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, 2002 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 2,003,388
- ------------------------------------- ------------------------------
Title of Class Number of Shares Outstanding as
of June 30, 2002
SOUTHERN SECURITY LIFE INSURANCE COMPANY
FORM 10Q
QUARTER ENDED JUNE 30, 2002
TABLE OF CONTENTS
PART I - FINANCIAL INFORMATION
Item 1 Financial Statements Page No.
- ------ --------
Statement of Operations - Six and Three Months
ended June 30, 2001 and 2002 (unaudited)..........................3
Balance Sheet - June 30, 2002 (unaudited)
and December 31, 2001...........................................4-5
Statement of Cash Flows - Six Months ended June 30,
2002 and 2001 (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
Certification....................................................12
2
SOUTHERN SECURITY LIFE INSURANCE COMPANY
Statement of Operations
(Unaudited)
Six Months Ended June 30, Three Months Ended June 30,
2002 2001 2002 2001
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
----------- ----------- ----------- -----------
Revenues:
- --------
Net insurance revenues $3,345,416 $3,401,629 $1,752,896 $1,547,202
Net investment income 1,911,155 1,837,411 960,112 919,194
----------- ----------- ----------- -----------
5,256,571 5,239,040 2,713,008 2,466,396
----------- ----------- ----------- -----------
Benefits, claims and expenses:
-----------
Benefits and claims 2,385,057 2,308,945 1,331,849 1,124,974
Amortization of deferred policy
acquisition costs 1,114,969 1,299,751 607,342 546,611
Operating expenses 1,830,365 1,805,715 902,323 932,898
----------- ----------- ----------- -----------
5,330,391 5,414,411 2,841,514 2,604,483
----------- ----------- ----------- -----------
Income (loss) before income taxes (73,820) (175,371) (128,506) (138,087)
Income tax expense (benefit) (16,512) (35,000) (27,512) (27,500)
----------- ----------- ----------- -----------
Net income (loss) $(57,308) $(140,371) $(100,994) $(110,587)
=========== =========== =========== ===========
Basic and diluted net income
(loss) per share of common stock $(.03) $(.07) $(.05) $(.06)
===== ===== ===== =====
Weighted average outstanding
common shares - basic and
diluted 1,955,689 1,907,989 2,003,388 1,907,989
=========== =========== =========== ===========
See accompanying notes to financial statements.
3
SOUTHERN SECURITY LIFE INSURANCE COMPANY
BALANCE SHEET
June 30, 2002 December 31,
(Unaudited) 2001
-------------- -----------
Assets:
Investments:
Fixed maturities held-to-maturity $4,077,927 $3,156,650
Securities available-for-sale,
at fair value:
Fixed maturities 19,126,277 21,364,731
Equity securities 331,838 372,183
Mortgage loans 2,257,591 2,268,292
Policy and student loans 7,960,987 8,181,223
Short-term investments 13,203,058 13,860,534
----------- -----------
46,957,678 49,203,613
Cash and cash equivalents 4,953,603 1,969,055
Accrued investment income 535,656 613,280
Deferred policy acquisition costs 13,175,187 12,974,390
Policyholders' account balances on
deposit with reinsurer 7,081,246 7,148,068
Reinsurance receivable 286,741 569,163
Receivables:
Agent balances 769,814 1,005,535
Other 587,672 722,075
Property and equipment, net, at cost 2,447,892 2,491,062
Investment in affiliate at cost 745,263 783,087
----------- -----------
Total assets $77,540,752 $77,479,328
=========== ===========
See accompanying notes to financial statements.
4
SOUTHERN SECURITY LIFE INSURANCE COMPANY
BALANCE SHEET (Continued)
June 30, 2002 December 31,
(Unaudited) 2001
-------------- -----------
Liabilities and Shareholders' Equity:
Liabilities:
Policy liabilities and accruals $2,970,827 $2,901,599
Future policy benefits:
Policyholders' account balances 47,473,656 47,601,259
Unearned revenue 4,691,189 4,694,563
Other policy claims and benefits
payable 1,084,268 1,147,403
Other policyholders' funds, dividend
and endowment accumulations 62,492 64,045
Funds held related to reinsurance
treaties 1,342,235 1,379,640
Note payable to related party 1,000,000 1,000,000
Due to affiliated companies 314,619 193,689
General expenses accrued 74,460 93,436
Unearned investment income 354,208 357,322
Other liabilities 278,604 247,665
Income taxes 938,894 895,437
----------- -----------
Total liabilities 60,585,452 60,576,058
----------- -----------
Shareholders' equity:
Common stock, $1 par, authorized
3,000,000 shares; issued and out-
standing, 2,003,388 shares in 2002
and 1,907,989 in 2001 2,003,388 1,907,989
Capital in excess of par 4,267,188 4,011,519
Accumulated other comprehensive
income (loss) 667,470 558,131
Retained earnings 10,017,254 10,425,631
----------- -----------
Total shareholders' equity 16,955,300 16,903,270
Commitments and contingencies -- --
Total liabilities and
shareholders' equity $77,540,752 $77,479,328
=========== ===========
See accompanying notes to financial statements.
5
SOUTHERN SECURITY LIFE INSURANCE COMPANY
STATEMENT OF CASH FLOWS
(Unaudited)
Six Months Ended June 30,
2002 2001
---- ----
Net cash provided by operating activities $ 1,812,068 $ 1,606,085
----------- -----------
Cash flows (used in) provided by
investing activities:
Proceeds from maturity of
held-to-maturity securities 867,620 1,607,279
Proceeds from maturity of available
for-sale securities 2,300,000 1,064,816
Proceeds from sale of available for
sale equity securities 37,824 11,270
Purchase of investments held to
maturity (1,784,283) --
Mortgage loan repayments 10,701 15,432
Net change in short-term investments 657,476 (3,048,865)
Net change in policy and student loans 220,236 70,072
Acquisition of property and equipment (21,831) (64,927)
----------- -----------
Net cash (used in) provided by
investing activities 2,287,743 (344,923)
----------- -----------
Cash flow used in financing activities:
Receipts from universal life and
certain annuity policies credited
to policyholder account balances 2,573,248 2,567,825
Return of policyholder balances
on universal life and certain
annuity policies (3,688,511) (4,392,326)
----------- -----------
Net cash used in financing activities (1,115,263) (1,824,501)
----------- -----------
(Decrease) increase in cash and
cash equivalents 2,984,548 (563,339)
Cash and cash equivalents at beginning
of period 1,969,055 2,513,668
----------- -----------
Cash and cash equivalents at
end of period $4,953,603 $1,950,329
=========== ===========
See accompanying notes to financial statements.
6
SOUTHERN SECURITY LIFE INSURANCE COMPANY
Notes to Condensed Financial Statements
June 30, 2002
(Unaudited)
1. Basis of Presentation
The accompanying unaudited condensed financial statements have been prepared by
management in conformity with accounting principles generally accepted in the
United States of America 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 accounting principles generally accepted in
the United States of America 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 2001 Annual Report on Form 10-K for the fiscal year ended
December 31, 2001 (file number 2-35669).
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America 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, 2002 and 2001, total comprehensive income was
$52,031 and $218,153, respectively. For the three months ended June 30, 2002 and
2001, total comprehensive income (loss) was $164,542 and $(168,216)
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, 2002 compared to Six Months Ended June 30, 2001
Total revenues increased by $18,000, or .3%, to $5,257,000 for the six months
ended June 30, 2002, from $5,239,000 for the six months ended June 30, 2001.
Contributing to this increase was a $74,000 increase in net investment income.
Net insurance revenues decreased by $57,000, or 1.7%, to $3,345,000 for the six
months ended June 30, 2002, from $3,402,000 for the six months ended June 30,
2001. This decrease was primarily the result of the declining sales of the
Company's universal life business.
Net investment income increased by $74,000, or 4.0%, to $1,911,000 for the six
months ended June 30, 2002, from $1,837,000 for the six months ended June 30,
2001. This increase was due to additional rental income from new tenants in the
Company's office building.
Benefits and claims increased by $76,000, or 3.3%, to $2,385,000 for the six
months ended June 30, 2002, from $2,309,000 for the comparable period in 2001.
This increase was primarily due to an increase in death claims and traditional
life reserves.
The amortization of deferred policy acquisition costs decreased by $185,000, or
14.2%, to $1,115,000 for the six months ended June 30, 2002, from $1,300,000 for
the comparable period in 2001. This decrease was in line with actuarial
assumptions.
Operating expenses increased by $24,000, or 1.4%, to $1,830,000 for the six
months ended June 30, 2002, from $1,806,000 for the same period in 2001. This
increase was primarily the result of additional legal fees expended for
litigation purposes.
Second Quarter of 2002 Compared to Second Quarter of 2001
Total revenues increased by $247,000, or 10.0%, to $2,713,000 for the three
months ended June 30, 2002, from $2,466,000 for the six months ended June 30,
2001. Contributing to this increase was a $206,000 increase in net insurance
revenues and a $41,000 increase in net investment income.
Net insurance revenues increased by $206,000, or 13.3%, to $1,753,000 for the
three months ended June 30, 2002, from $1,547,000 for the comparable period in
2001. This increase was primarily the result of an increase in the amortization
of unearned revenue to the Company's current actuarial assumptions.
Net investment income increased by $41,000, or 4.5%, to $960,000 for the three
months ended June 30, 2002, from $919,000 for the comparable period in 2001.
This increase was due to additional rental income from new tenants in the
Company's office building.
Benefits and claims increased by $207,000, or 18.4%, to $1,332,000 for the three
months ended June 30, 2002, from $1,125,000 for the comparable period in 2001.
This increase was primarily due to an increase in death claims and traditional
life reserves.
The amortization of deferred policy acquisition costs increased by $60,000, or
11.1%, to $607,000 for the three months ended June 30, 2002, from $547,000 for
the comparable period in 2001. The increase was primarily due to the adjustment
of the amortization rate to the Company's current actuarial assumptions.
8
Operating expenses decreased by $31,000, or 3.3%, to $902,000 for the three
months ended June 30, 2002, from $933,000 for the comparable period in 2001.
This decrease was primarily the result of lower bank charges and other
administrative 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
$23,204,000 as of June 30, 2002, as compared to $24,521,000 as of December 31,
2001. This represents 49.4% and 49.8% of the total investments as of June 30,
2002 and December 31, 2001, 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,
2002, and at December 31, 2001, the Company had investments in bonds in rating
categories three through six, which are considered non-investment grade, of
$482,000.
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, 2002 and
December 31, 2001, the Company exceeded the regulatory criteria.
Lapse rates measure the amount of insurance terminated during a particular
period. The Company's lapse rate for life insurance in 2001 was 13.8% as
compared to a rate of 16.1% for 2000. The 2002 lapse rate is approximately the
same as 2001.
At June 30, 2002, $9,126,000 of the Company's 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, 2001.
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. A motion for summary judgment filed on
behalf of the Company was denied. A trial date has yet to be set
as the Company continues to vigorously defend the matter.
An action was brought against the Company by National Group
Underwriters, Inc. ("NGU") in state court in the State of Texas.
The case was removed by the Company to the United States District
Court for the Northern District of Texas, Fort Worth Division,
with Civil No. 4:01-CV-403-E. An Amended Complaint was filed on
or about July 18, 2001. The Amended Complaint asserts that NGU
had a contract with the Company wherein NGU would submit
applications for certain policies of insurance to be issued by
the Company. It is alleged that disputes have arisen between NGU
and the Company with regard to the calculation and payment of
certain advanced commissions as well as certain production
bonuses.
NGU alleges that it "has been damaged far in excess of the
$75,000 minimum jurisdictional limits of this Court." NGU also
seeks attorney's fees and costs as well as prejudgment and
postjudgment interest. A second amended complaint and a third
amended complaint which included a fraud claim were filed. A
motion was filed by the Company to dismiss the third amended
complaint, including the fraud claim. The court denied the
motion. The Company has counterclaimed for what it claims to be a
debit balance owing to it pursuant to the relationship between
the parties with said counterclaim seeking a substantial amount
from NGU (said amount potentially subject to reduction as
premiums are received). The Company is also seeking to recover
attorney's fees and costs, as well punitive damages on three of
its causes of action. A response has not yet been filed to the
amended counterclaim. The change of venue motion of the Company
was denied. Certain discovery has taken place and further
discovery is anticipated, e.g., depositions. The Company intends
to vigorously defend the matter as well as prosecute its
counterclaims.
An action was brought by Bernice Johnson against the Company in
May, 2002 in the Circuit Court of Jefferson County, Alabama,
Civil Action No. CV02 2963. The face amount of coverage under the
policy is $15,000. The insured died in July 2001. Claims are made
for non-payment of the policy amount. The claims for relief
include misrepresentation, mental anguish and emotional distress,
fraud, intentional and bad faith, non-payment of the benefit,
intentional and bad faith failure to investigate the claim for
benefits, reckless and negligent and wanton action relative to
misrepresentation and/or concealment of facts, negligence and the
wanton hiring, training and supervision of agent. Compensatory
and punitive damages are sought along with interest and costs. An
answer has been filed by the Company and discovery is in process.
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
10
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
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 14, 2002 By: George R. Quist,
----------------
Chairman of the Board,
Chief Executive Officer
(Principal Executive Officer)
DATED: August 14, 2002 By: Stephen M. Sill
---------------
Vice President, Treasurer and
Chief Financial Officer
(Principal Financial and
Accounting Officer)
CERTIFICATION PURSUANT TO
18 U.S.C. ss. 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of Southern Security Life Insurance
Company (the "Company") on Form 10Q for the period ending June 30, 2002, as
filed with the Securities and Exchange Commission on the date hereof (the
"Report"), I, George R. Quist, Chief Executive Officer of the Company, certify,
pursuant to 18 U.S.C. ss. 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002, that, to the best of my knowledge and belief:
(1) the Report fully complies with the requirements of Section 13(a)
or 15(d) of the Securities Exchange Act of 1934; and
(2) the information contained in the Report fairly presents, in all
material respects, the financial condition and result of
operations of the Company.
George R. Quist
Chief Executive Officer
August 14, 2002
CERTIFICATION PURSUANT TO
18 U.S.C. ss. 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of Southern Security Life Insurance
Company (the "Company") on Form 10Q for the period ending June 30, 2002, as
filed with the Securities and Exchange Commission on the date hereof (the
"Report"), I, Stephen M. Sill, Chief Financial Officer of the Company, certify,
pursuant to 18 U.S.C. ss. 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002, that, to the best of my knowledge and belief:
(1) the Report fully complies with the requirements of Section 13(a)
or 15(d) of the Securities Exchange Act of 1934; and
(2) the information contained in the Report fairly presents, in all
material respects, the financial condition and result of
operations of the Company.
Stephen M. Sill
Chief Financial Officer
August 14, 2002
12