10-Q 1 ssl0310q.txt UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. FORM 10-Q QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For Quarter Ended March 31, 2001 Commission File Number: 2-35669 -------------------------------- ------------------------------- SOUTHERN SECURITY LIFE INSURANCE COMPANY Exact Name of Registrant. FLORIDA 59-1231733 ------------------------------- ------------------------- (State or other jurisdiction of IRS Identification Number incorporation or organization) 755 Rinehart Road, Lake Mary, Florida 32746 ------------------------------------- ---------- (Address of principal executive offices) (Zip Code) Registrant's telephone number, including Area Code (407) 321-7113 -------------- 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 such filing requirements for the past 90 days. YES XX NO ---- Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. Class A Common Stock, $1.00 par value 1,907,989 ------------------------------------- ------------------------------- Title of Class Number of Shares Outstanding as of March 31, 2001 SOUTHERN SECURITY LIFE INSURANCE COMPANY FORM 10Q QUARTER ENDED March 31, 2001 TABLE OF CONTENTS PART I - FINANCIAL INFORMATION Item 1 Financial Statements Page No. ------ -------- Statement of Income - Three Months ended March 31, 2001 and 2000 (unaudited)........................3 Balance Sheet - March 31, 2001 (unaudited) and December 31, 2000......................................4-5 Statement of Cash Flows - Three months ended March 31, 2001 and 2000 (unaudited)..................................6 Notes to Condensed Financial Statements....................7 Item 2 Management's Discussion and Analysis....................... 7-9 Item 3 Quantitative and Qualitative Disclosure of Market Risk......9 PART II - OTHER INFORMATION Other Information............................................10-11 Signature Page...............................................12 2 SOUTHERN SECURITY LIFE INSURANCE COMPANY Statement of Income (Unaudited) Three Months Ended March 31, 2001 2000 (Unaudited) (Unaudited) ----------- ----------- Revenues: ----------- Net insurance revenues $1,854,427 $1,728,054 Net investment income 918,217 979,315 ----------- ----------- 2,772,644 2,707,369 ----------- ----------- Benefits, claims and expenses: ----------=------------------ Benefits and claims 1,183,971 1,177,248 Amortization of deferred policy acquisition costs 753,140 649,207 Operating expenses 872,817 820,896 ----------- ----------- 2,809,928 2,647,351 ----------- ----------- Income (loss) before income taxes (37,284) 60,018 Income tax expense (benefit) (7,500) 11,100 ----------- ----------- Net income (loss) $(29,784) $48,918 =========== =========== Basic and diluted net income (loss) per share of common stock $(0.02) $0.03 =========== =========== Weighted average outstanding common shares 1,907,989 1,907,989 =========== =========== See accompanying notes to financial statements. 3 SOUTHERN SECURITY LIFE INSURANCE COMPANY BALANCE SHEET March 31, 200 December 31, (Unaudited) 2000 -------------- ----------- Assets: Investments: Fixed maturities held-to-maturity $4,821,146 $5,374,204 Securities available-for-sale, at fair value: Fixed maturities 23,922,210 23,367,483 Equity securities 396,323 358,932 Mortgage loans 2,290,135 2,298,163 Policy and student loans 8,281,507 8,220,736 Short-term investments 9,864,314 7,814,813 ----------- ----------- 49,575,635 47,434,331 Cash and cash equivalents 417,886 2,513,668 Accrued investment income 810,504 610,474 Deferred policy acquisition costs 13,050,456 13,211,413 Policyholders' account balances on deposit with reinsurer 7,401,986 7,434,750 Reinsurance receivable 330,291 324,793 Receivables: Agent balances 1,207,307 1,208,378 Other 424,600 279,567 Property and equipment, net, at cost 2,530,075 2,542,384 Investment in affiliate at cost 1,566,173 1,566,173 ----------- ----------- Total assets $77,314,913 $77,125,931 =========== =========== See accompanying notes to financial statements. 4 SOUTHERN SECURITY LIFE INSURANCE COMPANY BALANCE SHEET (Continued) March 31, 2001 December 31, (Unaudited) 2000 -------------- ----------- Liabilities and Shareholders' Equity: Liabilities: Policy liabilities and accruals $2,875,230 $2,965,940 Future policy benefits: Policyholders' account balances 48,460,466 48,722,138 Unearned revenue 4,756,671 4,948,989 Other policy claims and benefits payable 780,510 580,196 Other policyholders' funds, dividend and endowment accumulations 71,747 72,890 Funds held related to reinsurance treaties 1,410,670 1,417,216 Note payable to related party 1,000,000 1,000,000 Due to affiliated companies 132,438 151,689 General expenses accrued 113,004 157,944 Unearned investment income 367,315 323,830 Other liabilities 1,815 28,488 Income taxes 760,143 558,076 ----------- ------------ Total liabilities 60,730,009 60,927,396 ------------ ------------ Shareholders' equity: 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) 340,525 (75,628) Retained earnings 10,324,871 10,354,655 ------------ ------------ Total shareholders' equity 16,584,904 16,198,535 Commitments and contingencies -- -- ------------ ------------ Total liabilities and shareholders' equity $77,314,913 $77,125,931 ============ ============ See accompanying notes to financial statements. 5 SOUTHERN SECURITY LIFE INSURANCE COMPANY STATEMENT OF CASH FLOWS (Unaudited) Three Months Ended March 31, 2001 2000 ---- ---- Net cash provided by operating activities $80,558 $617,374 Cash flows (used in) provided by investing activities: Purchase of investments held-to-maturity -- (2,606,749) Purchase of investments equity securities -- (815,121) Proceeds from maturity of held-to-maturity securities 552,877 554,007 Proceeds from maturity of available for-sale securities 6,250 1,008,940 Purchase of mortgage loans -- (825,000) Mortgage loan repayments 8,028 5,212 Net change in short-term investments (2,049,501) 1,282,044 Net change in policy and student loans (60,771) 24,724 Acquisition of property and equipment (15,576) -- ----------- ----------- Net cash (used in) provided by investing activities (1,558,693) (1,371,943) Cash flow used in financing activities: Receipts from universal life and certain annuity policies credited to policyholder account balances 1,321,065 1,521,693 Return of policyholder balances on universal life and certain annuity policies (1,938,712) (2,188,709) ----------- ----------- Net cash used in financing activities (617,647) (667,016) (Decrease) increase in cash and cash equivalents (2,095,782) (1,421,585) Cash and cash equivalents at beginning of period 2,513,668 4,013,401 ----------- ----------- Cash and cash equivalents at end of period $417,886 $2,591,816 =========== =========== See accompanying notes to financial statements. 6 SOUTHERN SECURITY LIFE INSURANCE COMPANY Notes to Condensed Financial Statements March 31, 2001 (Unaudited) 1. Basis of Presentation The accompanying unaudited condensed financial statements have been prepared by management in conformity with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Regulation S-X. Accordingly, they do not include all of the disclosures required by generally accepted accounting principles for complete financial statements. All adjustments and accruals considered necessary for fair presentation of financial information have been included in the opinion of management, and are of a normal recurring nature. Quarterly results of operations are not necessarily indicative of annual results. These statements should be read in conjunction with the financial statements and the notes thereto included in the Southern Security Life Insurance Company 1999 Annual Report on Form 10- K for the fiscal year ended December 31, 2000 (file number 2-35669). The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. The estimates susceptible to significant change are those used in determining the liability for future policy benefits and claims. Although some variability is inherent in these estimates, management believes the amounts provided are adequate. 2. Comprehensive Income For the three months ended March 31, 2001 and 2000, total comprehensive income (loss) was $386,369 and $(8,137), respectively. Item 2. Management's Discussion and Analysis Overview This analysis of the results of operations and financial condition of Southern Security Life should be read in conjunction with the Condensed Financial Statements and Notes to the Condensed 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 life and annuity products in debt and equity securities in order to earn interest and dividend income, a portion of which is credited back to the policyholders. Interest rates and maturities of the Company's investment portfolio play an important part in determining the interest rates credited to policyholders. 7 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 First Quarter of 2001 Compared to First Quarter of 2000 Total revenues increased by $66,000, or 2.5%, to $2,773,000 for the three months ended March 31, 2001, from $2,707,000 for the three months ended March 31, 2000. Contributing to this increase was a $126,000 increase in net insurance revenues. Net insurance revenues increased by $126,000 or 7.3%, to $1,854,000 for the three months ended March 31, 2001, from $1,728,000 for the three months ended March 31, 2000. This increase was primarily the result of additional premiums from increased sales of final expense products. Net investment income decreased by $61,000, or 6.2%, to $918,000 for the three months ended March 31, 2001, from $979,000 for the three months ended March 31, 2000. This decrease was due to a reduction in policy loan interest income. Benefits and claims increased by $7,000, or .6%, to $1,184,000 for the three months ended March 31, 2001, from $1,177,000 for the comparable period in 2000. This increase was primarily due to an increase in interest crediting for universal life policyholder account balances. The amortization of deferred policy acquisition costs increased by $104,000, or 16.0%, to $753,000 for the three months ended March 31, 2001, from $649,000 for the comparable period in 2000. This increase was in line with actuarial assumptions. Operating expenses increased by $52,000, or 6.3%, to $873,000 for the three months ended March 31, 2001, from $821,000 for the same period in 2000. This increase was primarily the result of additional marketing expenses. Liquidity and Capital Resources The Company attempts to match the duration of invested assets with its policyholder liabilities. The Company may sell investments other than those held-to-maturity in the portfolio to help in this timing; however, to date, that has not been necessary. The Company purchases short-term investments on a temporary basis to meet the expectations of short-term requirements of the Company's products. The Company's investment philosophy is intended to provide a rate of return which will persist during the expected duration of policyholder liabilities regardless of future interest rate movements. The Company's investment policy is to invest predominantly in fixed maturity securities, mortgage loans, and warehouse mortgage loans on a short-term basis before selling the loans to investors in accordance with the requirements and laws governing life insurance companies. Bonds owned by the Company amounted to $28,743,000 as of March 31, 2001, as compared to $28,742,000 as of December 31, 2000. This represents 58.0% and 60.6% of the total investments as of March 31, 2001 and December 31, 2000, respectively. Generally, all bonds owned by the Company are rated by the National Association of Insurance Commissioners. Under this rating system, there are six categories used for rating bonds. At March 31, 2001, and at December 31, 2000, the Company did not have investments in bonds in rating categories three through six, which are considered non-investment grade. 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 8 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 March 31, 2001 and December 31, 2000, the Company exceeded the regulatory criteria. Lapse rates measure the amount of insurance terminated during a particular period. The Company's lapse rate for life insurance in 2000 was 16.1% as compared to a rate of 9.1% for 1999. The 2001 lapse rate is approximately the same as 2000. At March 31, 2001, $8,186,000 of the Company's consolidated stockholders' equity represented the statutory stockholders' equity. The Company cannot pay a dividend to its parent company without the approval of insurance regulatory authorities. The Company has no material commitments for capital expenditures. Item 3. Quantitative and Qualitative Disclosure of Market Risk There have been no significant changes since the annual report Form 10-K filed for the year ended December 31, 2000. Part II Other Information: Item 1. Legal Proceedings An action was brought against the Company in July 1999 by Dorothy Ruth Campbell in the Circuit Court of Escambia County, Alabama. The action arises out of a denial of coverage under a $10,000 insurance policy. The claims are for breach of contract, bad faith and fraudulent misrepresentation. In the action, Campbell seeks compensatory and punitive damages plus interest. The Company has filed its response to the complaint and certain discovery has taken place. The Company intends to vigorously defend the matter. An action was brought against the Company 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 intends to continue to vigorously defend the action. 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. 9 Item 2. Changes in Securities NONE Item 3. Defaults Upon Senior Securities NONE Item 4. Submission of Matters to a Vote of Security Holders NONE Item 5. Other Information NONE Item 6. Exhibits and Reports on Form 8-K (a) Exhibits 3. Articles of Incorporation, as amended, and By-laws, as amended, dated September 1994, incorporated by reference from the Annual Report filed 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. B. Reinsurance Agreement between the Company and United Group Insurance Company, dated as of December 31, 1992 incorporated by reference from Annual Report on Form 10-K for fiscal year ended December 31, 1992. 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. D. Administrative Services Agreement between the Company and Security National Financial Corporation effective December 17, 1998, incorporated by reference from Annual Report on Form 10-K for fiscal year ended December 31, 1998. 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. F. Loan Funding and Fee 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. (b) Reports on Form 8-K: NONE 10 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. REGISTRANT SOUTHERN SECURITY LIFE INSURANCE COMPANY Registrant DATED: May 15, 2001 By: George R. Quist, ---------------- Chairman of the Board, President and Chief Executive Officer (Principal Executive Officer) DATED: May 15, 2001 By: Scott M. Quist -------------- First Vice President, General Counsel and Treasurer (Principal Financial and Accounting Officer) 11