $61,576 and $149,198 at December 31, 2000 and 1999, respectively, which are guaranteed by the U.S. government. Subsequent to December 31, 2000, all of these loans were sold at their unpaid principal balance. 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, 2000, 1999, and 1998 consists of the following: 2000 1999 1998 Interest: Fixed maturities $2,014,883 $2,123,671 $2,633,888 Policy and student loans 505,319 579,774 489,991 Short-term investments 937,077 859,699 474,949 Mortgage loans 190,068 25,759 -- Rental income 278,302 319,758 -- Dividends on equity securities common stock, including mutual fund 33,412 15,610 719 ---------- ----------- ----------- 3,959,061 3,924,271 3,599,547 Less investment expenses 23,454 14,898 12,400 ---------- ---------- ---------- $3,935,607 $3,909,373 $3,587,147 ========== ========== ========== (d) Investments on deposit In order to comply with statutory regulations, investments were on deposit with the Insurance Departments of certain states as follows: 2000 1999 1998 Florida $1,708,735 $1,708,530 $1,718,097 Alabama 100,199 100,702 101,170 South Carolina 300,596 302,106 303,511 Georgia 250,496 251,755 252,926 Indiana 200,000 199,855 199,578 ---------- ---------- ---------- $2,560,025 $2,562,948 $2,575,282 ========== ========== ========== Certain of these assets, totaling approximately $850,000 for each of the years ended December 31, 2000 and 1999, are restricted for the future benefit of policyholders in a particular state. 4. Deferred policy acquisition costs --------------------------------- Deferred policy acquisition costs at December 31, 2000, 1999, 1998 consist of the following: 2000 1999 1998 ------ ------ ------ Deferred policy acquisition costs at beginning of year $12,874,219 $13,583,956 $15,451,689 Policy acquisition costs deferred: Commissions 1,384,782 1,223,187 1,053,953 Underwriting & issue costs 398,622 440,200 429,600 Other 422,721 421,051 427,729 Change in unrealized appreciation (depreciation) (71,611) 235,048 (294,326) ----------- ----------- ----------- 2,134,514 2,319,486 1,616,956 Amortization of deferred policy acquisition costs (1,797,320) (3,029,223) (3,484,689) ----------- ----------- ----------- Deferred policy acquisition costs at end of year $13,211,413 $12,874,219 $13,583,956 =========== =========== =========== SOUTHERN SECURITY LIFE INSURANCE COMPANY Notes to Financial Statements (continued) 5. Property and equipment ---------------------- Property and equipment consists of the following: December 31, December 31, 2000 1999 Land $ 982,027 $ 982,027 Building and improvements 2,348,973 2,205,795 Furniture and equipment 945,345 993,198 ------------ ----------- 4,276,345 4,181,020 Less accumulated depreciation (1,733,961) (1,745,455) ------------ ----------- $ 2,542,384 $ 2,435,565 ============ =========== Depreciation expense for the years ended December 31, 2000, 1999, 1998 totaled $115,425, $135,145, and $153,348, respectively. 6. Future policy benefits ---------------------- At December 31, 2000 and 1999, future policy benefits, exclusive of universal life and flexible term annuities consist of the following: December 31, December 31, 2000 1999 ------------- ------------ Life insurance $2,677,841 $1,334,887 Annuities 235,032 304,414 Accident & health insurance 53,067 9,675 ---------- ---------- Total life & health future policy benefits $2,965,940 $1,648,976 ========== ========== Life insurance in-force aggregated approximately $1.2 billion at December 31, 2000, and 1999. Mortality and withdrawal assumptions are based upon the Company's experience and actuarial judgment with an allowance for possible unfavorable deviations from the expected experience. The mortality tables used in calculating benefit reserves for non universal life contracts are the 1965-1970 Basic Select and Ultimate for males and the 1980 U.S. Population mortality table modified for company expected experience. For non-universal life policies written during 1983 through 1988, interest rates used are 8.0 percent for policy years one through five, decreasing by .1 percent per year for policy years six through twenty, to 6.5 percent for policy years twenty-one and thereafter. For certain non universal life contracts written in 1996-2000, interest rates of 6.75% level have been assumed. For non-universal life policies written in 1982 and prior, interest rates vary, depending on policy type, from 7 percent for all policy years to 6 percent for policy years one through five and 5 percent for years six and thereafter. For universal life policies written since 1988, the interest rate used is a credited rate generally based upon the Company's investment yield less 1%. 7. Reinsurance ----------- The Company routinely cedes and, to a limited extent, assumes reinsurance to limit its exposure to loss on any single insured. Ceded insurance is treated as a risk and liability of the assuming companies. As of December 31, 2000, ordinary insurance coverage in excess of $75,000 is reinsured; however for some policies previously issued, the first $30,000, $40,000 or $50,000 was retained and the excess ceded. The retention limit for some substandard risks is less than $75,000. Reinsured risks would give rise to liability to the Company in the event that the reinsuring company were unable to SOUTHERN SECURITY LIFE INSURANCE COMPANY Notes to Financial Statements (continued) 7. Reinsurance, continued ---------------------- meet its obligations under the reinsurance agreement in force, as the Company remains primarily liable for such obligations. Under reinsurance agreements exclusive of the MEGA agreement discussed below, the Company has ceded premium of $275,288, $424,255, and $415,080 included in reinsurance premiums ceded, and received recoveries of $131,886, $162,871 and $88,457 included in annuity, death and other benefits for the years ended December 31, 2000, 1999, 1998, 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, 2000, 1999, 1998, the Company ceded premiums to MEGA of $419,353, $424,592 and $448,355, included in reinsurance ceded, and received recoveries of $478,485, $576,194 and $469,307, included in annuity, death and other benefits, respectively. The funds held related to reinsurance treaties of $1,417,216 and $1,475,512 represent the 18% share of policy loans ceded to the reinsurer at December 31, 2000 and 1999, respectively. 8. Notes payable ------------- As of December 31, 2000, the Company had an unused line of credit of $5,000,000 which is secured by student loans equaling 115% of the unpaid principal balance. The facility bears interest at a variable rate per annum payable monthly and expires on September 18, 2007. 9. Note payable to related party ----------------------------- A note payable to a related party consists of amounts due on demand to Security National Life Insurance Company. The note's proceeds were obtained in December 1988 and the note qualifies as shareholders' equity for statutory accounting purposes in accordance with Section 628.401 of the Florida Statutes. At December 31, 2000, the note bears interest at 11.0% percent (payable monthly); principal repayment is contingent upon the Company maintaining statutory surplus in excess of $1,900,000 and obtaining approval in advance by the Florida Department of Insurance. Interest expense relating to the balance of the note payable to the related party during 2000, 1999, 1998 aggregated $105,000, $90,000, and $90,000 respectively. 10. Income taxes ------------ The Company's income tax liability at December 31 is summarized as follows: 2000 1999 --------- -------- Current $ 57,471 $139,160 Deferred 500,605 274,550 Total $558,076 $413,710 SOUTHERN SECURITY LIFE INSURANCE COMPANY Notes to Financial Statements (continued) 10. Income taxes, continued ----------------------- Total income taxes including taxes on the change in the value of investments for the years ended December 31, 2000, 1999, and 1998 were as follows: 2000 1999 1998 ------ ------ ------ Tax expense (benefit) in operations $ 38,105 $ 150,168 $(241,907) Tax on unrealized appreciation (depreciation) of investments 235,481 (532,532) (174,016) -------- --------- --------- $273,586 $(382,364) $(415 923) Income tax expense (benefit) for the years ended December 31, 2000, 1999, 1998 is summarized as follows: 2000 1999 1998 ------ ------ ------ Current: Federal $ 40,812 $123,268 $ 9,329 State 6,719 15,891 1,207 -------- -------- --------- 47,531 139,159 10,536 -------- --------- --------- Deferred: Federal (7,073) 9,693 (215,838) State (2,353) 1,316 (36,605) -------- -------- --------- (9,426) 11,009 (252,443) -------- -------- --------- $ 38,105 $150,168 $(241,907) ======== ======== ========= Income tax expense (benefit) for the years ended December 31, 2000, 1999, 1998 differs from "expected" tax (computed by applying the U.S. federal income tax rate to pretax income) as a result of the following: 2000 1999 1998 Computed "expected" tax expense (benefit) $ 67,444 $ 265,923 $(212,718) Increase (reduction) in income taxes resulting from: Small life insurance company deduction (3,485) (139,195) (12,390) Changes in the valuation allowance for deferred tax assets, allocated to income tax expense (27,338) 17,590 (17,950) State taxes, net of federal income tax benefit 1,484 5,850 1,207 Other, net -- -- (56) -------- --------- --------- $ 38,105 $ 150,168 $(241,907) ======== ========= ========= 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: SOUTHERN SECURITY LIFE INSURANCE COMPANY Notes to Financial Statements (continued) 10. Income taxes, continued ----------------------- a. The Policyholders' Surplus exceeds a prescribed maximum, or; b. Distributions, other than stock dividends, are made to shareholders in excess of Shareholders' Surplus, as defined by prior law, or; c. The entity ceases to qualify for taxation as a life insurance company, or; d. the tax deferred status of the Policyholder's Surplus Account is modified by future tax legislation. At December 31, 2000, 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 2000, 1999, 1998, AMT exceeded regular tax by $19,854, $27,338, and $156,820, respectively. At December 31, 2000, the AMT tax credit available to reduce future regular tax totaled $262,528. The tax effect of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities at December 31, 2000 and 1999 are presented below: 2000 1999 ------- ------- Deferred tax assets: Unearned revenue, due to deferral of "front-end" fee $ 1,939,023 $ 1,950,587 Policy liabilities and accruals, principally due to adjustments to reserves for tax purposes 2,003,251 1,804,230 Deferred policy acquisition costs related to unrealized appreciation (depreciation) 137,601 (126,830) Alternative minimum tax credit carry forwards 262,528 235,190 ------------ ----------- Total gross deferred tax assets 4,342,403 3,863,177 Less valuation allowance (262,528) (235,190) ------------ ----------- Net deferred tax assets 4,079,875 3,627,987 ------------ ----------- Deferred tax liabilities: Deferred policy acquisition costs (4,565,655) (3,908,348) Other (22,576) (252,011) Unrealized (appreciation) depreciation of securities 7,751 257,822 ------------ ----------- Total gross deferred tax liabilities (4,580,480) (3,902,537) ------------ ----------- Net deferred tax (liability) $ (500,605) $ (274,550) =========== =========== The net change in the total valuation allowance for the years ended December 31, 2000 and 1998 was an increase of $27,338 and $11,100, respectively. The net change in the total valuation allowance for the year ended December 31, 1999 was a decrease of $17,590. SOUTHERN SECURITY LIFE INSURANCE COMPANY Notes to Financial Statements (continued) 10. Income taxes, continued ----------------------- In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Management considers the scheduled reversal of deferred tax liabilities, projected future taxable income, and tax planning strategies in making this assessment. Based upon the level of historical taxable income and projections for future taxable income over the periods which the deferred tax assets are deductible, management believes it is more likely than not the Company will realize the benefits of these deductible differences, net of the existing valuation allowances at December 31, 2000. 11. Related party transactions -------------------------- The Company's general agent, Insuradyne Corporation, is a wholly-owned subsidiary of Security National Financial Corporation. The balances due to an affiliated insurance agency reflected in the accompanying balance sheets principally represent earned commission due to Insuradyne. The Company incurred commission expense to Insuradyne aggregating $180,941, $175,409 and $252,955, in 2000, 1999, and 1998, respectively. These amounts are included as components of acquisition costs deferred and related amortization. Insuradyne incurred insurance-related expenses aggregating $1,147, $495, and $33,374 in 2000, 1999, 1998, respectively. Effective December 31, 1998, the Company entered into an Administrative Services Agreement with its ultimate parent Security National Financial Corporation (Security National). Under the terms of the Administrative Services Agreement, all of the Company's employees became employees of Security National. Administrative functions previously performed by the Company are now being furnished to the Company under the Agreement. The Company pays to Security National $250,000 per month or $3 million per year for the administrative services and Agency Agreement. On December 28, 1998 the Company entered into a Loan Funding and Fee Agreement and Agency Agreement (the "Agreement") with Security National Mortgage Company ("SNMC"), a subsidiary of Security National. Under the terms of the Agreement, SNMC assigns their interest in residential mortgage loans that have been pre-sold to third party investors to the Company. The Company purchases these loans and holds them as short-term investments until it receives the proceeds from the third party investors. The Company receives interest income from SNMC based upon how long the loans were outstanding. At December 31, 2000 and 1999 the Company had outstanding loan purchases of $7,814,813 and $8,595,093, respectively. Included in investment income is $732,691 and $457,861 for the years ended December 31, 2000 and 1999, respectively. The Company received for the years ended December 31, 2000 and 1999, $182,248 and $219,684 respectively, as rental income from Security National for a lease of office space in the Company's building under the terms of the Administrative Services Agreement. The Company received for the years ended December 31, 2000 and 1999, $123,393 and $230,639 respectively, in interest income from Security National for short-term loans of which none were outstanding as of December 31, 2000 and 1999. SOUTHERN SECURITY LIFE INSURANCE COMPANY Notes to Financial Statements (continued) 12. Earnings per share ------------------ The following table sets forth the computation of basic and diluted earnings per share: 2000 1999 1998 ------- ------- ------- Numerator for basic and diluted Earnings per share: Net income (loss) $ 160,260 $ 631,958 $(383,733) Denominator: Denominator for basic earnings per share weighted average shares 1,907,989 1,907,989 1,907,989 Effective dilutive securities: Agent stock options -- -- -- Dilutive potential common shares -- -- -- Denominator for diluted earnings per share weighted average shares and assumed conversions 1,907,989 1,907,989 1,907,989 Basic earnings per share $0.08 $.33 $(0.20) Diluted earnings per share $0.08 $.33 $(0.20) 13. Agents' incentive stock bonus plan ---------------------------------- The Company has an incentive bonus plan for agents that was adopted January 1, 1995 by the Company's Board of Directors and effective through December 31, 2001. Agents that qualify under the plan have the option to purchase shares of common stock. The number of shares of common stock is determined on the date of the award as the number of whole shares equal to the award based on the applicable stock price on December 31 of the year the agent has qualified for the bonus. For each share of common stock purchased by the agent, the Company will concurrently award an equivalent number of shares to the agent. Awards were granted in 1999 under this plan. The Company incurred expenses of approximately $5,010 relating to the Company's matching number of shares. There were no awards granted in 2000. If the agent does not purchase the shares within the designated period, then the agent forfeits their rights to purchase the shares of common stock as well as the matching number of shares to be contributed by the Company. 14. Disclosures about fair value of financial instruments ----------------------------------------------------- Statement of Financial Accounting Standards No. 107 Disclosures About Fair Value of Financial Instruments (SFAS 107) requires the Company to disclose estimated fair value information. The following methods and assumptions were used by the Company in estimating fair values of financial instruments as disclosed herein: Cash and cash equivalents, short-term investments and policy and student loans: The carrying amount reported in the balance sheet for these instruments approximate their fair value. Investment securities available-for-sale and held-to-maturity: Fair value for fixed maturity and equity securities is based on quoted market prices at the reporting date for those or similar investments. Policyholders' account balances: The fair values for policyholder account balances are based on their approximate surrender values. SOUTHERN SECURITY LIFE INSURANCE COMPANY Notes to Financial Statements (continued) 14. Disclosures about fair value of financial instruments, continued The following table presents the carrying amounts and estimated fair values of financial instruments held at December 31, 2000 and 1999. The fair value of a financial instrument is the amount at which the instrument could be exchanged in a current transaction between willing parties.
2000 1999 ---------------------- ------------------------ Carrying Estimated Carrying Estimated amount fair value amount fair value -------- ---------- --------- ----------- Financial assets: Fixed maturities held-to-maturity (see note 3) $5,374,204 $5,273,032 $ 3,978,871 $ 3,985,336 Fixed maturities available-for- sale (see note 3) 23,367,483 23,367,483 23,951,111 23,951,111 Equity securities available-for-sale 358,932 358,932 378,440 378,440 Mortgage loans 2,298,163 2,298,163 1,497,688 1,497,688 Policy and student loans 8,220,736 8,220,736 8,328,847 8,328,847 Short-term investments 7,814,813 7,814,813 8,595,093 8,595,093 Cash and cash equivalents 2,513,668 2,513,668 4,013,401 4,013,401 Financial liabilities: Policy liabilities- policyholders' account balances $48,722,138 $45,680,048 $50,377,101 $46,586,173
15. Legal proceedings Lawsuits against the Company have arisen in the normal course of the Company's business. However, contingent liabilities arising from litigation and other matters are not considered material in relation to the financial position of the Company. To the best of the Company's knowledge, it has no potential or pending contingent liabilities that might be material to the Company's financial condition, results of operations or liquidity pursuant to product and environmental liabilities.
Schedule I SOUTHERN SECURITY LIFE INSURANCE COMPANY Summary of Investments Other Than Investments in Related Parties December 31, 2000 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 2,000,000 $ 2,001,985 $ 2,015,312 $ 2,001,985 Public utilities -- -- -- -- Industrial and miscellaneous 2,730,380 2,684,573 2,569,537 2,684,573 Special revenue and special assessment of agencies and authorities of governments and political subdivisions 686,200 687,646 688,183 687,646 ---------- ----------- ------------ ----------- Total fixed maturities held for investment 5,416,580 5,374,204 5,273,032 5,374,204 ---------- ----------- ------------ ----------- Fixed maturities available-for-sale: U.S. Government and government agencies and authorities 3,350,000 3,367,086 3,411,441 3,411,441 Public utilities 655,000 680,708 687,750 687,750 Industrial and miscellaneous 18,860,000 19,306,728 19,203,385 19,203,385 Special revenue and special assessment of agencies and authorities of governments and political subdivisions 64,816 64,836 64,907 64,907 ----------- ----------- ------------ ----------- Total fixed maturities available for sale 22,929,816 23,419,358 23,367,483 23,367,483 ----------- ----------- ----------- ----------- 28,346,396 28,793,562 $28,640,515 $28,741,687 ----------- ----------- ------------ ----------- Equity securities: Common, including investments in mutual fund 49,067 327,674 $ 358,932 358,932 =========== =========== Mortgage loans 2,298,163 2,298,163 Policy loans 8,159,160 8,159,160 Student loans 61,576 61,576 Short-term investments 7,814,813 7,814,813 ----------- ----------- Total investments $47,454,948 $47,434,331 =========== =========== See accompanying auditors' report.
Schedule III SOUTHERN SECURITY LIFE INSURANCE COMPANY Supplementary Insurance Information December 31, 2000, 1999, 1998 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 2000 Life and annuities $13,211,413 2,965,940 48,722,138 4,948,989 580,196 6,698,869 3,959,061 5,109,411 1,797,320 3,552,834 =========== ========= =========== ========= ======= ========= ========= ========= ========= ========= 1999 Life and annuities $12,874,219 1,648,976 50,377,101 5,323,954 540,407 6,901,546 3,909,373 4,453,564 3,029,223 3,261,134 =========== ========= ========== ========= ======= ========= ========= ========= ========= ========= 1998 Life and annuities $13,583,956 1,727,300 52,520,300 6,023,399 540,789 7,228,227 3,587,147 4,346,820 3,484,689 4,134,686 =========== ========= ========== ========= ======= ========= ========= ========= ========= ========= See accompanying auditors' report.
Schedule IV SOUTHERN SECURITY LIFE INSURANCE COMPANY Reinsurance December 31, 2000, 1999, 1998 Percentage Ceded to Assumed of amount other from other assumed Direct amount companies companies Net amount to net December 31, 2000: Life insurance in force $811,233,000 210,365,000 558,575,000 1,159,443,000 48% ============ =========== =========== ============= === Premiums: Life insurance $ 6,641,835 668,323 557,352 6,530,864 9% Accident & health insurance 194,323 26,318 -- 168,005 -- ------------ ----------- ----------- ------------- --- Total Premiums $ 6,836,158 694,641 557,352 6,698,869 8% ============ =========== =========== ============= === December 31, 1999: Life insurance in force $896,846,000 250,691,000 558,571,000 1,204,726,000 46% ============ =========== =========== ============= === Premiums: Life insurance $ 7,126,938 984,550 537,797 6,680,185 8% Accident & health insurance 236,536 15,175 -- 221,361 -- ------------ ----------- ----------- ------------- --- Total Premiums $ 7,363,474 999,725 537,797 6,901,546 8% ============ =========== =========== ============= === December 31, 1998: Life insurance in force $919,014,000 297,913,000 548,515,000 1,169,616,000 47% ============ =========== =========== ============= === Premiums: Life insurance $ 7,366,153 863,436 566,628 7,069,345 8% Accident & health insurance 158,882 -- -- 158,882 -- ------------ ----------- ----------- ------------- --- Total Premiums $ 7,525,035 863,436 566,628 7,228,227 8% ============ =========== =========== ============= ===
Item 9. Change in and disagreements on accounting and financial disclosure. Southern Security Life, (the "Company") retained Tanner + Co. as its independent auditors and replaced Ernst & Young LLP effective December 1, 1999. The Company retained Ernst & Young LLP as its independent auditors and replaced KPMG Peat Marwick LLP effective February 21, 1999. No report of KPMG Peat Marwick LLP or Ernst & Young LLP on the financial statements of the Company for either of the past two years contained an adverse opinion, or disclaimer of opinion, or was qualified or modified as to uncertainty, audit scope, or accounting principles. Since the engagement of KPMG Peat Marwick LLP and Ernst & Young, LLP for the Company's two most recent fiscal years and through the date of replacement, there were no disagreements between the Company and KPMG Peat Marwick LLP and Ernst and Young, LLP on any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedure. The change in independent accountants was approved by the Company's Board of Directors and disclosed in a Form 8-K, which was filed with the Securities and Exchange Commission on December 21, 1999. PART III Item 10. Directors and executive officers of the Company. --------------------------------------------------------- The Company's Board of Directors consists of eight persons, four of whom are not employees of the Company. There is no family relationship between or among any of the directors, except that Scott M. Quist and G. Robert Quist are the sons of George R. Quist. The following table sets forth certain information with respect to the directors and executive officers of the Company. Director Name Age Since Position(s) with the Company ------------ ----- -------------- -------------------------------- George R. Quist 80 December 1998 Chairman of the Board, President and Chief Executive Officer William C. Sargent 72 December 1998 Senior Vice President, Secretary and Director Scott M. Quist 47 December 1998 First Vice President, General Counsel, Treasurer and Director Charles L. Crittenden 81 December 1998 Director H. Craig Moody 47 December 1998 Director Norman G. Wilbur 62 December 1998 Director Robert G. Hunter 41 December 1998 Director G. Robert Quist 49 April 1999 Director Committees of the Board of Directors include an executive committee, on which George Quist, Scott Quist, Sargent and Moody serve; an audit committee, on which Crittenden, Moody, and Wilbur serve; and a compensation committee, on which Crittenden, Wilbur and George Quist serve. The following is a description of the business experience of each of the directors. George R. Quist, age 80, has been Chairman of the Board, President and Chief Executive Officer of the Company since December 1998. Mr. Quist is also Chairman of the Board, President and Chief Executive Officer of Security National Financial Corporation and has served in this position since October 1979. From 1960 to 1964, he was Executive Vice President and Treasurer of Pacific Guardian Life Insurance Company. From 1946 to 1960, he was an agent, District Manager and Associate General Agent for various insurance companies. Mr. Quist also served from 1981 to 1982 as the President of The National Association of Life Companies, a trade association of 642 life insurance companies, and from 1982 to 1983 as its Chairman of the Board. William C. Sargent, age 72, has been Senior Vice President, Secretary and a director since December 1998. Mr. Sargent is also Senior Vice President, Secretary and a Director of Security National Financial Corporation and has served in this position since February 1980. Prior to 1980, he was employed by Security National as a salesman and agency superintendent. Scott M. Quist, age 47, has been General Counsel, First Vice President, Treasurer and a director since December 1998. Mr. Quist is also First Vice President, General Counsel, Treasurer and a Director of Security National Financial Corporation and has served in this position since May 1986. From 1980 to 1982, Mr. Quist was a tax specialist with Peat, Marwick, Mitchell, & Co., in Dallas, Texas. From 1986 to 1991, he was a treasurer and director of The National Association of Life Companies, a trade association of 642 insurance companies until its merger with the American Council of Life Companies. Mr. Quist has been a member of the Board of Governors of the Forum 500 Section (representing small insurance companies) of the American Council of Life Insurance. Mr. Quist has also served as regional director of Key Bank of Utah since November 1993. Mr. Quist is currently a director and immediated past president of the National Alliance of Life Companies, a trade association of over 200 life companies. Charles L. Crittenden, age 81, has been a director of the Company since December 1998. Mr. Crittenden is also a Director of Security National Financial Corporation and has served in this position since October 1979. Mr. Crittenden has been sole stockholder of Crittenden Paint & Glass Company since 1958. He is also an owner of Crittenden Enterprises, a real estate development company and Chairman of the Board of Linco, Inc. H. Craig Moody, age 47, has been a director of the Company since December 1998. Mr. Moody is also a Director of Security National Financial Corporation and has served in this position since September 1995. Mr. Moody is owner of Moody & Associates, a political consulting and real estate company. He is a former Speaker and House Majority Leader of the House of Representatives of the State of Utah. Norman G. Wilbur, age 62, has been a director of the Company since December 1998. Mr. Wilbur is also a Director of Security National Financial Corporation and has served in this position since October 1998. Mr Wilbur worked for J.C. Penny's regional offices in budget and analysis. His final position was Manager of Planning and Reporting for J.C. Penney's stores. After 36 years with J.C. Penny's, he took an option of an early retirement in 1997. Mr. Wilbur is a past board member of a homeless organization in Plano, Texas. Robert G. Hunter, M.D., age 41, has been a director of the Company since December 1998. Dr. Hunter is also a Director of Security National Financial Corporation and has served in this position since October 1998. Dr. Hunter is currently a practicing physician in private practice. Dr. Hunter created the State Wide E.N.T. Organization (Rocky Mountain E.N.T., Inc.) where he is currently a member of the Executive Committee. He is Chairman of Surgery at Cottonwood Hospital, a delegate to the Utah Medical Association and a delegate representing Utah to the American Medical Association, and a member of several medical advisory boards. G. Robert Quist, age 49, has been a director of the Company since April 1999. Mr. Quist has served as President of Big Willow Water Company from 1987 to the present time. He has served on the Board of Directors of Associated Investors Company of Hawaii, has served on the Board of Directors and is Secretary/Treasurer of the Utah Cemetery Association. Executive Officers ------------------ The following table sets forth certain information with respect to the executive officers of the Company (the business biographies set forth above): Name Age Title ------ ----- --------------- George R. Quist (1) 80 Chairman of the Board, President and Chief Executive Officer William C. Sargent 72 Senior Vice President and Secretary Scott M. Quist (1) 47 First Vice President, General Counsel and Treasurer (1) George R. Quist is the father of Scott M. Quist. The Board of Directors of the Company has a written procedure which requires disclosure to the Board of any material interest or any affiliation on the part of any of its officers, directors or employees which is in conflict or may be in conflict with the interests of the Company. No director, officer or 5% stockholder of the Company or its subsidiaries, or any affiliate thereof has had any transactions with the Company or its subsidiaries during 2000 or 1999. Each of the directors are board members of Security National Financial Corporation (the ultimate parent of the Company) with the exception of G. Robert Quist, which has a class of equity securities registered under the Securities Exchange Act of 1934, as amended. In addition, Scott M. Quist is a regional director of Key Bank of Utah. All directors of the Company hold office until the next annual meeting of stockholders, until their successors have been elected and qualified, or until their earlier resignation or removal. Item 11. Executive compensation. --------------------------------- (a) Summary compensation. The following summary compensation table is provided with respect to the Company's Chief Executive Officer and its Executive Vice President, who constitute all of the executive officers of the Company whose total annual salary and bonus exceed $100,000:
SUMMARY COMPENSATION TABLE Long Term Compensation Annual Compensation Awards Awards Payouts (a) (b) (c) (d) (e) (f) (g) (h) (i) Other Restricted Securities All other Name and Annual Stock Underlying LTIP Compen- Principal Compensation Awards Options/ Payouts sation Position Year Salary($) Bonus($) ($) ($) SARs(#) ($) $ --------------------------------------------------------------------------------------------------- President and Chief Executive Officer George R. Quist(5) 2000 $0 $0 $0 $0 N/A N/A N/A George R. Quist(5) 1999 $0 $0 $0 $0 N/A N/A N/A George Pihakis 1998 $244,800 $0 $13,625(2) $0 N/A N/A $1,050,000 (3) George R. Quist(1) 1998 $0 $0 $0 $0 N/A N/A N/A Executive Vice President David C. Thompson(5)1999 $0 $0 $0 $0 N/A N/A N/A David C. Thompson 1998 $121,275 $0 $13,313(4) $0 N/A N/A N/A
(1) New officers appointed in December 1998 did not receive any compensation in 1998. (2) During 1998 this amount included $6,350 paid in the form of a director's fee, and $7,275 paid in the form of a car allowance. (3) Payment of lump sum settlement under Executive Compensation Agreement. See "Item 11, Executive Compensation (e) Employee Contracts." (4) During 1998 this amount included $6,350 paid in the form of a director's fee,$6,000 paid in the form of a car allowance, and $963 paid in the form of dues at a social club used exclusively for business purposes. (5) Effective January 1, 1999, the Company entered into an Administrative Services Agreement with its ultimate parent Security National Financial Corporation (Security National). Under the terms of the Administrative Services Agreement, all of the Company's employees became employees of Security National. Administrative functions previously performed by the Company are now being furnished to the Company under this Agreement. The Company pays to Security National $250,000 per month or $3 million per year for the Administrative services. (b) Perquisites. Executive officers of the Company who are employees of the Company are covered under a group life, group disability, and hospitalization plan that does not discriminate in favor of officers and that is generally available to all salaried employees. The Company does not have a pension, retirement or other deferred compensation plan, or any other similar arrangement. (c) Director's fees and other fees. Directors of the Company prior to December 17, 1998 received a director's fee of $6,600 per year for serving as director of the Company. Each director of the Company also received the sum of $275 for each committee meeting attended, if such committee meeting is not in conjunction with a meeting of the Company's Board of Directors held at the same time and place. New directors elected in December 1998 did not receive any compensation in 1998, 1999 or 2000. Item 11. Executive compensation, continued ------------------------------------------- (d) Compensation committee interlocks and insider participation. The Executive Committee of the Company's Board of Directors makes recommendation to the Board of Directors concerning the compensation of the Company's executive officers. Subsequently, the Board of Directors makes all final decisions concerning such compensation. (e) Employee contracts. As part of the acquisition by Security National Financial Corporation (SNFC) on December 17, 1998 of SSLIC Holding Company (formerly Consolidare Enterprises, Inc.), SNFC caused the Company to pay $1,050,000 to George Pihakis, President and Chief Executive Officer of the Company prior to closing, as a lump sum settlement of the executive compensation agreement between the Company and Mr. Pihakis. Item 12. Security ownership of certain beneficial owners and management. ------------------------------------------------------------------------ The following table sets forth, as of December 31, 2000, information with respect to the only persons known by the Company to be the beneficial owner of more than 5% of the Company's outstanding voting securities: Number of Shares Title and Nature of of Name and Address of Beneficial Percent Class Beneficial Owner Ownership of Class -------- ------------------------------------- ------------ --------- Common SSLIC Holding Company Inc., formerly Shares Consolidare Enterprises, Inc. 1,095,496 57.4% c/o Security National Life Ins. Co. Direct 5300 S 360 W, Suite 200 Salt Lake City, UT 84123 Common Security National Life Insurance Company 267,770 14.0% Shares 5300 South 360 West, Suite 200 Direct Salt Lake City, Utah 84123 Item 13. Certain relationships and related transactions. -------------------------------------------------------- Insuradyne Corporation, a wholly-owned subsidiary of Security National Financial Corporation, serves as general agent for the Company, pursuant to a general agency agreement, which is terminable by either party with 30 days notice. In such capacity, Insuradyne receives a commission on the first year commissionable premium on certain of the Company's policies as well as a small renewal commission on certain other policies. In accordance with the Florida Insurance Code, a copy of the Company's General Agency Agreement with Insuradyne Corporation was filed with and approved by the Florida Department of Insurance. Management of the Company believes that the terms of its General Agency Agreement with Insuradyne are as favorable to the Company as terms which could be obtained from independent third parties. During 2000 and 1999, gross commissions in the amount of $180,941 and $175,409 respectively, were earned by Insuradyne Corporation. At December 31, 2000, the Company owes $65,103 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, 2000. The Company continues to be indebted to its parent, Security National Life Insurance Company, (SNLIC) in the amount of $1,000,000, pursuant to a promissory note dated December 1988, which bears interest at the annual rate of interest equal to the prime rate (as hereinafter defined) plus 2%, with such interest rate not to be less than 9% nor in excess of 11%. For purposes of this promissory note, prime rate is defined to mean the prime rate as announced by Compass Bank, Birmingham, Alabama, from time to time, as its prime rate (which interest rate is only a bench mark, is purely discretionary and is not necessarily the best or lowest rate charged borrowing customers). This promissory note is due on demand and is payable out of capital surplus in excess of $1,900,000, pursuant to Florida Statutes 628.401 (1990). Interest and principal can only be repaid upon the express written approval of the Florida Department of Insurance. Item 13. Certain relationships and related transactions. (Continued) -------------------------------------------------------------------- The Company entered into an Administrative Services Agreement dated December 17, 1998 with SNFC. Under the terms of the agreement, SNFC has agreed to provide the Company with certain defined administrative and financial services, underwriting, data processing, legal, building management, marketing advisory services and investment services. In consideration for the services to be provided by SNFC, the Company shall pay SNFC an administrative services fee of $250,000 per month, which may be increased, beginning on January 1, 2001, to reflect increases in Consumer Price Index, over the index amount as of January 1, 2000. The Administrative Services Agreement shall remain in effect for an initial term expiring on December 16, 2003. However, the term of the agreement may be automatically extended for an additional one-year term unless either the Company or SNFC shall deliver a written notice on or before September 30 of any year stating to the other its desire not to extend the term of the agreement. SSLIC Holding Company, a wholly owned subsidiary of SNLIC, and owns 71.5% of the outstanding shares of common stock of the Company. SNLIC is a wholly owned subsidiary of SNFC. In addition, George R. Quist, the Company's President and Chef Executive Officer is the President and Chief Executive Officer of SNFC; Scott M. Quist, the Company's First Vice President, General Counsel and Treasurer is the First Vice President, General Counsel and Treasurer of SNFC; and William C. Sargent, the Company's Senior Vice President and Secretary is the Senior Vice President and Secretary of SNFC. Finally, the directors of the Company also serve as the directors of SNFC. See Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operation. On December 28, 1998 the Company entered into a Loan Funding and Fee Agreement and Agency Agreement (the "Agreement") with Security National Mortgage Company ("SNMC"), a subsidiary of SNFC. Under the terms of the Agreement SNMC assigns their interest in residential mortgage loans that have been pre-sold to third party investors to the Company. The Company purchases these loans and holds them as short-term investments until it receives the proceeds from the third-party investors. The Company receives fee income from SNMC based upon how long the loans were outstanding. At December 31, 2000 and 1999 the Company had outstanding loan purchases of $7,814,813 and $8,595,093 respectively. Included in investment income is $732,691 and $457,861 for the years ended December 31, 2000 and 1999, respectively. The Company received for the years ended December 31, 2000 and 1999, $182,248 and $219,684 respectively as rental income from SNFC for a lease of office space in the Company's building under the terms of the Administrative Services Agreement. The Company received for the year ended December 31, 2000 and 1999, $123,393 and $230,639 respectively in interest income from SNFC for short-term loans of which none were outstanding as of December 31, 2000. PART IV Item 14. Financial statements, exhibits filed and reports on Form 10-K. ----------------------------------------------------------------------- Page Number (a) 1. See item 8 2. Supplemental Schedules Required Financial Data - for the years ended December 31, 2000, 1999 and 1998 - included in Part II, Item 8: Schedule I - Summary of Investments - Other than Investments in Related Parties.................................. . . . .40 Schedule III - Supplementary Insurance Information.............................. . . . .41 Schedule IV - Reinsurance................ . . . .42 Schedules other than those listed above have been omitted because they are not applicable or because the required information is included in the financial statements and notes thereto or in Item 7 - Management's Discussion and Analysis of Financial Condition and Results of Operations. 3. Exhibits Exhibit Document No. 3. Articles of Incorporation, as amended, and Bylaws, as amended, dated September 1994, incorporated by reference from the Annual Report on Form 10-K for fiscal year ended December 31, 1994. 10.A Revolving Financing Agreement between the Company and the Student Loan Marketing Association, dated September 19, 1996, incorporated by reference from Annual Report on Form 10-K for fiscal year ended December 31, 1997. 10.B Reinsurance Agreement between the Company and United Group Insurance Company, dated December 31, 1992 incorporated by reference from Annual Report on Form 10-K for fiscal year ended December 31, 1992. 10.C Agency Agreement between the Company and Insuradyne Corporation, incorporated by reference from Annual Report on Form 10-K for fiscal year ended December 31, 1993. 10.D Administrative Services Agreement between the Company and Security National Financial Corporation dated December 17, 1998, incorporated by reference from Annual Report on Form 10-K for fiscal year ended December 31, 1998. 10.E Agency Agreement between the Company and Security National Mortgage Company dated December 28, 1998, incorporated by reference from Annual Report on Form 10-K for fiscal year ended December 31, 1999. 10.F Loan Funding and Fee Agreement between the Company and Security National Mortgage Company dated December 28, 1998, from Annual Report on Form 10-K for fiscal year ended December 31, 1999. 11. Statement Re Computation of Net Income per common share b) Reports on Form 8-K None Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Company has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. SOUTHERN SECURITY LIFE INSURANCE COMPANY Dated: April 12, 2001 By: George R. Quist George R. Quist Chairman of the Board, President and Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934 as amended, this report has been signed by the following persons in counterpart on behalf of the Company on the dates indicated: Signature Title Date George R. Quist Chairman of the April 12, 2001 Board, President and Chief Executive Officer (Principal Executive Officer) Scott M. Quist First Vice President, April 12, 2001 General Counsel, Treasurer and Director (Principal Financial and Accounting Officer) William C. Sargent Senior Vice President, April 12, 2001 Secretary and Director Charles L. Crittenden Director April 12, 2001 Robert G. Hunter Director April 12, 2001 H. Craig Moody Director April 12, 2001 G. Robert Quist Director April 12, 2001 Norman G. Wilbur Director April 12, 2001 SOUTHERN SECURITY LIFE INSURANCE COMPANY EXHIBIT 11 COMPUTATION OF NET INCOME PER COMMON SHARE 2000 1999 1998 Weighted Average Shares Outstanding 1,907,989 1,907,989 1,907,989 Net Income (Loss) $160,260 $631,958 $(383,733) Per Share Amount $.08 $.33 $(.20)