- MANAGEMENT’S DISCUSSION AND ANALYSIS OF CONSOLIDATED FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The Company and COUNTRY must satisfy certain conditions to closing set forth in the Agreement and Plan of Merger, including, without limitation, receipt of necessary regulatory approvals and shareholder approval, which may not occur.
Insurance is a highly competitive industry, and the Company encounters significant competition in all lines of business from other insurance companies, many of which have greater financial resources than the Company, as well as competition from other providers of financial services.
The Company is subject to government regulation in each of the states in which it conducts business. Such regulation is vested in state agencies having broad administrative power dealing with many aspects of the insurance business, which may include premium rates, marketing practices, advertising, policy forms, and capital adequacy. The Company cannot predict the form of any future regulatory initiatives or its impact on the Company’s operations or its effect on the Company’s financial performance.
The Company’s financial results may fluctuate from year-to-year or be adversely affected on account of fluctuations in policy claims received by the Company.
Through underwriting and reinsurance, the Company has attempted to limit its mortality and morbidity exposure and has established reserves for claims and future policy benefits based on accepted actuarial methodologies. There can be no assurance, however, that these estimated reserves will prove to be sufficient or that the Company will not experience adverse mortality or morbidity experience which would result in operating losses.
Policy acquisition costs, which include commissions and certain other expenses that vary with and are primarily associated with acquiring business, are deferred and amortized with interest over the estimated lives of the contracts, usually 30 years. The principal expenses deferred are commissions and certain expenses of the policy issue, underwriting and agency departments. Policy acquisition costs deferred were $11.1 million in 2003, $10.2 million in 2002, and $9.8 million in 2001. For statutory accounting purposes, such costs are expensed as incurred.
Statement of Financial Accounting Standard (“SFAS”) No. 60 “Accounting and Reporting by Insurance Enterprises” applies to our traditional life policies. For traditional life policies, deferred costs are amortized in proportion to the ratio of the annual premium income to the total present value of expected premium income. Future premium income is estimated using actuarial assumptions established at policy issue such as mortality, persistency and interest. Assumptions established at policy issue are based on anticipated experience, which, together with interest and expense assumptions, provide a margin for adverse deviation. Should the liabilities for future policy benefits plus the present value of expected future gross premiums for a product be insufficient to provide for expected future benefits and expenses for that product, deferred acquisition costs will be written off and thereafter, if required, a premium deficiency reserve will be established by a charge to income. Changes in the assumptions for mortality, persistency and interest could result in material changes to the financial statements.
SFAS No. 97 “Accounting and Reporting by Insurance Enterprises for Certain Long-Duration Contracts and for Realized Gains and Losses from the Sale of Investments” applies to our universal life-type contracts. Acquisition costs are deferred and recognized as expense as a constant percentage of gross profit using assumptions as to mortality, persistency, maintenance expense and interest margins established at policy issue without provision for adverse deviation. First-year excess expense charges are also deferred and accreted to income in the same manner as deferrable costs are amortized. The amortized percentage of gross profit is revised periodically to reflect emerging actual experience and any material changes in expected future experience. Changes in the emerged actual experience or changes in expected future experience for mortality, persistency, maintenance expense and interest margins could result in material changes to the financial statements.
Investment policy is determined by the Board of Directors of the Company. The Company’s current investment policy is to balance its portfolio between long-term and short-term investments so as to achieve long-term returns consistent with the preservation of capital and maintenance of adequate liquidity to meet the payment of the Company’s policy benefits and claims. The Company’s invested asset maturities correspond with the Company’s expectations regarding anticipated cash flow payments based on the Company’s policy benefit and claim cycle. The Company invests primarily in fixed maturity securities of the U.S. government and its related agencies, investment grade fixed maturity corporate securities and mortgage-backed securities.
The following table provides information on the Company’s fixed maturity investments as of December 31 (dollars in thousands):
Mortgage-backed securities comprised 22% of the Company’s fixed maturity portfolio at December 31, 2003 as compared to 21% at December 31, 2002. Mortgage-backed securities are subject to risks associated with variable pre-payments. This may result in these securities having a different actual cash flow and maturity than expected at the time of purchase. Securities that have an amortized cost greater than par and are backed by mortgages that prepay faster than expected will incur a reduction in yield or a loss. Those securities with an amortized cost lower than par that prepay faster than expected will generate an increase in yield or a gain. In addition, the Company may incur reinvestment risks if market yields are lower than the book yields earned on the securities. Prepayments occurring slower than expected have the opposite impact. The Company may incur disinvestment risks if market yields are higher than the book yields earned on the securities and the Company is forced to sell the securities. The degree to which a security is susceptible to either gains or losses is influenced by (a) the difference between its amortized cost and par, (b) the relative sensitivity of the underlying mortgages backing the assets to prepayment in a changing interest rate environment and (c) the repayment priority of the securities in the overall securitization structure. There are negligible default risks in the mortgage-backed securities portfolio as a whole as the vast majority of the assets are either guaranteed by U.S. government-sponsored entities or are supported in the securitization structure by junior securities enabling the assets to achieve high investment grade status.
One of the significant estimations inherent in the valuation of investments is the evaluation of other-than-temporary impairments. The evaluation of impairments is a quantitative and qualitative process, which is subject to risks and uncertainties and is intended to determine whether declines in the fair value of investments should be recognized in current period earnings. The risks and uncertainties include changes in general economic conditions, the issuer’s financial condition or near term recovery prospects and the effects of changes in interest rates. The Company’s accounting policy requires that a decline in the value of a security below its amortized cost basis be assessed to determine if the decline is other-than-temporary. If so, the security is deemed to be other-than-temporarily impaired, and a charge is recorded in net realized capital losses equal to the difference between the fair value and amortized cost basis of the security. The fair value of the other-than-temporarily impaired investment becomes its new
cost basis. The Company has a security monitoring process that identifies securities that, due to certain characteristics, as described below, are subjected to an enhanced analysis on a quarterly basis.
The Company establishes and carries as liabilities actuarially determined reserves which are calculated to meet the Company’s estimated future obligations. Reserves for life insurance and disability contracts are based on actuarially recognized methods using prescribed morbidity and mortality tables in general use in the United States, which are modified to reflect the Company’s actual experience when appropriate. These reserves are computed at amounts that, with additions from estimated premiums to be received and with interest on such reserves compounded annually at certain assumed rates, are expected to be sufficient to meet the Company’s policy obligations at their maturities or in the event of an insured’s death. Changes in or deviations from the assumptions used for mortality, morbidity, expected future premiums and interest can significantly affect the Company’s reserve levels and related future operations. Reserves also include unearned premiums, premium deposits, claims incurred but not reported and claims reported but not yet paid. Reserves for assumed and ceded reinsurance are computed in a manner that is comparable to direct insurance reserves.
The liability for policy benefits for universal life-type contracts is equal to the balance that accrues to the benefit of policyholders, including credited interest, amounts that have been assessed to compensate the Company for services to be performed over future periods, and any amounts previously assessed against policyholders that are refundable on termination of the contract.
The Company accounts for income taxes using the asset and liability method prescribed by SFAS No. 109, “Accounting for Income Taxes.” Under the asset and liability method of SFAS No. 109, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities, and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which these temporary differences are expected to be recovered or settled. Under SFAS No. 109, the effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.
Income tax expense recognized by the Company in any one year is impacted by the extent to which the Company qualifies for the small life company deduction. The small life company deduction is 60% of life insurance company taxable income up to a maximum taxable income of $3 million. This deduction is phased out on taxable income above $3 million up to and including a maximum of $15 million. To the extent, if any, that the Company’s taxable income exceeds $3 million, its effective federal income tax rate will increase.
In December 2002, the Financial Accounting Standards Board issued SFAS No. 148 “Accounting for Stock-Based Compensation - Transition and Disclosure,” which is effective for financial statements issued after December 15, 2002. The adoption of SFAS No. 148 did not affect the Company’s results of operations or financial position. The Company has complied with the disclosure requirements of SFAS No. 148 in these consolidated financial statements.
In May 2003, the FASB issued SFAS No. 150, “Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity.” SFAS No. 150 addresses certain financial instruments that, under previous guidelines, could be accounted for as equity, but now must be classified as liabilities in the statement of financial position. These financial instruments include: (a) mandatorily redeemable financial instruments, (b) obligations to repurchase the issuer’s equity shares by transferring assets, and (c) obligations to issue a variable number of shares. SFAS No. 150 is effective for financial instruments entered into or modified after May 31, 2003, and otherwise is effective at the beginning of the first interim period beginning after June 15, 2003. The implementation of SFAS No. 150 did not have an impact on the Company’s consolidated financial statements.
The Company is headquartered in Atlanta, Georgia and sells individual life insurance products through a distribution force consisting of 251 multi-line exclusive agents and approximately 4,700 independent agents as of December 31, 2003. Payroll deduction universal life products are also marketed through a third party administrator. The Company’s two brokerage subsidiaries generate commission income from brokerage agreements with other non-affiliated property and casualty and life and health insurance carriers.
The amount of spread (excess of net investment income earned over interest credited) earned on universal life contract holders’ account balances.
The ability of the brokerage subsidiaries to generate commission income through the sale of other companies’ products.
Following is a summary of net income by business segment for the years ended December 31 (dollars in thousands):
mortality experience in the Company’s individual life products. Additionally, 2003 results reflect an increase in operating expenses as compared to 2002, caused by an increase in standard operating costs as well as transaction costs associated with the anticipated merger with COUNTRY. Continued growth in premiums, mortality that was consistent with management’s expectations, and lower operating expenses accounted primarily for the improved results in 2002 compared to 2001. In addition, 2002 results reflect a favorable adjustment to the amortization of policy acquisition costs resulting from updating actuarial assumptions. Other lines consist of the Company’s participation in a federally sponsored group life pool and income from a closed block of individual accident and health business.
Guaranteed issue and simplified issue life insurance premiums continued to show significant growth for the three year period from 2001 to 2003, primarily as a result of sustained production by the Company’s independent agency force which had approximately 4,700 agents under contract at December 31, 2003 compared to approximately 4,300 in 2002 and approximately 4,400 in 2001. This product is also distributed by the Company’s multi-line exclusive agents and is available for purchase over the Internet at the Company’s home page (www.cottonstatesinsurance.com).
Individual life insurance products are principally sold by the Company’s exclusive agent producers. Growth in individual life premiums largely reflects an increase in production of the Company’s universal life product. The exclusive agency force of 251 as of December 31, 2003 compares to 272 as of the same date in 2002 and 266 in 2001. Other premiums consist of the Company’s participation in a federally sponsored group life pool and income from a closed block of individual accident and health business.
The following table summarizes the Company’s investment results for the years ended December 31 (dollars in thousands):
Represents net investment income (excluding net realized capital gains (losses)) divided by average invested assets at cost or amortized cost, as applicable. Average invested assets are calculated by dividing the sum of the beginning and ending period amounts by two.
During the third quarter of 2002 the Company realized a pre-tax investment loss of $120,000 from the write-down of the carrying value of Intel common stock. This write-down was the result of the Company determining that an other-than-temporary impairment had occurred.
Life benefits and claims, including reserve increases on traditional life and guaranteed issue and simplified issue products, are as follows (dollars in thousands):
Benefits and claims, as a percentage of premium, fluctuate within a normal range reflecting volatility in mortality, changes in mix of business, and age of policyholders. Guaranteed issue and simplified issue experience for the three year period is consistent with the Company’s future expectations for those products as the block of business matures. Individual life benefits increased in 2003 compared to 2002 due to a significant increase in mortality in the Company’s traditional life and universal life products during the fourth quarter of 2003. Individual life benefits increased in 2002 compared to 2001 due to higher traditional life reserve increases, which were the result of an overall improvement in persistency. Death benefits for 2002 were consistent with management’s expectations.
The Company has reached a partial settlement regarding $900,000 in reinsurance coverage. In addition,
The effective tax rate for 2003 was 33% compared to 29% in 2002 and 27% in 2001. The four percentage point increase from 2002 to 2003 and the two percentage point increase from 2002 to 2001 are the result of decreases in the allowable small company deduction.
The investment portfolios are managed based on the underlying characteristics and nature of the Company’s respective liabilities and within established risk parameters. (For a further discussion of the Company’s approach to managing risks, see the Investment Credit Risk section in
Cotton States Life Insurance Company (the “Company”) was organized under the laws of the State of Georgia in 1955. The Company is currently licensed to transact business in Alabama, Florida, Georgia, Kentucky, Louisiana, Mississippi, North Carolina, South Carolina, Tennessee and Virginia. The Company currently markets only individual life insurance, payroll deduction life insurance, guaranteed issue and simplified issue life insurance and individual annuities.
In July of 1989, the Company formed CSI Brokerage Services, Inc. (“CSI”). CSI brokers insurance products for the Company’s exclusive agents not offered by the Company’s affiliated property and casualty companies.
The consolidated financial statements include the accounts of the Company, and its wholly owned subsidiaries, CSI and CSMR. All significant intercompany balances and transactions have been eliminated in consolidation.
The costs of acquiring most new life business are deferred and amortized with interest over the premium-paying period of the related policies. For individual 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 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 $11,064,000 in 2003, $10,215,000 in 2002, and $9,831,000 in 2001.
Fixed maturities held for investment are stated at amortized cost. Fixed maturities available for sale are stated at fair value. The cost of securities sold is determined by the specific identification method. First mortgage loans are stated at their aggregate unpaid balance. Policy loans are stated at their aggregate unpaid balance and short-term investments are stated at cost.
Investments deemed to have a loss in value which is other-than-temporary are written down to their fair 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.
In May 2003, the FASB issued SFAS No. 150, “Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity.” SFAS No. 150 addresses certain financial instruments that, under previous guidelines, could be accounted for as equity, but now must be classified as liabilities in the statement of financial position. These financial instruments include: 1) mandatorily redeemable financial instruments, 2) obligations to repurchase the issuer’s equity shares by transferring assets, and 3) obligations to issue a variable number of shares. SFAS No. 150 is effective for financial instruments entered into or modified after May 31, 2003, and otherwise is effective at the beginning of the first interim period beginning after June 15, 2003. The implementation of SFAS No. 150 did not have an impact on the Company’s consolidated financial statements.
The amortized cost and estimated fair values of investments in debt and equity securities as of December 31, 2003 and 2002 are as follows:
The amortized cost and estimated fair value of debt securities at December 31, 2003, by contractual maturity, are shown on the following page. 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 carrying amount of universal life and annuity benefits is a reasonable estimate of fair value since credited interest approximates current market rates.
The estimated fair values and carrying values of the Company’s financial instruments at December 31, 2003 and 2002 are the same except for investment securities which are detailed in footnote 2 and mortgage loans as follows:
The Company utilizes reinsurance agreements to reduce its exposure to large losses in all aspects of its insurance business. Such reinsurance permits recovery of a portion of large losses from reinsurers, although it does not discharge the primary liability of the Company as direct insurer of the risks insured. The Company evaluates the financial strength of potential reinsurers and continually monitors the financial condition of reinsurers. Only those reinsurance recoverable balances deemed probable of recovery are reflected as assets on the Company’s consolidated balance sheets. Amounts ceded under reinsurance agreements become liabilities of the Company should the reinsurers be unable to meet their obligations under the reinsurance agreements.
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, 2003 and 2002 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
In assessing the deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. Management considers the scheduled reversal of deferred tax liabilities, projected future taxable income, and tax planning strategies in making this assessment. Management has concluded that it is more likely than not that all of its deferred tax assets are realizable. Therefore, no valuation allowance was established at December 31, 2003 and 2002.
Federal income tax expense is less than amounts determined by multiplying earnings before federal income taxes by the federal tax rate of 35%. The reasons for such difference and the tax effect of each are as follows:
The following table summarizes plan assets, obligations, and pension cost of the pension plan and other postretirement benefit plan as of December 31, 2003 and 2002:
The accumulated benefit obligation of the pension plan was $2,055,103 and $1,938,297 at December 31, 2003 and 2002, respectively.
The following table summarizes weighted average assumptions used to determine benefit obligations and net periodic benefit cost for years ended December 31:
The Company selects the expected long-term rate-of-return assumption in consultation with the plan’s investment advisors and the plan’s consulting employee benefit actuary. The rate is intended to reflect the average rate of earnings to be earned on the plan’s invested assets sufficient to provide expected plan benefits. The return assumptions are based on the long-term behavior of financial indices over full market cycles. Undue weight is not given to recent experience with higher significance placed on current forecasts of future long-term economic conditions. Consideration is given to the potential impact of current and future investment policy, cash flows into and out of the plan, and expenses (both investment and non-investment) typically paid out of plan assets to the extent such expenses are not explicitly estimated within periodic costs.
Assumed health care trend rates at December 31 are as follows:
Assumed health care cost trend rates have a significant effect on the amounts reported for the health care plan. A one percent annual increase in assumed health care cost would increase the accumulated postretirement benefit obligation at December 31, 2003 by approximately $7,000 and the service and interest cost components of the net periodic postretirement benefit cost for 2003 by $500. A one percent annual decrease in the assumed health care costs would decrease the accumulated postretirement benefit obligation at December 31, 2003 by approximately $6,500 and the service and interest components of the net periodic postretirement benefit cost by $400.
There may also be additional requirements of the Act, such as amending the Company’s plan, in order for the Company to benefit from the new legislation.
The investment objective of the Company’s pension plan is to achieve a 3.5% premium over the rate of inflation on a total return basis. The rate of inflation is defined as the Consumer Price Index and the time horizon is five years on a rolling basis. The Company’s risk management practices include monitoring of the plan’s actuarial assumptions for investment return and adjusting the investment objectives accordingly.
Equity holdings: Securities which are broadly classified as investment grade issues, regardless of whether or not they are listed on a recognized stock exchange, are eligible for inclusion in the plan’s portfolio. The market value of any one company holding shall not exceed 10% of the total market value of equities held in the portfolio. Convertible securities are permitted if their credit quality rating from a recognized rating service is not lower than BB.
from any of the nationally recognized rating services. No one company’s aggregate debt and equity holdings in the plan shall exceed 10% of the total plan’s market value.
The Company expects to contribute $126,000 to its pension plan and $8,400 to its other postretirement benefits plan in 2004.
The Company also sponsors a defined contribution plan for the benefit of the Company’s employees and the employees of affiliated companies. Matching contributions by the Company vary and are determined by the Company’s prior year profitability measured by return on equity. The Company’s matching contributions were $14,706 in 2003, $26,664 in 2002 and $38,000 in 2001.
Rent for use of software of $106,000 in 2003, 2002, and 2001, has been charged to the affiliated companies.
Under the employee plan, options may be granted to purchase up to 937,500 shares of the Company’s common stock at a per share price of not less than 100% of fair market value at date of grant. Under the directors’ plan, options are granted based on the level of directors’ fees at a per share price of 50% of fair market value at date of grant. The employee and directors’ options have a term of 10 years and are not subject to any vesting requirements. The weighted-average remaining contractual life on options outstanding at December 31, 2003 is 7.0 years. The weighted-average grant date fair value of options granted during 2003, 2002, and 2001 was $9.28, $9.61, and $7.69, respectively. Stock option transactions are summarized below:
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 57,984, 67,329, and 47,439 shares of restricted stock under such plans during 2003, 2002, and 2001, respectively. The weighted-average grant date fair value of such shares was $9.81, $9.09, and $9.83 respectively. Aggregate compensation expense with respect to the foregoing restricted stock awards was $472,764, $51,553, and $424,726 in 2003, 2002, and 2001 respectively.
In accordance with APB Opinion No. 25, $552,000, $135,000, and $519,000 in compensation expense has been recorded in 2003, 2002, and 2001, respectively, for the various stock option and restricted stock awards granted in 2003, 2002, and 2001. Had the Company determined compensation cost based on the fair value at the grant date for its stock options and restricted stock awards under SFAS No. 123, “Accounting for Stock-Based Compensation,” the Company’s net income, basic net income per share, and diluted net income per share would have been reduced to the pro forma amounts indicated below:
Accounting practices used to prepare statutory financial statements for regulatory filings of stock life insurance companies differ from GAAP. Material differences resulting from these accounting practices include: deferred policy acquisition costs which are not recognized for statutory purposes; statutory non-admitted assets are recognized under GAAP accounting; statutory investment valuation reserves are not recognized under GAAP accounting; premiums for universal life and investment-type products are recognized as revenues for statutory purposes and as deposits to policyholders’ accounts under GAAP; different assumptions are used in calculating future policyholders’ benefits; and different methods are used for calculating valuation allowances and deferred federal income taxes for statutory and GAAP purposes.
Net income 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, 2003 are 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 express permission of the Georgia Insurance Department is obtained. Dividend payments to shareholders are further limited by the Georgia Insurance Code to unassigned statutory surplus, which at December 31, 2003 was approximately $27,000,000. The excess of retained earnings determined in accordance with GAAP over unassigned statutory surplus is not available for payment of dividends. The Company may pay a dividend amounting to approximately $2,700,000 in 2004 without prior regulatory approval.
The Company’s operations can be grouped into three major segments: (i) individual life insurance, (ii) guaranteed issue and simplified issue life insurance, and (iii) brokerage operations. These segments are differentiated primarily by their respective methods of distribution and the nature of related products, as the Company’s operations in each segment are concentrated within its southeastern states geographic market. Individual life insurance products are distributed through the Company’s multi-line exclusive agents, guaranteed issue and simplified issue products are distributed through independent agents as well as exclusive agents, and brokerage operations involve third party products distributed through the Company’s exclusive and independent agents. The Company does not group items on the consolidated balance sheet into segments, nor does it analyze those items by segment
Note - Failure of individual quarterly income per share to total to annual income per share results from the computation of weighted average number of shares on an individual quarterly basis.
We have audited the accompanying consolidated balance sheet of Cotton States Life Insurance Company and subsidiaries as of December 31, 2003 and 2002, and the related consolidated statements of earnings, shareholders’ equity, cash flows, and comprehensive income for the years then ended. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.
In our opinion, the 2003 and 2002 consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Cotton States Life Company and subsidiaries at December 31, 2003 and 2002, and the consolidated results of their operations and their cash flows for the years then ended in conformity with accounting principles generally accepted in the United States.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the results of operations and cash flows of Cotton States Life Insurance Company and subsidiaries for the year ended December 31, 2001, in conformity with accounting principles generally accepted in the United States of America.
The accompanying consolidated financial statements for Cotton States Life Insurance Company and subsidiaries (the “Company”) were prepared by management, which is responsible for the objectivity and integrity of these statements. The consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America and, where appropriate, are based on management’s best estimates and judgments. Other financial data about the Company contained in this annual report is consistent with that presented in the consolidated financial statements.
The Company’s consolidated financial statements for the years ended December 31, 2003 and 2002 have been audited by independent auditors, Ernst & Young LLP. The Company’s consolidated financial statements for the year ended December 31, 2001 have been audited by independent auditors, KPMG LLP. Their roles are to audit the consolidated financial statements in accordance with auditing standards generally accepted in the United States of America and render an independent and professional opinion on management’s consolidated financial statements. The auditors’ reports on the Company’s consolidated financial statements appear on the previous two pages.
The Board of Directors, through its audit committee comprised 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.