Note: All share and per share amounts have been adjusted for the following stock splits: October 1995 five-for-four April 1997 five-for-four January 1998 three-for-two
Premiums, mortality and expense charges, and investment income are the Company's major sources of cash flow used to meet its short-term and long-term cash requirements.
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. The Company grants loans only to employees (excluding officers and directors) and agents.
The loan-to-value ratio on delinquent loans is 28%. Therefore, the Company does not anticipate any loss should it choose to foreclose.
Other investments consist of the Company's equity in a limited partnership. The partnership invests in other insurance companies and related industries.
The Company's insurance operations require capital to support premium writings. The National Association of Insurance Commissioners ("NAIC") developed a model law and risk-based capital formula designed to help regulators identify life insurers that may be inadequately capitalized. Under the NAIC's requirements, an insurer must maintain total capital and surplus above a calculated threshold or face varying levels of regulatory action. The Company's capital and surplus at December 31, 1999 was above the minimum regulatory threshold.
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 all involve third party products distributed through the Company's exclusive and independent agents.
Guaranteed issue and simplified issue products are distributed by approximately 2,700 independent agents and the Company's multi-line exclusive agents. The Company began selling these products in 1996. Premium income from these products were $5,843,177, $3,794,585 and $1,922,379 in 1999, 1998 and 1997, respectively. The Company expects continued growth in this line of business.
During the third quarter of 1999, CSI reached production levels with one of its brokerage affiliated property and casualty companies which resulted in approximately $100,000 of additional brokerage income. Production levels are determined annually for the period October 1 to September 30 of each agreement year; however, there is no guarantee that CSI will achieve the stated goals each year. Hence brokerage income under this arrangement may fluctuate.
Another subsidiary, CSMR, provides the Company with commission income from brokerage agreements with other life and health insurance companies. These companies supply the Company's multi-line agents with life and health products that the Company does not want to underwrite. CSMR earned $373,031 in 1999, $295,053 in 1998 and $305,086 in 1997. The decline in CSMR earnings in 1998 resulted from the utilization of all of its tax loss carry forwards during 1997. On an overall basis, total brokerage revenues amounted to $3,828,087 $3,214,216 and $3,141,695 in 1999, 1998 and 1997, respectively.
Benefits for individual life and guaranteed issued simplified issue as a percentage of premiums and mortality and expense charges for those products were 69% in 1999, 67% for 1998 and 66% for 1997. The Company expects the ratio to range between 65% and 70%.
During the year, the Company experienced increased mortality across all lines of business. Based on the Company's analysis, the mortality fluctuations were not concentrated in any one particular product line or age group. The Company understands that it can and will experience fluctuations in mortality. The Company is insulated from abnormal mortality fluctuations having routinely purchased "stop loss" reinsurance coverage to limit its exposure. The Company reached the attachment point of the reinsurance program during the third quarter and recorded a pretax reinsurance recovery of approximately $500,000 in the third quarter and $600,000 in the fourth quarter of 1999.
The effective tax rates of the Company were 28% for 1999, 30% for 1998 and 26% for 1997. The increase in effective tax rates from 1997 to 1998, was due to CSMR utilizing all of its tax loss carryforwards in the fourth quarter of 1997 and the increase in deferred acquisition costs and other temporary differences which are taxed at a rate of 34% and do not reflect the impact of the small company deduction. The Company anticipates that future tax rates will range from 28% to 33%.
Prolonged inflation can adversely affect insurance operations. Expenses tend to increase while premiums are generally fixed for the life of the policy. Real and nominal interest rates have fluctuated considerably over the years, causing major swings in investment market values and growth in related investment income. In an effort to control these effects, management is continuing to emphasize cost control and to invest in short-term and intermediate-term investments.
The Company did not experience any material date-related problems with its internal information or other systems and has not experienced any material disruptions in connection with external information systems and data exchanges. The Company will continue to monitor its internal and external information systems and data exchanges throughout the year for first date occurrence events. Based on the information now available, the Company does not expect any material disruptions with respect to such events during the coming year.
The Company has made certain forward-looking statements in this Annual Report for the year ended December 31, 1999, and has and will make such statements in other contexts. Forward-looking statements are statements not based on historical information and which relate to future operations, strategies, financial results, or other developments. Statements using verbs such as "expect," "anticipate," "believe" or words of similar import generally involve forward-looking statements. Without limiting the foregoing, forward-looking statements include statements which represent the Company's beliefs concerning future levels of sales and redemptions of the Company's products, investment spreads and yields, or the earnings and profitability of the Company's activities.
The Company accounts for its various stock-based compensation in accordance with the provisions set forth in SFAS No. 123, Accounting for Stock-Based Compensation. SFAS No. 123 permits entities to recognize as expense over the vesting period the fair value of all stock-based awards on the date of the grant, or alternatively continue to apply the provisions of Accounting Principles Board ("APB") Opinion No. 25, Accounting for Stock Issued to Employees, and related interpretations and provide pro forma net income and pro forma earnings per share disclosures for employee stock-based grants as if the fair value-based method had been applied as defined in SFAS No. 123. In accordance with APB Opinion No. 25, compensation expense is 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. 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. See note 8 for further information.
Effective January 1, 1998, the Company adopted the provisions of SFAS No. 130, Reporting Comprehensive Income. This statement establishes standards for reporting and displaying comprehensive income and its components in a full set of general purpose financial statements. SFAS No. 130 requires all items that are required to be recognized under accounting standards as components of comprehensive income be reported in a financial statement that is displayed in equal prominence with the other financial statements. The term "comprehensive income" is used in the statement to describe the total of all components of comprehensive income including net income. "Other comprehensive income" refers to revenues, expenses, gains, and losses that are included in comprehensive income but excluded from earnings under current accounting standards, and consists of items recorded directly in equity under SFAS No. 115, Accounting for Certain Investments in Debt and Equity Securities.
Also effective January 1, 1998, the Company adopted the provisions of SFAS No. 131, Disclosures about Segments of an Enterprise and Related Information. SFAS No. 131 establishes new standards for the disclosures made by public business enterprises to report information about operating segments in annual financial statements and requires those enterprises to report selected information about operating segments in interim financial reports issued to shareholders. It also establishes standards for related disclosures about products and services, geographic areas, and major customers. The operating results for the Company's operating segments are contained in note 11.
In March 1998, the AICPA Accounting Standards Executive Committee issued on SOP 98-1, Accounting for the Costs of Computer Software Developed or Obtained for Internal Use. SOP 98-1 is effective for all fiscal years beginning after December 15, 1998. The Company has adopted SOP 98-1, effective January 1, 1999 and there was no impact on the Company's financial statements.
The estimated fair values and carrying value of the Company's financial instruments at December 31, 1999 and 1998 are the same except for investment securities which are detailed in footnote 2 and mortgage loans as follows:
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 0% in 1999 up to 5% in 2006 and thereafter. A 1% annual increase in these assumed cost trend rates would increase the accumulated postretirement benefit obligation at December 31, 1999 by approximately $9,691 and the service and interest cost components of the net periodic postretirement benefit cost for 1999 by approximately $892. A 1% annual decrease in these assumed cost trends would decrease the accumulated postretirement benefit obligation at December 31, 1999 by approximately $8,724 and the service and interest components of the net periodic postretirement benefit cost by $803. The assumed discount rate used in determining the accumulated postretirement obligation was 7.75% at December 31, 1999 and 6.75% at December 31, 1998.
COTTON STATES LIFE INSURANCE COMPANY AND SUBSIDIARIES Notes to Consolidated Financial Statements December 31, 1999, 1998, and 1997
The Company expensed pension costs and 401(k) matching costs of $63,354, $36,148, $(6,517) and $36,451, $42,805, and $39,287 in 1999, 1998, and 1997 respectively.
The Company has various stock option plans for the Company's officers and key employees, as well as directors. 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, 1999 is four years. The weighted-average grant date fair value of options granted during 1999 and 1998 was $16.19 and $15.81, respectively. A summary of options follows:
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 three years for restricted stock for all years, expected dividend yield of 1.35% for 1999 grants and 1.0% for all other years, risk-free interest rate of 5.5% for 1999, 1998, and 1997, and an expected volatility of 52% for 1999 grants, 67% for 1998 grants, and 52% for 1997 grants.
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, 1999 was approximately $24,000,000. 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 2000 without approval.
QUARTERLY RESULTS The following is a summary of the unaudited quarterly results of operations for the three years ended December 31, 1999.