The Company's principal long-term obligations are fixed contractual obligations incurred in the sale of its life insurance products. The premiums and mortality and expense charges billed for these products are based on conservative and actuarially sound assumptions as to mortality, persistency and interest. The Company believes these assumptions will produce revenues sufficient to meet its future contractual benefit obligations and operating expenses, and provide an adequate profit margin to finance future growth without a major entry into the debt or equity markets.
The total income amount for 1999 represents a 8.6% increase over 1998, compared with a 3.2% increase in 1998 over 1997. Improvements in two key products in late 1998 helped generate additional growth in these lines.
The Company also receives premium income from individual accident and health policies and group life premiums from participation in the Federal employee and servicemen pools. The earnings effect from these sources of premium income is not significant.
Investment income increased 5%, 9% and 6% in 1999, 1998 and 1997, respectively. Growth in the overall investment portfolio, fluctuations in interest rates on new investments, and the mix of securities account for the variance in yearly increases.
Realized investment gains during the past three years resulted from the sale of bonds by the Company and the sale of equity securities by CSI. The Company anticipates that future gains will be approximately $200,000 per year. Larger gains in 1999 resulted from the Company and CSI taking advantage of market conditions to increase its overall portfolio yield.
CSI provides the Company with commission income from brokerage agreements with other property and casualty insurance carriers. These carriers supply the Company's multi-line agents with property and casualty products that the Company's affiliated property and casualty companies do not underwrite. CSI earned $1,641,193 in 1999, $1,271,450 in 1998 and $1,236,114 in 1997. In late 1996, CSI, in conjunction with its property and casualty affiliate, finalized a contract to transfer management of its property and casualty affiliate's multi-peril crop and crop hail insurance to Blakely Crop Hail, a Kansas based company. Through the brokerage agreement with Blakely, CSI will receive an override commission based on premium volume generated by sales of multi-peril crop and crop hail insurance. During 1999, 1998 and 1997, $699,000, $537,000 and $780,000, respectively, of gross income was realized under this agreement.
CSI also received override commissions of $871,000, $819,000 and $855,000 from a non-standard auto insurer during 1999, 1998 and 1997, respectively. In 1998, CSI added an additional non-standard automobile insurer. Override commission received in 1999 and 1998 was $509,000 and $326,000, respectively, from this new carrier.
Benefits, including reserve increases, for the last three years on individual life and guaranteed issue/simplified issue products are as follows:
CREDIT RISK is the risk that issuers of securities owned by the Company will default, or other parties, including reinsurers which owe the Company money, will not pay. The Company attempts to minimize this risk by adhering to a conservative investment strategy and by contracting with reinsuring companies that meet certain rating criteria and other qualifications.
Future policy benefits on traditional individual life insurance policies are computed using a net level premium method based upon conservative assumptions as to investment yields, withdrawals, morbidity, and mortality. Future policy benefits on universal life insurance policies and annuities represent the contract's accumulated account value.
Investments deemed to have a loss in value, which is other than temporary, are written down to their estimated net realizable value. Unrealized gains and losses on fixed maturities available for sale are excluded from earnings and are reported within shareholders' equity as a component of accumulated other comprehensive income, net of deferred taxes and amounts attributable to the Company's universal life and annuity products.
Basic earnings per share are based on the weighted-average number of common shares outstanding adjusted for the following stock splits effected in the form of a stock dividend.
In June 1998, the FASB issued SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities. In June 1999, the FASB issued SFAS 137 which changed the effective date of SFAS 133. As a result, the effective date of SFAS 133 was deferred for financial statements for all fiscal quarters of all fiscal years beginning after June 15, 2000. The Company does not believe the provisions of SFAS 133 will have a significant impact on the financial statements upon adoption.
In December 1997, the Accounting Standards Executive Committee of the American Institute of Certified Public Accountants ("AICPA") issued Statement of Position ("SOP") 97-3, Accounting by Insurance and Other Enterprises of Insurance Related Assessments SOP 97-3 is effective for all fiscal years beginning after December 15, 1998. The Company has adopted SOP 97-3, effective January 1, 1999 and there was no impact on the Company's financial statements.
The amortized cost and estimated market values of investments in debt and equity securities as of December 31, 1999 and 1998 are as follows:
The amortized cost and estimated fair value of debt securities at December 31, 1999, by contractual maturity, are shown 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.
The Company participates in certain business assumed from federally sponsored group pools. Further, it is the Company's general policy to reinsure individual life insurance in excess of $100,000, group life insurance in excess of $55,000, major medical payments in excess of $75,000 annually per individual, accidental deaths, and certain disability income coverage.
Deferred income taxes reflect the net tax effects of temporary differences between the carrying values of assets and liabilities for financial reporting purposes and Federal income tax purposes. The net deferred tax liability at December 31, 1999 and 1998 is composed of the tax-effected temporary differences related to the following amounts:
SFAS No. 109, Accounting for Income Taxes specifically identifies certain temporary differences for which deferred tax liabilities are not recognized unless it becomes apparent that those temporary differences will reverse in the foreseeable future. The Company has not recorded a deferred tax liability for one such item entitled "policyholders' surplus" created by Federal income tax regulations in effect prior to 1984. Certain untaxed income accumulated in this special memorandum tax account will become taxable if distributions, other than stock dividends, are made in excess of certain amounts accumulated in another special memorandum tax account entitled "shareholders' surplus." The balance in the "policyholders' surplus" account at December 31, 1999 was $4,203,000.
The following tables set forth the plan's funded status, reconciles the amounts shown in the Company's balance sheet, and reconciles the accumulated postretirement benefit obligation at December 31, 1999 and 1998:
Cotton States Mutual Insurance Company ("Mutual"), through its wholly owned subsidiary, Shield Insurance Company ("Shield"), controls approximately 33% of the Company's outstanding common stock. Most officers and directors of the Company hold similar positions with Mutual.
Certain general expenses are allocated to the Company by Mutual. These expenses, such as salaries, advertising, rents, etc., represent the Company's share of expenses initially paid by Mutual and are allocated based on specific identification or, if undeterminable, generally on the basis of each company's premium income. Expenditures allocated to the Company amounted to $2,957,431 in 1999, $2,779,136 in 1998, and $2,467,408 in 1997. At December 31, 1999 and 1998, the Company owed Mutual $507,187 and $823,293, respectively.
Included in other assets are deferred software costs relating to various system development projects of the Company and Mutual that were amortized over five years, and were fully amortized as of December 31, 1996. Rent, for use of the software, of approximately $106,000 in 1999, 1998 and 1997 has been charged to Mutual and Shield.
In addition to the stock options described above, the Company has awarded nontransferable, restricted shares of Company common stock to various key executives under key executive restricted stock bonus plans. The market value of the common stock at the date of issuance is recorded as compensation expense using the straight-line method over the vesting period of the awards. The Company awarded 24,460, 22,857, and 23,015 shares of restricted stock under such plans during 1999, 1998, and 1997, respectively. The weighted-average grant date fair value of such shares was $11.41, $15.53, and $7.43, respectively. Aggregate compensation expense with respect to the foregoing restricted stock awards was approximately $308,000, $252,000, and $151,000, in 1999, 1998, and, 1997, respectively.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Cotton States Life Insurance Company and subsidiaries at December 31, 1999 and 1998, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 1999, in conformity with generally accepted accounting principles.
J. Ridley Howard William J. Barlow, CPA Chairman of the Board, Vice President and Controller President and Chief Executive Officer
Note - Failure of individual quarterly earnings per share to total annual earnings per share results from the computation of weighted average number of shares on an individual quarterly basis. Earnings per share amounts have been adjusted for the April 1997 and January 1998 five-for four stock and three-for-two stock splits, respectively.