The Company's principal long-term obligations are fixed contractual obligations incurred in the sale of its life insurance and certain accident and health products. The premiums charged for these products are based on conservative and actuarially sound assumptions as to mortality, morbidity, 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.
In 1995, 1994 and 1993, the Company provided loss provisions of approximately $300,000, $580,000 and $320,000, respectively, for U.S. government agency derivative securities whose decline in value was deemed to be other than temporary. These securities are U.S. government agency securities whose principal repayments are linked to the valuation of foreign currencies. Three of these securities matured in 1995, the remaining security matures in 1996. The Company does not anticipate any further significant write-downs.
The Company's mortgage loan policy stipulates that the Company will loan no more than 80% of the value on residential loans and no more than 75% of the value on commercial loans. For the past five years, the Company has granted loans only to employees (excluding officers and directors), agents, agents' relatives, employees of Gold Kist and current mortgagees.
The geographic distribution of the loan portfolio as of December 31, 1995 is:
Individual accident and health premiums decreased 24% in 1995 and 1994, and 8% in 1993. In 1988, the Company ceased writing new individual accident and health policies. The Company anticipates that premium income from the line will continue to decrease.
Group premiums from the Company's agents and employees are based on actual claims experience and participation in government pools. Group premiums decreased approximately $767,000 in 1995 and $423,000 in 1994 and increased $1,616,000 in 1993. The fluctuation in group premiums has no effect on the Company's earnings, because those premiums were based on actual claims experience plus a modest expense allowance. On January 1, 1996, the Company ceased writing group health insurance on its agents and employees. This will result in a decrease in premium income and benefits in 1996 of approximately $2,136,000, based on 1995 experience.
Realized investment gains/losses during the past three years resulted primarily from the sale of bonds and write-down of bonds. During 1995, 1994 and 1993, the Company booked provisions for possible investment losses of $300,000, $580,000 and $320,000 respectively. (See previous discussion of investment securities.)
income, mortality and expense charges, and brokerage income were 41%, 40% and 42% for 1995, 1994 and 1993, respectively. The Company anticipates the expense ratio will remain at approximately 40% in future years.
Quarterly earnings fluctuated significantly during the three years ending December 31, 1995. These fluctuations are due, in the most part, to irregular claims occurrences and the timing of certain investment transactions during the year.
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 defer from estimates. The significant accounting policies are as follows:
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 plus credited interest.
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 $4,241,000 in 1995, $3,710,000 in 1994 and $3,541,000 in 1993.
Earnings per share of common stock are based on the weighted average number of common shares outstanding, adjusted for the October 16, 1995 five-for-four stock split, effected in the form of a 25% stock dividend. The effect of unexercised stock options is not significant.
The amortized cost and estimated fair value of debt securities at December 31, 1995, 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 $1,843,000 at December 31, 1995 were on deposit with state regulatory authorities in accordance with statutory requirements.
The estimated fair values and carrying value of the Company's financial instruments at December 31, 1995 and 1994 are the same except for investment securities which are detailed in footnote 2 and mortgage loans as follows:
The composition of future policy benefits and the significant assumptions used in their development are as follows:
SFAS No. 109 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, 1995 was $4,203,000. The balance in the "shareholders' surplus" account at December 31, 1995 was $28,400,000. 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%. The reason for such difference and the tax effect of each are as follows:
The Company has a plan which provides for postretirement health care and life insurance benefits for certain employees. These benefits include major medical insurance with deductible and coinsurance provisions. The Company pays all benefits on a current basis and the plan is not funded.
The following table sets forth the plan's funded status reconciled with the amount shown in the Company's statement of financial position at December 31, 1995 and 1994:
The postretirement benefit obligation was determined by application of the terms of the plan using relevant actuarial assumptions. Health care costs are projected to increase at annual rates ranging from 10% in 1995 down to 6% in 2000 and thereafter. A 1% annual increase in these assumed cost trend rates would increase the accumulated postretirement benefit obligation at December 31, 1995 by approximately $12,000 and the service and interest cost components of the net periodic postretirement benefit cost for 1995 by approximately $1,400. The assumed discount rate used in determining the accumulated postretirement obligation was 7.25% at December 31, 1995 and 8.50% at December 31, 1994.
Cotton States Mutual Insurance Company, through its wholly owned subsidiary, Shield Insurance Company, controls approximately 40% of the Company's outstanding common stock. Most officers and directors of the Company hold similar positions with Cotton States Mutual.
Certain directors of the Company are either directors or advisory directors of Gold Kist Inc. However, Gold Kist has no equity ownership in the Company.
The Company has an incentive stock option plan for the Company's officers and key employees. Under the plan, options are granted to purchase up to 500,000 shares of the Company's stock at a per share price of not less than 100% of fair market value at date of grant. A summary of options follows:
Net earnings and stockholders' 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, 1995 is as follows:
The Georgia Insurance Code limits dividends in any one year to the greater of statutory earnings, excluding realized capital gains, or 10% of statutory surplus, unless the expressed permission of the Georgia Insurance Department is obtained. Dividend payments to stockholders are further limited by the Georgia Insurance Code to unassigned statutory surplus, which at December 31, 1995 was approximately $18,000,000. The excess of retained earnings, determined in accordance with generally accepted accounting principles, over unassigned statutory surplus is not available for payment of dividends. The Company may pay a dividend amounting to $2,147,387 in 1996 without approval.
TO THE BOARD OF DIRECTORS AND STOCKHOLDERS OF COTTON STATES LIFE INSURANCE COMPANY
/s/ KPMG Peat Marwick L.L.P. - --------------------------- KPMG Peat Marwick L.L.P.
The Company's consolidated financial statements have been audited by independent auditors, KPMG Peat Marwick LLP. Their role is to audit the consolidated financial statements in accordance with generally accepted auditing standards and render an independent and professional opinion on management's consolidated financial statements. The auditors' report on the Company's consolidated financial statements appears above.
The Board of Directors, through its audit committee composed of outside directors, monitors management's financial reporting. The independent auditors have direct access to the audit committee and meet with the committee periodically to discuss the scope of each audit, the results of the audit and other matters which they believe should be brought to the committee's attention.
The following is a summary of the quarterly results of operations for the three years ended December 31, 1995: