The Company, Mutual and Shield occupy offices located at 244 Perimeter Center Parkway, Atlanta, Georgia. The building is owned by a general partnership composed of Mutual and Gold Kist Inc. ("Gold Kist"). The Company has no ownership interest in the partnership. The facility consists of a three-story office building containing approximately 260,000 square feet of space of which the Company, Mutual and Shield share approximately 90,000 square feet. Rental expense is allocated to the Company based on its proportionate share of square footage occupied.
On December 1, 1995, the Company transferred an additional $11,193,866 in securities from its held for investment portfolio to its available for sale portfolio.
In 1995 and 1994, the Company provided loss provisions of approximately $300,000 and $580,000, respectively, for U.S. Government agency derivative securities for which the decline in value was deemed to be other than temporary. These securities were U.S. Government agency securities in which principal repayments are linked to the valuation of foreign currencies. Three of these securities matured in 1995; the remaining security matured in 1996.
The loan-to-value ratio on delinquent loans is 42%, 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.
Individual accident and health premiums decreased 23% in 1996 and 24% in 1995 and 1994. 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.
Investment income increased 8%, 10% and 5% in 1996, 1995 and 1994, respectively. The increases are due to a larger investment portfolio.
Realized investment gains/losses during the past three years resulted primarily from the sale of bonds and write-down of bonds. During 1995 and 1994, the Company booked provisions for possible investment losses of $300,000 and $580,000. (See previous discussion of investment securities).
Individual benefits as a percentage of individual life premiums and mortality and expense charges were 66%,70% and 64% for 1996, 1995 and 1994, respectively. The Company expects the ratio to range between 65% and 70%.
Operating expenses and amortization of policy acquisition costs as a percentage of total premium income, mortality and expense charges, and brokerage income were 45%, 41% and 40% for 1996, 1995 and 1994, respectively. The increase in 1996 was due to the elimination of group health premiums received from the Company's agents and employees. Even though, the ratio increased, it did not have an adverse impact on the Company's earnings. The Company anticipates the expense ratio will remain at approximately 45% in future years.
COTTON STATES LIFE INSURANCE COMPANY AND SUBSIDIARIES Consolidated Statements of Stockholders' Equity
Interest Rate Risk is the risk that interest rates will change and cause a decrease in the value of an insurer's investments. The Company mitigates this risk by attempting to match the maturity schedule of its assets with the expected payout of its liabilities. To the extent that liabilities come due more quickly than assets mature, an insurer would have to sell assets prior to maturity and recognize a gain or loss.
On October 23, 1995, the Financial Accounting Standards Board (FASB) issued SFAS No. 123, Accounting for Stock-Based Compensation, which permits entities to recognize as expense over the vesting period the fair value of all stock-based awards on the date of the grant. Alternatively, SFAS No. 123 also allows entities to continue to apply the provisions of APB Opinion No. 25 and provide pro forma net income and pro forma earnings per share disclosures for employee stock-based grants made in 1995 and future years as if the fair value-based method had been applied as defined in SFAS No. 123. The Company has elected to continue to apply the provisions set forth in APB Opinion No. 25 and follow the disclosure provisions of SFAS No. 123.
The amortized cost and estimated fair value of debt securities at December 31, 1996, 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. Amortized Estimated cost fair value ---------- ----------- Held for investment: Due in one year or less $ 1,101,480 1,100,000 Due after one year through five years 7,582,727 7,716,589 Due after five years through 10 years 11,561,576 11,580,450 ----------- ---------- Total $20,245,783 20,397,039 ========== ==========
Amortized Estimated cost fair value ---------- ----------- Available for sale: Due in one year or less $ 3,508,236 3,520,620 Due after one year through five years 11,069,795 11,137,720 Due after five years through 10 years 32,391,836 34,571,720 Due after 10 years 11,432,100 9,300,181 Mortgage-backed securities 21,669,731 22,092,008 ----------- ---------- Total $ 80,071,698 80,622,249 ========== ========== Bonds with amortized cost of approximately $1,780,000 at December 31, 1996 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, 1996 and 1995 are the same except for investment securities which are detailed in footnote 2 and mortgage loans as follows:
Mortgage loans Carrying Fair amount value --------- ------- 1996 $ 4,770,277 4,864,411 1995 5,424,472 5,601,569 ========= =========
1996 1995 1994 ---- ---- ---- Premium income: Direct premiums $ 7,102,032 8,248,692 8,354,462 Reinsurance assumed 712,170 677,928 676,912 Reinsurance ceded (1,111,280) (1,084,025) (1,039,568) ----------- ---------- --------- Net premium income $ 6,702,922 7,842,595 7,991,806 ======== ======== ======== Benefits and claims:
A valuation allowance of $600,000 was established in 1994, of which $300,000 was recorded through equity due to the initial establishment of the deferred tax asset associated with unrealized losses on available for sale securities. The valuation allowance established through equity in 1994 was taken down through equity in 1995 as a result of an increase in the value of the securities.
The following table sets forth the plan's funded status reconciled with the amount shown in the Company's balance sheet at December 31, 1996 and 1995:
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 9% in 1996 down to 5% in 2004 and thereafter. A 1% annual increase in these assumed cost trend rates would increase the accumulated postretirement benefit obligation at December 31, 1996 by approximately $16,700 and the service and interest cost components of the net periodic postretirement benefit cost for 1996 by approximately $1,300. The assumed discount rate used in determining the accumulated postretirement obligation was 7.50% at December 31, 1996 and 7.25% at December 31, 1995.
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 $2,469,691 in 1996, $1,915,305 in 1995, and $1,790,633 in 1994. 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 and 1994, premiums earned on group policies with Cotton States Mutual and its agents were $1,576,074 and $1,821,114, respectively. Premiums on the Cotton States Mutual policies were based on actual claims experience plus an expense and profit allowance of 10%. At December 31, 1996 and 1995, the Company owed Cotton States Mutual $405,665 and $690,910, respectively.
We have audited the accompanying consolidated balance sheets of Cotton States Life Insurance Company and subsidiaries (the "Company") as of December 31, 1996 and 1995, and the related consolidated statements of earnings, stockholders' equity, and cash flows for each of the years in the three-year period ended December 31, 1996. 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.
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, 1996 and 1995, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 1996, in conformity with generally accepted accounting principles.
/s/ KPMG Peat Marwick LLP KPMG PEAT MARWICK LLP Atlanta, Georgia February 21, 1997
The accompanying consolidated financial statements for Cotton States Life Insurance Company and subsidiaries ("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 generally accepted accounting principles and, where appropriate, are based on management's best estimates and judgements. Other financial data about the Company contained in this annual report is consistent with that presented in the consolidated financial statements.