In 1995, the Company provided loss provisions of approximately $300,000 for U.S. Government agency derivative securities whose decline in value was deemed to be other than temporary. These securities were U.S. Government agency securities whose principal repayments were linked to the valuation of foreign currencies. The last security matured in 1996.
No of Loans State Book Value 12/31/97 12/31/96 12/31/97 12/31/96 5 5 Alabama $ 259,155 313,697 6 6 Florida 418,326 443,165 70 81 Georgia 3,538,481 4,013,415 -- -- --------- --------- 81 92 $4,215,962 4,770,277 						========= ========= The loan-to-value ratio on delinquent loans is 35 percent, the Company does not anticipate any loss should it choose to foreclose. The Company has foreclosed on only one loan since 1985 and incurred no loss on the sale of the underlying collateral.
Policy Loans All policy loans are secured by the cash surrender value of the policies.
Realized Investment Gains: Realized investment gains during the past three years resulted primarily from the sale of bonds. The Company anticipates that future gains will be approximately $120,000 per year.
Benefits: Individual benefits as a percentage of individual life premiums and mortality and expense charges were 66 percent, 66 per cent and 70 percent for 1997, 1996 and 1995, respectively. The Company expects the ratio to range between 65 percent and 70 percent.
Federal Income Taxes: The effective tax rates were 26 percent for 1997, 21 percent for 1996 and 24 percent for 1995. The effective tax rate increased in 1997 because Marketing Resources utilized all of its tax loss carry forwards in 1997. The Company anticipates that future tax rates will range from 27 per cent to 30 percent.
Quarterly Results: Quarterly earnings may fluctuate significantly during the year. These fluctuations are due primarily to irregular claims occurrences and the timing of certain investment transactions.
December 31, Assets 1997 1996 Investments: ---- ---- Fixed maturities, held for investment, at amortized cost $ 18,104,440 20,245,783 Fixed maturities, available for sale, at fair value 91,891,271 80,622,249 First mortgage loans on real estate 4,215,962 4,770,277 Policy loans 7,976,103 7,037,745 Short-term investments 3,755,294 2,250,551 ----------- ----------- Total investments 125,943,070 114,926,605 =========== ===========
Cash 1,303,739 279,742 Accrued investment income 1,928,498 1,791,048 Amounts receivable, principally premiums 3,242,432 2,371,562 Amount due from reinsurers 2,376,473 2,027,229 Deferred policy acquisition costs 29,842,783 26,790,307 Refundable Federal income taxes 166,460 100,439 Other assets 533,854 537,255 ----------- ----------- $ 165,337,309 148,824,187 =========== =========== Liabilities and Shareholders' Equity
Policy liabilities and accruals: Future policy benefits $104,269,283 96,935,660 Policy claims and benefits payable 1,356,308 1,319,416 ----------- ---------- Total policy liabilities and accruals 105,625,591 98,255,076
Federal income taxes - deferred 3,920,376 2,650,383 Other liabilities 6,395,329 5,004,876 ----------- ----------- Total liabilities 115,941,296 105,910,335 ----------- ----------- Shareholders' equity: Common stock of $1 par value. Authorized 10,000,000 shares; issued 6,754,504 shares 6,754,504 6,754,504 Additional paid-in capital 1,283,745 1,283,969 Net unrealized gains on fixed maturities available for sale 1,285,556 297,609 Retained earnings 41,204,889 35,713,441 Less treasury stock, at cost (353,629 shares in 1997 and 354,563 shares in 1996) (1,132,681) (1,135,671) ----------- ----------- Total shareholders' equity 49,396,013 42,913,852 ----------- -----------
Notes to Consolidated Financial Statements December 31, 1997, 1996, and 1995
(1) Summary of Significant Accounting Policies The accompanying consolidated financial statements have been prepared in conformity with generally accepted accounting principles (GAAP), which vary in certain respects from reporting practices prescribed or permitted by the Insurance Department of the State of Georgia. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the reported amounts of revenues and expenses during the reporting period. Accounts that the Company deems to be acutely sensitive to changes in estimates include deferred policy acquisition costs and future policy benefits. In addition, the Company must determine requirements for disclosure of contingent assets and liabilities as of the date of the financial statements based upon estimates. In all instances, actual results could differ from estimates.
Recognition of Premium Income and Mortality and Expense Charges Premiums on traditional life and accident and health insurance policies are recognized as income when due. Mortality and expense charges on universal life policies are recognized as income when earned.
COTTON STATES LIFE INSURANCE COMPANY AND SUBSIDIARIES Notes to Consolidated Financial Statements
Deferred Policy Acquisition Costs The costs of acquiring most new individual life business are deferred and amortized with interest over the premium-paying period of the related policies. For traditional life policies, such amounts are amortized in proportion to the ratio of the annual premium income to the total anticipated premium income. Such anticipated premium income is estimated using the same assumptions as used for computing future policy benefits. For universal life policies, deferrable costs are amortized in proportion to the ratio of the contract's annual gross profits to total anticipated gross profits. First-year excess expense charges are also deferred and accreted to income in the same manner as deferrable costs are amortized. Total anticipated gross profits are based on assumptions for investment margins, surrender charges, mortality charges, and level expense loads. The principal expenses deferred are commissions and certain expenses of the product development, policy issue, underwriting, and agency departments, all of which vary with and are primarily related to the production of new business. Policy acquisition costs deferred were approximately $5,526,000 in 1997, $4,780,000 in 1996, and $4,241,000 in 1995.
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 accounted for as direct increases or decreases in stockholders' equity, net of deferred taxes and amounts attributable to the Company's universal life and annuity products.
COTTON STATES LIFE INSURANCE COMPANY AND SUBSIDIARIES 		 Notes to Consolidated Financial Statements
Income Taxes The Company and CSI Brokerage Services, Inc. and Cotton States Marketing Resources, Inc. file a consolidated Federal income tax return.
Earnings Per Share 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.
Stock-Based Compensation The Company accounts for its various stock-based compensation in accordance with the provisions set forth in SFAS No. 123, Accounting for Stock-Based Compensation. SFAS No. 123 permits entities to recognize as expense over the vesting period the fair value of all stock-based awards on the date of the grant or alternatively, continue to apply the provisions of Accounting Principles Board (APB) Opinion No. 25, Accounting for Stock Issued to Employees, and related interpretations and provide pro forma net income and pro forma earnings per share disclosures for employee stock-based grants as if the fair value-based method had been applied as defined in SFAS No. 123. In accordance with APB Opinion No. 25, compensation expense is recorded on the grant date only to the extent that the current market price of the underlying stock exceeds the exercise price on the grant date.
Recent Accounting Pronouncements In June 1997, the Financial Accounting Standards Board (FASB) issued SFAS No. 130, Reporting Comprehensive Income. This statement establishes standards for reporting and displaying comprehensive income and its components in a full set of general purpose financial statements. SFAS No. 130 requires all items that are required to be recognized under accounting standards as components of comprehensive income be reported in a financial statement that is displayed in equal prominence with the other financial statements. The term "comprehensive income" is used in the statement to describe the total of all components of comprehensive income including net income. "Other comprehensive income" refers to revenues, expenses, gains, and losses that are included in comprehensive income but excluded from earnings under current accounting standards. Currently, "other comprehensive income" for the Company consists of items recorded directly in equity under SFAS No. 115. SFAS No. 130 is effective for financial statements for interim and annual periods beginning after December 15, 1997.
The amortized cost and estimated fair value of debt securities at December 31, 1997, 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.
Bonds with amortized cost of approximately $1,800,000 at December 31, 1997 were on deposit with state regulatory authorities in accordance with statutory requirements.
The Company wrote down certain securities to current market value in 1995 by recognizing losses of $300,000. In 1996, these securities were sold and a corresponding net gain of $51,200 was recognized.
Cash and Short-Term Investments The carrying amount of cash and short-term investments is a reasonable estimate of fair value.
Mortgage Loans The fair value of mortgage loans is estimated using the quoted market prices for securities backed by similar loans, adjusted for differences in loan characteristics.
Policy Loans The carrying amount of policy loans is a reasonable estimate of fair value.
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, 1997 was $4,203,000. The balance in the "shareholders' surplus" account at December 31, 1997 was $34,938,000. The Company does not anticipate any of the "policyholders' surplus" account becoming taxable in the foreseeable future.
Federal income tax expense is less than amounts determined by multiplying earnings before Federal income taxes by the Federal tax rate of 35 percent. The reason for such difference and the tax effect of each are as follows:
Service cost $ 351 350 8,124 Interest cost 13,631 10,883 22,000 Amortization of unrecognized gain (6,741) (9,370) (997) ------- ------- ------- Net periodic postretirement benefit cost $ 7,241 1,863 29,127 ===== ===== ======= The following table sets forth the plan's funded status reconciled with the amount shown in the Company's balance sheet at December 31, 1997 and 1996:
Unrecognized net gain 113,956 126,438 ------- ------- Accrued postretirement benefit cost $311,056 317,103 ======= =======
Certain general expenses are allocated to the Company by Cotton States Mutual. These expenses, such as salaries, advertising, rents, etc., represent the Company's share of expenses initially paid by Cotton States 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 $2,467,408 in 1997, $2,469,691 in 1996, and $1,915,305 in 1995. Effective January 1, 1996, the Company and Cotton States Mutual moved their employee and agent health plans to an outside health provider. Prior to this time, coverage was provided by Cotton States Life Insurance Company. During 1995, premiums earned on group policies with Cotton States Mutual and its agents were $1,576,074. Premiums on the Cotton States Mutual policies were based on actual claims experience plus an expense and profit allowance of 10 percent. At December 31, 1997 and 1996, the Company owed Cotton States Mutual $1,064,682 and $405,665, respectively.
Years ended December 31, 1997 1996 1995 Net income: As reported $ 6,304,558 4,832,577 4,070,871 Pro forma 6,218,558 4,776,458 4,014,752
Basic net earnings per share: As reported .99 .76 .64 Pro forma .97 .75 .63
Diluted net earnings per share: As reported .96 .74 .63 Pro forma .95 .73 .62
The per share weighted-average fair value of stock options and restricted stock granted was estimated using an option pricing model with the following weighted average assumptions: expected life of five years for options and three years for restricted stock for all years, expected dividend yield of 2.1 percent for all years, risk-free interest rate of 5.5 percent for 1997 grants and 6.0 percent for 1996 and 1995 grants, and an expected volatility of 52 percent for 1997 grants and 30 percent for 1996 and 1995 grants.
Net earnings and shareholders' equity, as reported to regulatory authorities in conformity with statutory accounting practices for each of the years in the three-year period ended December 31, 1997 are as follows:
/s/KPMG Peat Marwick LLP KPMG Peat Marwick LLP Atlanta, Georgia February 24, 1998
J. Ridley Howard Gary W. Meader, CPA ===================== ======================= Chairman of the Board, Chief Financial Officer President and Chief Executive Officer