10-Q 1 ssl10q6.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 June 30, 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 June 30, 2001 SOUTHERN SECURITY LIFE INSURANCE COMPANY FORM 10Q QUARTER ENDED JUNE 30, 2001 TABLE OF CONTENTS PART I - FINANCIAL INFORMATION Item 1 Financial Statements Page No. ------ -------- Statement of Income - Six and Three Months ended June 30, 2001 and 2000 (unaudited)........................3 Balance Sheet - June 30, 2001 (unaudited) and December 31, 2000.....................................4-5 Statement of Cash Flows - Six months ended June 30, 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) Six Months Ended June 30, Three Months Ended June 30, 2001 2000 2001 2000 (Unaudited) (Unaudited) (Unaudited) (Unaudited) ----------- ----------- ----------- ----------- Revenues: -------- Net insurance revenues $3,401,629 $3,385,908 $1,547,202 $1,657,854 Net investment income 1,837,411 1,970,261 919,194 990,946 ----------- ----------- ----------- ----------- 5,239,040 5,356,169 2,466,396 2,648,800 ----------- ----------- ----------- ----------- Benefits, claims and expenses: ----------- Benefits and claims 2,308,945 2,210,136 1,124,974 1,032,888 Amortization of deferred policy acquisition costs 1,299,751 1,373,955 546,611 724,748 Operating expenses 1,805,715 1,638,589 932,898 817,693 ----------- ----------- ----------- ----------- 5,414,411 5,222,680 2,604,483 2,575,329 ----------- ----------- ----------- ----------- Income (loss) before income taxes (175,371) 133,489 (138,087) 73,471 Income tax expense (benefit) (35,000) 26,097 (27,500) 14,997 ----------- ----------- ----------- ----------- Net income (loss) $(140,371) $107,392 $(110,587) $58,474 =========== =========== =========== =========== Basic and diluted net income (loss) per share of common stock $(0.07) $0.06 $(0.06) $0.03 =========== =========== =========== =========== Weighted average outstanding common shares 1,907,989 1,907,989 1,907,989 1,907,989 =========== =========== =========== ===========
See accompanying notes to financial statements. 3 SOUTHERN SECURITY LIFE INSURANCE COMPANY BALANCE SHEET June 30, 2001 December 31, (Unaudited) 2000 -------------- ----------- Assets: Investments: Fixed maturities held-to-maturity $3,767,342 $5,374,204 Securities available-for-sale, at fair value: Fixed maturities 22,677,149 23,367,483 Equity securities 442,485 358,932 Mortgage loans 2,282,731 2,298,163 Policy and student loans 8,150,664 8,220,736 Short-term investments 10,863,678 7,814,813 ----------- ----------- 48,184,049 47,434,331 Cash and cash equivalents 1,950,329 2,513,668 Accrued investment income 562,461 610,474 Deferred policy acquisition costs 12,987,976 13,211,413 Policyholders' account balances on deposit with reinsurer 7,325,828 7,434,750 Reinsurance receivable 389,380 324,793 Receivables: Agent balances 1,130,934 1,208,378 Other 557,626 279,567 Property and equipment, net, at cost 2,544,387 2,542,384 Investment in affiliate at cost 1,566,173 1,566,173 ----------- ----------- Total assets $77,199,143 $77,125,931 =========== =========== See accompanying notes to financial statements. 4 SOUTHERN SECURITY LIFE INSURANCE COMPANY BALANCE SHEET (Continued) June 30, 2001 December 31, (Unaudited) 2000 -------------- ----------- Liabilities and Shareholders' Equity: Liabilities: Policy liabilities and accruals $3,030,957 $2,965,940 Future policy benefits: Policyholders' account balances 48,051,585 48,722,138 Unearned revenue 4,801,196 4,948,989 Other policy claims and benefits payable 1,041,376 580,196 Other policyholders' funds, dividend and endowment accumulations 71,747 72,890 Funds held related to reinsurance treaties 1,391,740 1,417,216 Note payable to related party 1,000,000 1,000,000 Due to affiliated companies 193,547 151,689 General expenses accrued 81,652 157,944 Unearned investment income 367,041 323,830 Other liabilities 52,818 28,488 Income taxes 698,797 558,076 ------------ ------------ Total liabilities 60,782,456 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) 282,896 (75,628) Retained earnings 10,214,283 10,354,655 ------------ ------------ Total shareholders' equity 16,416,687 16,198,535 Commitments and contingencies -- -- ------------ ------------ Total liabilities and shareholders' equity $77,199,143 $77,125,931 ============ ============ See accompanying notes to financial statements. 5 SOUTHERN SECURITY LIFE INSURANCE COMPANY STATEMENT OF CASH FLOWS (Unaudited) Six Months Ended June 30, 2001 2000 ---- ---- Net cash provided by operating activities $1,606,085 $390,151 ----------- ----------- 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 1,607,279 1,105,557 Proceeds from maturity of available for-sale securities 1,064,816 1,214,748 Proceeds from sale of available for sale equity securities 11,270 Purchase of mortgage loans -- (825,000) Mortgage loan repayments 15,432 12,024 Net change in short-term investments (3,048,865) (1,585,573) Net change in policy and student loans 70,072 (66,897) Acquisition of property and equipment (64,927) (88,488) ----------- ----------- Net cash (used in) provided by investing activities (344,923) (3,655,499) ----------- ----------- Cash flow used in financing activities: Receipts from universal life and certain annuity policies credited to policyholder account balances 2,567,825 3,036,706 Return of policyholder balances on universal life and certain annuity policies (4,392,326) (3,495,993) ----------- ----------- Net cash used in financing activities (1,824,501) (459,287) ----------- ----------- (Decrease) increase in cash and cash equivalents (563,339) (3,724,635) Cash and cash equivalents at beginning of period 2,513,668 4,013,401 ----------- ----------- Cash and cash equivalents at end of period $1,950,329 $288,766 =========== =========== See accompanying notes to financial statements. 6 SOUTHERN SECURITY LIFE INSURANCE COMPANY Notes to Condensed Financial Statements June 30, 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 2000 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 six months ended June 30, 2001 and 2000, total comprehensive income (loss) was $218,153 and $12,540, respectively. For the three months ended June 30, 2001 and 2000, total comprehensive income (loss) was $(168,216) and $20,677, 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, 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. 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 Six Months Ended June 30, 2001 compared to Six Months Ended June 30, 2000 Total revenues decreased by $117,000, or 2.2%, to $5,239,000 for the six months ended June 30, 2001, from $5,356,000 for the six months ended June 30, 2000. Contributing to this decrease was a $133,000 decrease in net investment income. Net insurance revenues increased by $16,000 or .5%, to $3,402,000 for the six months ended June 30, 2001, from $3,386,000 for the six months ended June 30, 2000. This increase was primarily the result of additional premiums from increased sales of final expense products. Net investment income decreased by $133,000, or 6.7%, to $1,837,000 for the six months ended June 30, 2001, from $1,970,000 for the six months ended June 30, 2000. This decrease was due to a reduction in policy loan interest income, and lower interest rates on short-term investments. Benefits and claims increased by $99,000, or 4.5%, to $2,309,000 for the six months ended June 30, 2001, from $2,210,000 for the comparable period in 2000. This increase was primarily due to an increase in death claims and traditional life reserves. The amortization of deferred policy acquisition costs decreased by $74,000, or 5.4%, to $1,300,000 for the six months ended June 30, 2001, from $1,374,000 for the comparable period in 2000. This decrease was in line with actuarial assumptions. Operating expenses increased by $167,000, or 10.2%, to $1,806,000 for the six months ended June 30, 2001, from $1,639,000 for the same period in 2000. This increase was primarily the result of additional administration costs required under the Services and Administration Agreement with Security National Financial Corporation and bank service fees and the deferral of fewer expenses. Second Quarter of 2001 Compared to Second Quarter of 2000 Total revenues decreased by $182,000, or 6.9%, to $2,467,000 for the three months ended June 30, 2001, from $2,649,000 for the three months ended June 30, 2000. Contributing to this decrease was a $72,000 decrease in net investment income and an $111,000 decrease in net insurance revenues. Net insurance revenues decreased by $111,000 or 6.7%, to $1,547,000 for the three months ended June 30, 2001, from $1,658,000 for the three months ended June 30, 2000. This decrease was primarily due to the adjustment of the amortization rate of unearned revenue to the Company's current actuarial assumptions. Net investment income decreased by $72,000, or 7.2%, to $919,000 for the three months ended June 30, 2001, from $991,000 for the three months ended June 30, 2000. This decrease was primarily the result of lower interest rates on short-term investments. Benefits and claims increased by $92,000, or 8.9% to $1,125,000 for the three months ended June 30, 2001, from $1,033,000 for the comparable period in 2000. This increase was primarily due to an increase in traditional life reserves. 8 The amortization of deferred policy acquisition costs decreased by $178,000, or 24.6%, to $547,000 for the three months ended June 30, 2001, from $725,000 for the comparable period in 2000. The decrease was primarily due to the adjustment of the amortization rate to the Company's current actuarial assumptions. Operating expenses increased by $115,000, or 14.1% to $933,000 for the three months ended June 30, 2001, from $818,000 for the same period in 2000. This increase was primarily the result of additional administration costs required under the Services and Administration Agreement with Security National Financial Corporation and bank service fees and the deferral of fewer 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 $26,444,000 as of June 30, 2001, as compared to $28,742,000 as of December 31, 2000. This represents 54.9% and 60.6% of the total investments as of June 30, 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 June 30, 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 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 June 30, 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 June 30, 2001, $8,167,000 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. 9 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 by National Group Underwriters, Inc. ("NGU") in state court in the State of Texas. The case was removed by the Company to the United States District Court for the Northern District of Texas, Forth Worth Division, with Civil No. 4:01-CV-403-E. An Amended Complaint was filed on or about July 18, 2001. The Amended Complaint asserts that NGU had a contract with the Company wherein NGU would submit applications for certain policies of insurance to be issued by the Company. It is alleged that disputes have arisen between NGU and the Company with regard to the calculation and payment of certain advanced commissions as well as certain production bonuses. NGU alleges that it "has been damaged far in excess of the $75,000 minimum jurisdictional limits of this Court." NGU also seeks attorneys fees and costs as well as prejudgment and postjudgment interest. The Company, in addition to answering the Amended Complaint, has counterclaimed for what it claims to be a debit balance owing to it pursuant to the relationship between the parties with said counterclaim seeking an amount in excess of $625,000 (said amount potentially subject to reduction as premiums are received). The Company is also seeking to recover attorneys fees and costs, as well punitive damages on two of its causes of action. The Company has pending a motion for change of venue of the case to Salt Lake City, Utah. The Company intends to vigorously defend the matter as well as prosecute its counterclaims. The Company is not a party to any other legal proceedings outside the ordinary course of the Company's business or to any other legal proceedings which, if adversely determined, would have a material adverse effect on the Company or its business. Item 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. 10 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 11 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: August 20, 2001 By: George R. Quist, ---------------- Chairman of the Board, President and Chief Executive Officer (Principal Executive Officer) DATED: August 20, 2001 By: Scott M. Quist -------------- First Vice President, General Counsel and Treasurer (Principal Financial and Accounting Officer) 12