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. The Company believes that the facility is suitable to its business. Rental expense is allocated to the Company based on its proportionate share of square footage occupied.
Note: All share and per share amounts have been adjusted for the following stock splits:
Guaranteed and simplified issue life insurance premiums continued to show significant growth as a result of higher production by the Company's independent agency force which increased 44% to approximately 3,900 agents under contract at December 31, 2000 after increasing by 42% the previous year. 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 the popularity of universal life payroll deduction products. The exclusive agency force of 282 as of December 31, 2000 compares to 283 as of the same date in 1999 and 272 in 1998.
Life benefits and claims, including reserve increases on traditional life and guaranteed and simplified issue products are as follows:
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. Other benefits and claims consist of participation in a Federally sponsored group life pool and benefits on a closed block of individual accident and health business.
Interest credited to universal life contracts increased 10% reflecting growth in business. The annual interest rate credited to policyholders of universal life contracts was 6.2% for 2000, 1999, and 1998.
The amortization of policy acquisition costs decreased slightly from 1999 levels as the result of the periodic adjustment of actuarial assumptions to reflect current experience. For the year 2000, this adjustment represented the slow down in amortization as a result of higher estimated future profits resulting from expected improvement in mortality levels of universal life products from initial expectations. The after tax effect on net earnings for the period ended December 31, 2000 was $429,000.
Operating expense as a percentage of premiums decreased to 28% for the year compared to 31% in 1999 and 32% in 1998. The Company continues to realize increasing cost efficiencies from recently implemented digital imaging and automated policy processing technologies.
The effective tax rate for 2000 was 30% compared to 28% in 1999 and 30% in 1998. The 2 percentage point increase is the result of larger pretax income relative to the allowable small life company deduction.
Premiums and investment income are the Company's major sources of cash flow used to meet its short-term and long-term cash requirements. Short-term obligations consist primarily of operating expenses and policyholder benefits. The Company has been able to meet these funding requirements out of operating cash flow.
Since December 31, 1999, there has not been a material change in mix or credit quality of the Company's investment portfolio. All bond purchases have been available for sale and over 93% of the holdings at December 31, 2000 and 1999 are rated "A" or better. Due to the improvement in bond market conditions, the Company experienced an increase in the market value of bonds of approximately $2,471,000 for the fourth quarter and $3,299,000 year to date 2000.
The Company's mortgage loan policy limits the amounts of loans to no more than 80% of the value on residential loans and no more than 75% of the value on commercial loans. The Company grants loans only to employees (excluding officers and directors) and agents.
The consolidated financial statements include the accounts of the Company, and its wholly owned subsidiaries, CSI Brokerage Services, Inc. ("CSI") and Cotton States Marketing Resources, Inc. ("CSMR"). All significant intercompany balances and transactions have been eliminated in consolidation.
Future policy benefits on traditional individual life insurance policies are computed using a net level premium method based upon various 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.
COTTON STATES LIFE INSURANCE COMPANY AND SUBSIDIARIES Notes to Consolidated Financial Statements December 31, 2000, 1999, and 1998
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 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 $9,313,000 in 2000, $8,121,000 in 1999, and $6,982,000 in 1998.
For purposes of presenting its statements of cash flows, the Company considers all short-term investments to be cash equivalents. Short-term investments have original maturity dates of less than three months.
Financial Accounting Standards Board ("FASB") SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities, as amended by SFAS No. 137 and 138, is effective for years beginning January 1, 2001. The standard requires that all derivatives be recorded as an asset or liability, at fair value, regardless of the purpose or extent for holding the derivative. If a derivative is not utilized as a hedge, all gains and losses from the change in the derivative's estimated fair value are recognized in earnings. All gains and losses from the change in estimated fair value of certain derivatives utilized as hedges are recognized in earnings or other comprehensive income depending on the type of hedge relationship. Due to the Company's limited use of derivative financial instruments, the adoption of SFAS No. 133, as amended, will not have a material impact on the Company's consolidated financial position, results of operations or cash flows.
The amortized cost and estimated fair values of investments in debt and equity securities as of December 31, 2000 and 1999 are as follows:
The estimated fair values and carrying value of the Company's financial instruments at December 31, 2000 and 1999 are the same except for investment securities which are detailed in footnote (2) and mortgage loans as follows:
Amounts ceded under reinsurance agreements become liabilities of the Company should the reinsurers be unable to meet their obligations under the reinsurance agreements.
The effect of reinsurance assumed and ceded on certain financial statement accounts is as follows:
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, 2000 was $4,203,000.
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 accrues benefits on a current basis and the plan is not funded. The components of the net periodic postretirement benefit cost for the years ended December 31 are as follows:
Cotton States Mutual Insurance Company ("Mutual"), through its wholly owned subsidiary, Shield Insurance Company ("Shield"), controls approximately 33% of the Company's outstanding common stock. Most officers and directors of the Company hold similar positions with these affiliates.
Certain general expenses are allocated to the Company from its affiliates. These expenses, such as salaries, advertising, rents, etc., represent the Company's share of expenses initially paid by Mutual and are allocated based on specific identification or, if undeterminable, generally on the basis of each company's premium. Expenditures allocated to the Company amounted to $3,386,739 in 2000, $2,957,431 in 1999, and $2,779,136 in 1998. At December 31, 2000 and 1999, the Company owed Mutual $393,926 and $507,187, respectively.
The Company expensed pension costs of $61,645 in 2000, $63,354 in 1999, and $36,148 in 1998 and 401(k) matching costs of $43,838 in 2000, $36,451 in 1999, and $42,805 in 1998.
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 63,225, 29,298, and 23,258 shares of restricted stock under such plans during 2000, 1999, and 1998, respectively. The weighted-average grant date fair value of such shares was $7.04, $11.41, and $15.53, respectively. Aggregate compensation expense with respect to the foregoing restricted stock awards was $57,000, $308,000, and $252,000, in 2000, 1999, and, 1998, respectively.
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 seven years for restricted stock awarded in 1999 and 1998, and three years for restricted stock awarded in 2000, expected dividend yield of 2.10% for 2000 grants and 1.35% for all other years, risk-free interest rate of 5.0% for 2000, 5.50% for 1999, and 1998, and an expected volatility of 58% for 2000 grants, 52% for 1999 grants, and 67% for 1998 grants.
THE BOARD OF DIRECTORS AND SHAREHOLDERS COTTON STATES LIFE INSURANCE COMPANY:
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, 2000 and 1999, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2000, 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 judgements. Other financial data about the Company contained in this annual report is consistent with that presented in the consolidated financial statements.
Note - Failure of individual quarterly income per share to total annual income per share results from the computation of weighted average number of shares on an individual quarterly basis. Income per share amounts have been adjusted January 1998 three-for-two stock split.