Statements made in the following discussion that state the Company's or management's intentions, hopes, beliefs, expectations or predictions of the future are forward-looking statements. Without limiting the foregoing, forward-looking statements include statements which represent the Company's beliefs concerning future levels of sales and redemption of the Company's products, investment spreads and yields, or the earnings and profitability of the Company's activities.
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.
Investment income increased 9% in 2000 and 5% in 1999 reflecting growth in the average investment portfolio. The annualized average yield increased to 7.0% compared to 6.7% for 1999 and 1998.
Exclusive agents sell products that the Cotton States Group does not underwrite (both life and property and casualty) but are provided through the Company's brokerage operations, and for which the Company receives override commission. Growth in brokerage income for the year increased 10% due primarily to increased sales of non-standard automobile policies. Brokerage commissions increased 19% in 1999 due to a new affiliation with an additional non-standard automobile insurance carrier at higher override commission rates.
Continued strong growth and cost efficiencies accounted for the increase in operating income for the year. Income from brokerage operations increased reflecting higher override commissions generated by an increased volume of business.
The Company's principal long-term obligations are fixed contractual obligations incurred in the sale of its life insurance products. The premiums 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 entry into the debt or equity markets.
Two loans representing $113,000 in principal are over 30 days delinquent. The loan-to-value ratio on delinquent loans is 31%.
The accompanying consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America ("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 deem 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.
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.
Basic earnings per share are based on the weighted-average number of common shares outstanding adjusted for the following stock split effected in the form of a stock dividend.
Effective January 1, 2001, the State of Georgia adopted the National Association of Insurance Commissioner's Codification of Statutory Accounting Practices. Management has reviewed the impact on the Company's statutory surplus and has determined that the codification standards will not have a material impact.
The amortized cost and estimated fair value of debt securities at December 31, 2000, 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 $1,852,000 at December 31, 2000 were on deposit with state regulatory authorities in accordance with statutory requirements.
Realized and unrealized gains and losses on investments for the years ended December 31, were as follows:
The composition of future policy benefits, and the significant assumptions used in their development, are as follows:
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, 2000 and 1999 is composed of the tax-effected temporary differences related to the following amounts:
The balance in the "shareholders' surplus" account at December 31, 2000 was $50,571,000. The Company does not anticipate any of the "policyholders' surplus" account becoming taxable in the foreseeable future.
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, 2000, 1999, and 1998.
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, 2000 and 1999:
Rent for use of software of $106,000 in 2000, 1999, and 1998, has been charged to the affiliated companies.
The Company has various stock option plans for the Company's officers and key employees, as well as directors. The Company accounts for its various stock-based compensation as expense, 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.
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, 2000 is four years. The weighted-average grant date fair value of options granted during 2000, 1999, and 1998 was $8.78, $16.19, and $15.81, respectively. A summary of options follows:
In accordance with APB Opinion No. 25, $125,000, $373,000, and $320,000, in compensation expense has been recorded in 2000, 1999, and 1998, respectively, for the various stock option and restricted stock awards granted in 2000, 1999, and 1998. 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, 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:
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, 2000 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 shareholders are further limited by the Georgia Insurance Code to unassigned statutory surplus, which at December 31, 2000 was approximately $29,000,000. 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 $8,100,000 in 2001 without approval.
We have audited the accompanying consolidated balance sheets of Cotton States Life Insurance Company and subsidiaries (the "Company") as of December 31, 2000 and 1999, and the related consolidated statements of earnings, shareholders' equity, cash flows, and comprehensive income for each of the years in the three-year period ended December 31, 2000. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
The Company's consolidated financial statements have been audited by independent auditors, KPMG LLP. Their role is 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' report on the Company's consolidated financial statements appears on the previous page.
The following is a summary of the unaudited quarterly results of operations for the three years ended December 31, 2000.
The fourth quarter results for the three years include participation in federally sponsored group pools as follows: