1
Securities and Exchange Commission
Washington, D. C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number 2-39729
COTTON STATES LIFE INSURANCE COMPANY
------------------------------------
(Exact name of registrant as specified in its charter)
GEORGIA 58-0830929
------- ------------------
(State of incorporation (I.R.S. Employer
and jurisdiction) Identification No.)
244 PERIMETER CENTER PARKWAY, N.E., ATLANTA, GEORGIA 30346
---------------------------------------------------- -----
(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code: (404)39l-8600
Securities registered pursuant to Section 12(b) of the Act:
NONE
Securities registered pursuant to Section 12(g) of the Act:
EXEMPT-UNDER SECTION 12(g)(2)(G)
Indicate by check mark whether the registrant has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months and has been subject to the filing requirements for at
least the past 90 days.
YES [X] NO [ ]
Indicate by check mark if the disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
The aggregate market value of voting stock held by non-affiliates was
$43,756,380 based on the closing price of $10.31 on February 1, 2001, as
reported on the NASDAQ National Market.
As of February 1, 2001, there were 6,345,428 shares of registrant's common
stock outstanding.
The Exhibit Index is located on Page 50.
The total number of pages in this document is 55
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PART I
ITEM 1. BUSINESS
GENERAL
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-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.
In November of 1989, the Company acquired 60% of the outstanding
common stock of Cotton States Marketing Resources, Inc. ("CSMR"). During 1992,
the Company acquired the remaining 40% of CSMR's stock. CSMR brokers through
the Company's exclusive agents other insurance companies' life and accident and
health products not underwritten by the Company.
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FINANCIAL INFORMATION ABOUT INDUSTRY SEGMENTS
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.
2000 1999 1998
------------ ---------- ----------
Individual life insurance:
Premiums $ 17,816,354 16,653,463 15,334,599
Net investment income 9,403,578 8,837,008 8,461,988
Realized investment gains 160,104 254,052 358,000
------------ ---------- ----------
Total revenue 27,380,036 25,744,523 24,154,587
Policyholder benefits 13,337,303 12,173,031 10,429,767
Operating expenses 7,103,512 7,525,275 6,292,769
------------ ---------- ----------
Total benefits and expenses 20,440,815 19,698,306 16,722,536
------------ ---------- ----------
Operating profit 6,939,221 6,046,217 7,432,051
------------ ---------- ----------
Guaranteed and simplified life insurance:
Premiums 8,106,634 5,843,177 3,794,585
Net investment income 540,200 316,301 159,182
Realized investment gains 9,670 9,093 6,735
------------ ---------- ----------
Total revenue 8,656,504 6,168,571 3,960,502
Policyholder benefits 5,728,786 3,358,022 2,317,006
Operating expenses 2,368,914 1,616,158 890,787
------------ ---------- ----------
Total benefits and expenses 8,097,700 4,974,180 3,207,793
------------ ---------- ----------
Operating profit 558,804 1,194,391 752,709
------------ ---------- ----------
Brokerage:
Brokerage commissions 4,197,173 3,828,087 3,214,216
Net investment income 147,003 99,061 62,698
Realized investment gains 236,160 211,483 103,180
------------ ---------- ----------
Total revenue 4,580,336 4,138,631 3,380,094
Operating expenses 1,154,992 1,086,777 1,006,605
------------ ---------- ----------
Operating profit 3,425,344 3,051,854 2,373,489
------------ ---------- ----------
Combined operating profit 10,923,369 10,292,462 10,558,249
Group life insurance and individual
accident and health results (70,097) (109,127) (172,906)
------------ ---------- ----------
Earnings before Federal income taxes $ 10,853,272 10,183,335 10,385,343
============ ========== ==========
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NARRATIVE DESCRIPTION OF BUSINESS SEGMENTS
(I) INDIVIDUAL LIFE
The major forms of individual life insurance offered by the Company
include universal life, graded premium whole life, participating whole life,
term insurance, various supplemental riders including, but not limited to,
accidental death, disability waiver and guaranteed insurability, and disability
income riders. These products are sold by the Company's 282 multi-line
exclusive agents in Alabama, Florida, Georgia, Kentucky and Tennessee.
The Company offers its insurance through multi-line exclusive agents
who also write all lines of property and casualty insurance offered by Cotton
States Mutual Insurance Company ("Mutual") and its subsidiary, Shield Insurance
Company ("Shield"). See Item 13 of this report for an explanation of the
relationship between the Company, Mutual and Shield. Multi-line exclusive
agents are under contract to the Company, Mutual and Shield, and are paid on a
commission basis. The Company's multi-line exclusive agents are located in the
following states:
NUMBER OF AGENTS
DECEMBER 31,
--------------------
2000 1999 STATE
---- ---- -----
48 53 Alabama
24 24 Florida
159 164 Georgia
30 27 Kentucky
21 15 Tennessee
--- ---
TOTAL 282 283
=== ===
Unless the need for a medical examination is indicated by the
application or an investigation, the Company writes individual life insurance
based on age without requiring blood and specimen in the following maximum
amounts:
AGE GROUP MAXIMUM INSURANCE
--------- -----------------
0-17 $100,000
18-40 74,999
41-50 50,000
51 and over 25,000
As of December 31, 2000, less than 2.9% of the Company's individual
life premiums were represented by substandard risks. Substandard life insurance
risks are accepted by the Company at increased rates. The Company has no fixed
maximum on the size of substandard policies and will entertain any application
on which it can obtain suitable reinsurance.
The Company, as do others in the insurance industry, reinsures with
other companies portions of the individual life insurance policies it
underwrites. Reinsurance enables an insurance company to write a policy in an
amount larger than the risk it desires to assume. A contingent liability exists
on insurance ceded to the reinsurer which might become a liability of the
Company in the event that the reinsurer fails to meet its obligations under the
reinsurance treaty.
The Company presently retains, with respect to individual life
policies, no more than $100,000 of insurance on any one life, which may be
reduced, depending upon the age and the physical classification of the insured.
All accidental death riders are 100% reinsured.
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(II) GUARANTEED ISSUE AND SIMPLIFIED ISSUE WHOLE LIFE INSURANCE
The Company offers Guaranteed Issue and Simplified Issue whole life
insurance through its multi-line agency force and approximately 3,900
independent agents. The independent agents sell these products in all states in
which the Company is licensed.
Both plans are level-premium, cash value permanent life insurance
products issued from $2,500 to $25,000 face amounts. Both plans are frequently
used by individuals to cover final expenses. They are designed to be sold as
companion plans using a simple application and no medical exams or tests. If
all health questions can be answered "NO", the Simplified Issue policy may be
issued. Otherwise, the Guaranteed Issue policy will be issued.
Guaranteed Issue whole life is available for issue ages 46-80. The
death benefit in policy years one to three is limited to a return of premium
plus 10%. However, the full death benefit is payable in all years in case of
accidental death. After three years, the full death benefit is payable for any
cause of death.
Simplified Issue whole life is available for issue ages 0-80. The full
death benefit is payable from the issue date.
(III) BROKERAGE
The Company owns two brokerage subsidiaries, CSI and CSMR. CSI
provides the Company with commission income from brokerage agreements with
other property and casualty insurance carriers. These carriers supply the
Company's multi-line agents with property and casualty products that the
Company's affiliated property and casualty companies do not underwrite, such as
non-standard auto insurance, crop hail insurance, multi-peril crop insurance,
mobile home insurance, poultry house insurance and flood insurance.
Sixty-two percent of CSI's brokerage revenues come from the sale of
non-standard auto insurance through two carriers. Twenty percent of CSI's
revenue comes from the sale of crop hail and multi-peril crop insurance through
one carrier.
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 choose to underwrite, such as individual major-medical
policies, impaired risk life insurance, first to die life insurance, group life
and health insurance. CSMR has contracted with approximately 3,900 independent
agents to write the Company's Guaranteed Issue and Simplified Issue whole life
insurance.
REGULATION
The Company, like other insurance companies, is subject to regulation
and supervision by the states in which it transacts business. The insurance
laws of these states confer upon supervisory authorities broad administrative
powers relating to (i) the regulation and revocation of licenses to transact
business, (ii) the regulation of trade practices, (iii) the licensing of
agents, (iv) the approval of the form and content of policies and advertising,
(v) the depositing of securities for the benefit of policyholders, (vi) the
type and amount of investments permitted, and (vii) the maintenance of
specified reserves and capital for the protection of policyholders. In general,
insurance laws and regulations are designed primarily to protect policyholders
rather than shareholders.
The Company is also required under these laws to file detailed annual
reports with the supervisory agencies in each of the states in which it does
business. Under the rules of the National Association of Insurance
Commissioners, the Company's records are examined periodically by one or more
of the state supervisory agencies.
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EMPLOYEES
In addition to its principal officers, the Company shares 118 salaried
employees with Shield and Mutual. The Company pays an allocated portion of the
shared employees' salaries, either based upon the Company's premium income in
relation to the premium income of Mutual and Shield or the actual time expended
on each company's affairs. The Company and its subsidiaries also have 34
salaried employees who work on a full-time basis in its home office, where all
administrative functions, such as underwriting, billing and collection of
premiums, are centralized and from which all sales activities are directed.
None of the Company's employees is subject to a collective bargaining
agreement.
COMPETITION
The Company operates in a highly competitive industry. It competes
with a large number of stock and mutual insurance companies. Larger stock and
mutual insurance companies may have a competitive advantage in that they have
greater financial and human resources that enable them to offer more
diversified lines of coverage and develop new products faster.
Mutual companies may also have an additional advantage compared to
stock insurers because all of their profits accrue to the policyholders.
The Company has certain advantages that enable it to keep its premium
rates competitive with similar policies offered by competing companies. These
advantages are:
1. The Company offers most of its insurance through the same
agents who write property and casualty insurance for Mutual
and Shield. The sale of insurance through the same agents who
sell property and casualty insurance enables the Company to
incur less agency development and sales expense than is
customary in the industry;
2. Because the Company's agents can provide customers with
coverage for all major lines of individual insurance they may
utilize "account" selling. Account selling enables insureds
to contact one agent regarding their total insurance needs;
and
3. The Company shares certain facilities, equipment and
personnel with Mutual and Shield. The Company believes that
sharing these expenses has a favorable impact on the ratio of
expenses to premium income and enables the Company to enjoy
economies of scale.
In order to keep pace with trends in the industry, the Company
introduces new products with premium rates and benefits that it believes are
competitive with the industry.
ITEM 2. PROPERTIES
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.
ITEM 3. LEGAL PROCEEDINGS
The Company is a defendant in various actions incidental to the
conduct of its business. While the ultimate outcome of these matters cannot be
estimated with certainty, management does not believe the actions are
reasonably likely to result in a material loss to the Company.
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ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
PART II
ITEM 5. MARKET FOR THE COMPANY'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS
On January 1, 2001, there were approximately 1,900 shareholders of the
Company's common stock. The stock (symbol "CSLI") is traded over-the-counter on
the NASDAQ National Market System. Price history as provided by NASDAQ and
dividends declared during the past two years are presented below:
Stock Price(1) Dividend
High Low Declared
2000
First Quarter $ 9.00 7.00 .04
Second Quarter 8.63 7.13 .04
Third Quarter 9.81 8.00 .04
Fourth Quarter 11.50 8.25 .04
1999
First Quarter $14.50 11.75 .04
Second Quarter 12.50 10.38 .04
Third Quarter 12.38 9.00 .04
Fourth Quarter 10.38 7.50 .04
(1) The prices presented above are sale prices which represent price
between broker-dealers and do not include mark-ups or mark-downs or
any commission to the broker-dealer. Therefore, the prices presented
above do not reflect prices in actual transactions.
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ITEM 6. SELECTED FINANCIAL DATA
TEN-YEAR SELECTED FINANCIAL DATA
2000 1999 1998 1997 1996
------------ ----------- ----------- ----------- -----------
AS OF DECEMBER 31
Total assets $211,300,570 190,516,318 180,773,289 165,337,309 148,824,187
Total liabilities $148,566,691 5,729,241 126,282,437 115,941,296 105,910,335
Total shareholders' equity $ 62,733,879 54,787,077 54,490,852 49,396,013 42,913,852
Book value per share $ 9.89 8.66 8.56 7.72 6.71
Closing price per share $ 11.50 8.63 14.88 15.25 7.60
YEARS ENDED DECEMBER 31
Premiums $ 26,816,523 23,302,097 19,935,354 17,620,184 15,400,543
Net investment income, realized
investment gains and brokerage
income $ 14,693,886 13,555,085 12,365,999 11,308,794 9,458,474
Total revenue $ 41,510,409 36,857,182 32,301,353 28,928,978 24,859,017
Benefits and expenses $ 30,657,137 26,673,847 21,916,010 20,451,884 18,735,863
Net income $ 7,606,215 7,327,945 7,240,585 6,304,558 4,832,577
Basic net income per share $ 1.20 1.16 1.13 .99 .76
Diluted net income per share $ 1.18 1.14 1.10 .96 .74
Dividends per share $ .160 .160 .160 .126 .102
AS OF DECEMBER 31 1995 1994 1993 1992 1991
------------ ----------- ----------- ----------- -----------
Total assets $139,381,979 124,412,468 116,237,515 111,133,117 102,258,764
Total liabilities $ 99,694,942 90,855,648 85,285,402 82,346,176 75,210,219
Total shareholders' equity $ 39,687,037 33,556,820 30,952,113 28,786,941 27,048,545
Book value per share $ 6.23 5.28 5.10 4.74 4.46
Closing price per share $ 4.80 3.63 3.20 2.77 2.77
YEARS ENDED DECEMBER 31
Premiums $ 15,061,541 15,128,529 13,535,407 14,475,370 13,758,303
Net investment income, realized
investment gains and brokerage
income $ 8,814,035 7,597,136 7,271,267 7,111,110 7,069,597
Total revenue $ 23,875,576 22,725,665 20,806,674 21,586,480 20,827,900
Benefits and expenses $ 18,548,121 18,333,697 18,149,664 19,122,882 19,182,874
Net income $ 4,070,871 3,303,024 2,435,355 2,108,597 1,292,026
Basic net income per share $ .64 .54 .40 .33 .21
Diluted net income per share $ .63 .51 .39 .33 .20
Dividends per share $ .072 .060 .051 .068 .119
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
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ITEM 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF CONSOLIDATED
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FORWARD-LOOKING STATEMENTS
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.
Forward-looking statements are necessarily based on estimates and assumptions
that are inherently subject to significant business, economic and competitive
uncertainties and contingencies, many of which are beyond the Company's control
and many of which are subject to change. These uncertainties and contingencies
could cause actual results to differ materially from those expressed in any
forward-looking statements made by, or on behalf of, the Company. Whether or not
actual results differ materially from forward-looking statements may depend on
numerous foreseeable and unforeseeable developments. Some may be national in
scope, such as general economic conditions, changes in tax law and changes in
interest rates. Some may be related to the insurance industry generally, such as
pricing competition, regulatory developments and industry consolidation. Others
may relate to the Company specifically, such as credit, volatility and other
risks associated with the Company's investment portfolio. Investors are also
directed to consider other risks and uncertainties discussed in documents filed
by the Company with the Securities and Exchange Commission. If the Company's
assumptions and estimates are incorrect or do not come to fruition, or if the
Company does not achieve all of these key factors, then the Company's actual
performance could vary materially from the forward-looking statements made
herein. The Company disclaims any obligation to update forward-looking
information.
RESULTS OF OPERATIONS
(DOLLARS IN THOUSANDS)
2000 1999 INCREASE 1998 INCREASE
------- ------ -------- ------ --------
PREMIUMS
Guaranteed and simplified
issue life insurance $ 8,107 5,843 39% 3,795 54%
Individual life insurance:
Traditional life 6,057 5,848 4% 5,573 5%
Universal life 11,759 10,805 9% 9,762 11%
------- ------ -- ------ ---
Total individual life insurance 17,816 16,653 7% 15,335 9%
------- ------ -- ------ ---
Other Lines 894 806 11% --
805
TOTAL PREMIUMS $26,817 23,302 15% 19,935 17%
======= ====== == ====== ===
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.
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.
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INVESTMENT INCOME
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.
BROKERAGE COMMISSIONS
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.
BENEFITS AND CLAIMS
Life benefits and claims, including reserve increases on traditional life and
guaranteed and simplified issue products are as follows:
2000 1999 1998
----------------------- ---------------------- ----------------------
BENEFITS AND % OF BENEFITS AND % OF BENEFITS AND % OF
CLAIMS PREMIUM CLAIMS PREMIUM CLAIMS PREMIUM
------------ ------- ------------ ------- ------------ -------
BENEFITS AND CLAIMS
(dollars in thousands)
Guaranteed and $ 5,729 71% 3,358 57% 2,317 61%
simplified issue
Individual life insurance
Traditional life 4,261 70% 4,305 74% 3,538 64%
Universal life 3,878 33% 3,136 29% 2,441 25%
------- --- ------ --- ----- ---
Total individual life insurance 8,139 46% 7,441 45% 5,979 39%
------- --- ------ --- ----- ---
Other benefits and claims 932 104% 901 111% 959 118%
------- --- ------ --- ----- ---
TOTAL BENEFITS AND CLAIMS $14,800 55% 11,700 50% 9,255 46%
======= ====== =====
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 POLICYHOLDERS
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.
AMORTIZATION OF POLICY ACQUISITION COSTS AND OPERATING EXPENSES
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.
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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.
INCOME TAX EXPENSE
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.
PERCENTAGE PERCENTAGE
2000 1999 INCREASE/DECREASE 1998 INCREASE/DECREASE
NET INCOME ---- ---- ----------------- ---- -----------------
(Dollars in thousands)
Operating income:
Guaranteed and simplified issue 385 853 (55)% 520 64%
----- ----- -----
Individual life insurance:
Traditional 1,055 765 38% 794 (4)%
Universal life 3,696 3,404 9% 4,209 (19)%
----- ----- --- ----- ---
Total individual life insurance 4,751 4,169 14% 5,003 (17)%
----- ----- --- -----
Brokerage operations 2,235 2,044 9% 1,583 29%
----- ----- -----
Other Lines (49) (80) 39% (120) 33%
----- ----- -----
Total operating income 7,322 6,986 5% 6,986 --
Realized gains 284 342 (17)% 254 35%
----- ----- -----
Net Income 7,606 7,328 4% 7,240 1%
===== ===== =====
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.
LIQUIDITY AND CAPITAL RESOURCES
CASH FLOW
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.
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.
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INVESTMENTS
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.
MORTGAGE LOANS
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 geographic distribution of the loan portfolio is:
BOOK VALUE
NUMBER OF LOANS (DOLLARS IN THOUSANDS)
-------------------------------- --------------------------------
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
2000 1999 STATE 2000 1999
------------ ------------- ----- ------------ ------------
3 3 Alabama $ 130 146
6 6 Florida 354 385
36 47 Georgia 1,614 2,368
-- -- ------ -----
45 56 $2,098 2,899
== == ====== =====
Two loans representing $113,000 in principal are over 30 days delinquent. The
loan-to-value ratio on delinquent loans is 31%.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
CREDIT RISK
Credit risk is the risk that issuers of securities owned by the Company will
default, or other parties, including reinsurers, which owe the Company money,
will not pay. The Company attempts to minimize these risks by following a
conservative investment strategy and by contracting with reinsuring companies
that meet high standards for rating criteria and other qualifications. The
Company invests principally in government, governmental agency and high quality
corporate bonds having an A rating or better. The fixed maturity portfolio had
an average rating of AA- at December 31, 2000.
INTEREST RATE RISK
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's fixed maturity
investments are subject to interest rate risk. The Company seeks to manage the
impact of interest rate fluctuation through cash flow modeling, which attempts
to match the maturity schedule of its assets with expected payout of its
liabilities. Liabilities for interest sensitive products are carried at full
account value. The fixed maturity portfolio at December 31, 2000 and December
31, 1999 had an effective duration of 4.8 years and 5.1 years, respectively.
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The table below summarizes the Company's interest rate risk and shows the effect
of a hypothetical 100 and 200 basis point increase/decrease in interest rates on
the market values of the fixed investment portfolio. The selection of 100 and
200 basis point increases/decreases in interest rates should not be construed as
a prediction by the Company's management of future market events, but rather, to
illustrate the potential impact of such events. These calculations may not fully
capture the impact of the changes in the ratio of long-term rates to short-term
rates.
HYPOTHETICAL
PERCENTAGE
ESTIMATED FAIR INCREASE
VALUE AFTER (DECREASE) IN
ESTIMATED CHANGE IN HYPOTHETICAL SHAREHOLDERS'
ESTIMATED VALUE INTEREST RATES CHANGE IN EQUITY BEFORE
DECEMBER 31, 2000 (BP-BASIS POINTS) INTEREST RATES TAXES
----------------------------------------------------------------------------------
(dollars in thousands)
Held for investment:
U. S. Treasury securities and obligations 200 bp decrease 1,509 N/A
of U.S. government corporations 100 bp decrease 1,505 N/A
and agencies $1,501 100 bp increase 1,497 N/A
200 bp increase 1,495
Debt securities issued by
foreign governments $2,031 200 bp decrease 2,067 N/A
100 bp decrease 2,049 N/A
100 bp increase 2,013 N/A
200 bp increase 1,996 N/A
Corporate securities $11,682 200 bp decrease 12,207 N/A
100 bp decrease 11,939 N/A
100 bp increase 11,429 N/A
200 bp increase 11,186 N/A
Available for sale:
U.S. Treasury and obligations 200 bp decrease 11,079 1.32
of U.S. government corporations 100 bp decrease 10,669 0.67
and agencies $10,249 100 bp increase 9,810 (0.70)
200 bp increase 9,374 (1.39)
Corporate securities $89,385 200 bp decrease 99,933 16.81
100 bp decrease 94,659 8.41
100 bp increase 84,362 (8.01)
200 bp increase 79,705 (15.43)
Mortgage-backed securities $16,950 200 bp decrease 17,764 1.30
100 bp decrease 17,425 0.76
100 bp increase 16,308 (1.02)
200 bp increase 15,606 (2.14)
Total fixed maturities $131,798 200 bp decrease 144,559 20.34
-------- 100 bp decrease 138,246 10.28
100 bp increase 125,419 (10.17)
200 bp increase 119,362 (19.82)
13
14
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
COTTON STATES LIFE INSURANCE COMPANY AND SUBSIDIARIES
Consolidated Balance Sheets
DECEMBER 31,
----------------------------------
2000 1999
------------- ----------
ASSETS
Investments:
Fixed maturities, held for investment, at amortized
cost $ 15,057,092 16,076,877
Fixed maturities, available for sale, at fair value 116,584,243 102,772,134
Equity securities, at fair value 3,776,423 2,623,214
First mortgage loans on real estate 2,097,616 2,898,757
Policy loans 8,841,008 8,591,609
Short-term investments 3,538,856 5,494,839
Other invested assets 1,000,000 1,000,000
------------- -----------
Total investments 150,895,238 139,457,430
Cash 2,899,048 610,695
Accrued investment income 2,465,951 2,232,351
Amounts receivable, principally premiums 3,315,912 2,443,015
Amount due from reinsurers 4,376,910 4,038,669
Deferred policy acquisition costs 46,856,705 41,263,817
Other assets 490,806 470,341
------------- -----------
$ 211,300,570 190,516,318
============= ===========
Liabilities and Shareholders' Equity
Policy liabilities and accruals:
Future policy benefits $ 132,654,587 122,605,977
Policy claims and benefits payable 2,298,224 1,455,077
------------- -----------
Total policy liabilities and accruals 134,952,811 124,061,054
Federal income taxes:
Current 576,889 670,347
Deferred 5,689,282 3,435,378
Other liabilities 7,347,709 7,562,462
------------- -----------
Total liabilities 148,566,691 135,729,241
------------- -----------
Shareholders' equity:
Common stock of $1 par value. Authorized 20,000,000
shares; issued 6,754,504 shares 6,754,504 6,754,504
Additional paid-in capital 1,496,417 1,528,178
Accumulated other comprehensive income (loss), net of tax (1,715,931) (3,466,876)
Retained earnings 60,320,092 53,732,985
Less:
Unearned compensation - restricted stock (794,276) (362,458)
Treasury stock, at cost (409,076 shares in 2000 and
427,145 shares in 1999) (3,326,927) (3,399,256)
------------- -----------
Total shareholders' equity 62,733,879 54,787,077
------------- -----------
$ 211,300,570 190,516,318
============= ===========
See accompanying notes to consolidated financial statements.
14
15
COTTON STATES LIFE INSURANCE COMPANY AND SUBSIDIARIES
Consolidated Statements of Earnings
YEARS ENDED DECEMBER 31,
-----------------------------------------------
2000 1999 1998
----------- ---------- ----------
Revenue:
Premiums $26,816,523 23,302,097 19,935,354
Net investment income 10,090,780 9,252,370 8,787,048
Realized investment gains 405,933 474,628 364,735
Brokerage commissions 4,197,173 3,828,087 3,214,216
----------- ---------- ----------
Total revenue 41,510,409 36,857,182 32,301,353
----------- ---------- ----------
Benefits and expenses:
Benefits and claims 14,800,123 11,699,850 9,254,807
Interest credited 5,198,089 4,736,078 4,456,965
Amortization of deferred policy acquisition costs 3,214,110 3,041,566 1,809,619
Operating expenses 7,444,815 7,196,353 6,394,619
----------- ---------- ----------
Total benefits and expenses 30,657,137 26,673,847 21,916,010
----------- ---------- ----------
Income before Federal income taxes 10,853,272 10,183,335 10,385,343
----------- ---------- ----------
Federal income taxes:
Current 2,114,917 1,764,630 1,546,986
Deferred 1,132,140 1,090,760 1,597,772
----------- ---------- ----------
Total Federal income taxes 3,247,057 2,855,390 3,144,758
----------- ---------- ----------
Net income $ 7,606,215 7,327,945 7,240,585
=========== ========= =========
Basic income per share of
common stock $ 1.20 1.16 1.13
=========== ========= =========
Diluted income per share of
common stock $ 1.18 1.14 1.10
=========== ========= =========
Weighted-average number of shares used in
computing income per share:
Basic 6,345,687 6,341,393 6,410,345
=========== ========= =========
Diluted 6,466,069 6,444,202 6,562,370
=========== ========= =========
See accompanying notes to consolidated financial statements.
15
16
COTTON STATES LIFE INSURANCE COMPANY AND SUBSIDIARIES
Consolidated Statements of Shareholders' Equity
YEARS ENDED DECEMBER 31,
----------------------------------------------------
2000 1999 1998
------------ --------- ---------
Common stock - balance at beginning and
end of year $ 6,754,504 6,754,504 6,754,504
------------ --------- ---------
Additional paid-in capital:
Balance at beginning of year 1,528,178 1,478,639 1,283,745
Treasury shares issued (acquired) (83,304) (91,286) 9,894
Tax benefit arising from issuance of
restricted stock 51,543 140,825 185,000
------------ --------- ---------
Balance at end of year 1,496,417 1,528,178 1,478,639
------------ --------- ---------
Accumulated other comprehensive income (loss):
Balance at beginning of year (3,466,876) 1,779,920 1,285,556
------------ --------- ---------
Change in unrealized gains (losses):
Unrealized gains (losses) during year 3,313,133 (9,637,850) 848,053
Deferred (taxes) benefit (1,126,466) 3,276,869 (288,338)
Deferred acquisition cost adjustment (435,722) 1,114,185 (65,351)
------------ --------- ---------
Other comprehensive income (loss) 1,750,945 (5,246,796) 494,364
------------ --------- ---------
Balance at end of year (1,715,931) (3,466,876) 1,779,920
------------ --------- ---------
Retained earnings:
Balance at beginning of year 53,732,985 47,420,827 41,204,889
Net income 7,606,215 7,327,945 7,240,585
Dividends of $.16 per share in 2000,
$.16 in 1999, and $.16 in 1998 (1,019,108) (1,015,787) (1,024,647)
------------ --------- ---------
Balance at end of year 60,320,092 53,732,985 47,420,827
------------ --------- ---------
Unearned compensation - restricted stock:
Balance at beginning of year (362,458) (317,860) (188,850)
Shares awarded (490,964) (353,004) (381,306)
Compensation expense recorded 59,146 308,406 252,296
------------ --------- ---------
Balance at end of year (794,276) (362,458) (317,860)
------------ --------- ---------
Treasury stock:
Balance at beginning of year (3,399,256) (2,625,178) (1,132,681)
Cost of shares purchased (24,000 in 2000,
75,000 in 1999 and 89,354 shares in 1998) (145,945) (1,007,156) (1,581,678)
Cost of shares issued (49,910 shares in 2000,
43,502 shares in 1999 and 50,267 shares in 1998) 218,274 233,078 89,181
------------ --------- ---------
Balance at end of year (3,326,927) (3,399,256) (2,625,178)
------------ --------- ---------
Total shareholders' equity $ 62,733,879 54,787,077 54,490,852
============ ========== ==========
See accompanying notes to consolidated financial statements.
16
17
COTTON STATES LIFE INSURANCE COMPANY AND SUBSIDIARIES
Consolidated Statements of Cash Flows
YEARS ENDED DECEMBER 31,
----------------------------------------------------
2000 1999 1998
------------ --------- ---------
Cash flows from operating activities:
Net income $ 7,606,215 7,327,945 7,240,585
Adjustments to reconcile net income to net
cash provided by operating activities:
Increase in policy liabilities and accruals 10,891,757 10,182,099 7,851,348
(Increase) in deferred policy acquisition costs (6,028,610) (5,079,456) (5,172,476)
Change in liability for income taxes 1,054,461 1,820,865 1,845,101
Decrease (Increase) in amounts receivable
and amounts recoverable from reinsurers (1,211,138) (1,441,681) 578,902
Decrease (Increase) in amounts due affiliates (466,547) 188,462 (241,389)
Decrease (Increase) in deferred compensation accruals (133,818) 141,321 111,535
Decrease (Increase) in unearned policy charges (51,501) 117,790 428,383
Other, net 94,936 102,251 314,551
------------ ---------- -----------
Net cash provided by operating
activities 11,755,755 13,359,596 12,956,540
------------ ----------- -----------
Cash flows from investing activities:
Purchase of fixed maturities available for sale (20,141,334) (27,539,338) (31,232,770)
Purchase of equity securities (2,636,020) (3,236,452) --
Purchase of other invested assets -- -- (1,000,000)
Sale of fixed maturities available for sale 3,403,849 8,059,060 14,950,214
Sale of equity securities 1,496,638 704,605 --
Proceeds from maturities of fixed maturities
held for investment 1,010,000 500,000 1,500,000
Proceeds from maturity and redemption of
fixed maturities available for sale 6,154,391 7,751,371 8,090,844
First mortgage loans originated -- (178,000) --
Principal collected on first mortgage loans 801,141 810,971 684,234
Net increase in policy loans (249,399) (435,857) (179,649)
Other, net (232,568) (36,186) (185,567)
------------ ----------- -----------
Net cash used in investing activities (10,393,302) (13,599,826) (7,372,694)
------------ ----------- -----------
Cash flows from financing activities:
Cash dividends paid (1,019,108) (1,015,787) (1,024,647)
Purchase of treasury stock (145,945) (1,007,156) (1,581,678)
Stock issued under executive compensation plans 134,970 233,078 99,075
------------ ----------- -----------
Net cash used in financing activities (1,030,083) (1,789,865) (2,507,250)
------------ ----------- -----------
Net increase (decrease) in cash and
cash equivalents 332,370 (2,030,095) 3,076,596
Cash and cash equivalents:
Beginning of year 6,105,534 8,135,629 5,059,033
------------ ----------- -----------
End of year $ 6,437,904 6,105,534 8,135,629
============ =========== ===========
Supplemental disclosures of cash paid during
the year - income taxes $ 2,156,832 1,034,326 1,299,657
============ =========== ===========
See accompanying notes to consolidated financial statements.
17
18
COTTON STATES LIFE INSURANCE COMPANY AND SUBSIDIARIES
Consolidated Statements of Comprehensive Income
YEARS ENDED DECEMBER 31,
-------------------------------------------------
2000 1999 1998
----------- --------- ---------
Net income $ 7,606,215 7,327,945 7,240,585
----------- --------- ---------
Other comprehensive income (loss) before tax:
Unrealized gains (losses) on securities
available for sale 3,283,343 (8,998,293) 1,147,437
Reclassification adjustment for realized gains
included in net earnings (405,933) (474,628) (364,735)
----------- --------- ---------
Total other comprehensive income
(loss) before tax 2,877,410 (8,523,665) 782,702
Income tax expense (benefit) related to items
of other comprehensive income (loss) 1,126,466 (3,276,869) 288,338
----------- --------- ---------
Other comprehensive income (loss),
net of tax 1,750,944 (5,246,796) 494,364
----------- --------- ---------
Total comprehensive income $ 9,357,159 2,081,149 7,734,949
=========== ========= =========
See accompanying notes to consolidated financial statements.
18
19
COTTON STATES LIFE INSURANCE COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2000, 1999, and 1998
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
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.
Following is a description of the most significant risks facing
insurers and how the Company mitigates those risks:
CREDIT RISK is the risk that issuers of securities owned by
the Company will default, or other parties, including
reinsurers which owe the Company money, will not pay. The
Company attempts to minimize this risk by adhering to a
conservative investment strategy and by contracting with
reinsuring companies that meet certain rating criteria and
other qualifications.
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 attempts to mitigate 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.
The significant accounting policies are as follows:
CONSOLIDATION POLICY
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.
RECOGNITION OF PREMIUMS
Premiums on traditional life and accident and health
insurance policies are recognized as income when due.
Premiums on universal life policies are recognized when
earned.
FUTURE POLICY BENEFITS
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.
19
20
COTTON STATES LIFE INSURANCE COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2000, 1999, and 1998
DEFERRED POLICY ACQUISITION COSTS
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.
CASH AND CASH EQUIVALENTS
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.
INVESTMENTS
The Company accounts for investments under the provisions of
Statement of Financial Accounting Standards ("SFAS") No. 115,
Accounting for Certain Investments in Debt and Equity
Securities.
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
identified certificate 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.
INCOME TAXES
The Company, CSI and CSMR file a consolidated Federal income
tax return.
Deferred taxes are recognized for the tax consequences of
"temporary differences" by applying enacted statutory rates
applicable to future years to differences between the
financial statement carrying amounts and the tax bases of
existing assets and liabilities. The effect on deferred taxes
of a change in tax rates is recognized in income in the
period that includes the enactment date.
20
21
COTTON STATES LIFE INSURANCE COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2000, 1999, and 1998
EARNINGS PER SHARE
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.
January 20, 1998 Three-for-two
The following table summarizes information relating to the
calculation of basic and diluted earnings per share of common
stock:
YEARS ENDED DECEMBER 31,
-------------------------------------------------------------------------------------------------
2000 1999 1998
------------------------------- ----------------------------- ----------------------------
INCOME SHARES INCOME SHARES INCOME SHARES
(NUMERATOR) (DENOMINATOR) (NUMERATOR) (DENOMINATOR) (NUMERATOR) (DENOMINATOR)
----------- ------------- ----------- ------------- ----------- -------------
Data for Basic
EPS calculation $7,606,215 6,345,687 $7,327,945 6,341,393 $7,240,585 6,410,345
Effect of dilutive
securities:
Options -- 2,655 -- 35,953 -- 70,768
Restricted stock -- 117,727 -- 66,856 -- 81,257
---------- --------- ---------- --------- ---------- ---------
Data for Diluted
EPS calculation $7,606,215 6,466,069 $7,327,945 6,444,202 $7,240,585 6,562,370
========== ========= ========== ========= ========== =========
RECENT ACCOUNTING PRONOUNCEMENTS
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.
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.
21
22
COTTON STATES LIFE INSURANCE COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2000, 1999, and 1998
(2) INVESTMENTS
The amortized cost and estimated fair values of investments in debt
and equity securities as of December 31, 2000 and 1999 are as follows:
2000
-------------------------------------------------------------------
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
----------- ---------- ---------- ----------
Held for investment:
U.S. Treasury securities and
obligations of U.S. government
corporations and agencies $ 1,499,749 1,661 -- 1,501,410
Debt securities issued by
foreign governments 1,997,221 33,509 -- 2,030,730
Corporate securities 11,560,122 139,103 17,437 11,681,788
------------ --------- --------- ----------
Total $ 15,057,092 174,273 17,437 15,213,928
============ ========= ========= ===========
Available for sale:
U.S. Treasury securities and
obligations of U.S. government
corporations and agencies $ 10,070,642 233,263 55,365 10,248,540
Corporate securities 93,023,780 932,663 4,570,878 89,385,565
Mortgage-backed securities 16,718,625 245,121 13,608 16,950,138
------------ --------- --------- ----------
Total $119,813,047 1,411,047 4,639,851 116,584,243
============ ========= ========= ===========
Equity securities $ 3,671,233 506,060 400,870 3,776,423
============ ========= ========= ===========
1999
-------------------------------------------------------------------
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
----------- ---------- ---------- ----------
Held for investment:
U.S. Treasury securities and
obligations of U.S. government
corporations and agencies $ 1,498,783 4,502 -- 1,503,285
Debt securities issued by
foreign governments 1,994,887 20,793 -- 2,015,680
Corporate securities 12,583,207 62,364 188,767 12,456,804
------------ ------- --------- -----------
Total $ 16,076,877 87,659 188,767 15,975,769
============ ======= ========= ===========
Available for sale:
U.S. Treasury securities and
obligations of U.S. government
corporations and agencies $ 5,156,859 2,512 156,538 5,002,833
Corporate securities 86,908,334 64,094 6,161,734 80,810,694
Mortgage-backed securities 17,235,051 41,206 317,650 16,958,607
------------ ------- --------- -----------
Total $109,300,244 107,812 6,635,922 102,772,134
============ ======= ========= ===========
Equity securities $ 2,531,851 225,248 133,885 2,623,214
============ ======= ========= ===========
22
23
COTTON STATES LIFE INSURANCE COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2000, 1999, and 1998
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.
AMORTIZED ESTIMATED
COST FAIR VALUE
------------ -----------
Held for investment:
Due in one year or less $ 3,502,899 3,523,740
Due after one year through five years 11,554,193 11,690,188
------------ -----------
Total $ 15,057,092 15,213,928
============ ===========
Available for sale:
Due in one year or less $ 1,002,815 959,080
Due after one year through five years 30,989,249 30,078,890
Due after five years through 10 years 39,830,947 38,648,905
Due after 10 years 31,271,411 29,947,230
Mortgage-backed securities 16,718,625 16,950,138
------------ -----------
Total $119,813,047 116,584,243
============ ===========
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:
2000 1999 1998
----------- ----------- ----------
Realized gains (losses) on sales and
redemptions of investments:
Fixed maturities available for sale:
Gross gains $ 92,433 263,967 388,844
Gross losses (9,213) (822) (24,109)
----------- ----------- ---------
Net realized gains 83,220 263,145 364,735
----------- ----------- ---------
Equity securities:
Gross gains 450,315 244,159 --
Gross losses (127,602) (32,676) --
----------- ----------- ---------
Net realized gains 322,713 211,483 --
----------- ----------- ---------
Total 405,933 474,628 364,735
----------- ----------- ---------
Changes in unrealized gains (losses):
Fixed maturities held for investment 257,944 (946,135) 340,823
Fixed maturities available for sale 3,299,306 (9,729,213) 848,053
Equity securities 13,827 91,363 --
----------- ----------- ---------
Net unrealized gains (losses) 3,571,077 (10,583,985) 1,188,876
----------- ----------- ---------
Total realized and unrealized
gains (losses) $ 3,977,010 (10,109,357) 1,553,611
=========== =========== =========
23
24
COTTON STATES LIFE INSURANCE COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2000, 1999, and 1998
Details of net investment income are as follows:
2000 1999 1998
----------- --------- ---------
Investment income:
Fixed maturities held for investment $ 1,052,274 1,104,486 1,181,695
Fixed maturities available for sale 8,063,799 7,241,794 6,619,801
Equity securities 36,582 8,140 --
First mortgage loans 192,450 259,558 333,870
Policy loans 616,130 600,219 576,800
Short-term investments 319,935 283,324 355,820
----------- --------- ---------
Total investment income 10,281,170 9,497,521 9,067,986
Less investment expenses 190,390 245,151 280,938
----------- --------- ---------
Net investment income $10,090,780 9,252,370 8,787,048
=========== ========= =========
(3) DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used to estimate the fair
value of each class of financial instruments for which it is
practicable to estimate that value:
CASH AND SHORT-TERM INVESTMENTS
The carrying amount of cash and short-term investments is a
reasonable estimate of fair value.
INVESTMENT SECURITIES
For investment securities (which include fixed maturities
held for investment, fixed maturities available for sale, and
equity securities), fair values are based on quoted market
prices or dealer quotes. If a quoted market price is not
available, fair value is estimated using quoted market prices
for similar securities.
MORTGAGE LOANS
The fair value of mortgage loans is estimated using the
quoted market prices for securities backed by similar loans,
adjusted for differences in loan characteristics.
POLICY LOANS
The carrying amount of policy loans is a reasonable estimate
of fair value.
UNIVERSAL LIFE AND ANNUITY BENEFITS
The carrying amount of universal life and annuity benefits is
a reasonable estimate of fair value since credited interest
approximates current market rates.
24
25
COTTON STATES LIFE INSURANCE COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2000, 1999, and 1998
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:
MORTGAGE LOANS
----------------------------
CARRYING FAIR
AMOUNT VALUE
---------- ---------
2000 $2,097,616 2,126,289
1999 $2,898,757 2,909,318
(4) FUTURE POLICY BENEFITS AND REINSURANCE
The composition of future policy benefits, and the significant
assumptions used in their development, are as follows:
FUTURE POLICY ASSUMPTIONS
BENEFITS --------------------------------------------------------------------
--------------------- YEARS
LINE OF BUSINESS 2000 1999 OF ISSUE INTEREST RATES MORTALITY WITHDRAWALS
---------------- -------- -------- -------- -------------- --------- -----------
(DOLLARS IN THOUSANDS)
Life:
Individual $ 3,632 3,932 l956-65 4% l955-60 Basic Table Company
Select and Ultimate experience
Individual 8,059 8,353 l966-79 6.5% - 5%(A) Same as above Same as above
Individual 5,498 5,447 l980-88 7.5% - 6%(A) l965-70 Basic Table Same as above
Select and Ultimate
Individual 19,748 14,845 1989-00 7.5% - 6%(A) 1975-80 Basic Table Same as above
Select and Ultimate
Individual 4,611 4,392 Various 3.5% - 2.5% Statutory Same as above
Annuities and Accumulated Same as above
universal life 91,071 85,599 Various 6.25% - 4.5% account value
Group 5 5 Various -- Unearned premiums --
--------- -------
132,624 122,573
Accident and health -
Individual 31 33 Various 3% -- --
-------- -------
Total future
policy
benefits $132,655 122,606
======== =======
(A) Interest rates are graded to the ultimate rate in 25 years.
25
26
COTTON STATES LIFE INSURANCE COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2000, 1999, and 1998
The Company participates in certain business assumed from federally
sponsored group pools. Further, it is the Company's general policy to
reinsure individual life insurance in excess of $100,000, group life
insurance in excess of $55,000, major medical payments in excess of
$75,000 annually per individual, accidental deaths, and certain
disability income coverage.
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:
2000 1999 1998
------------ ----------- ----------
Premiums:
Direct premiums $ 30,346,024 26,554,116 22,813,996
Reinsurance assumed 766,213 667,688 672,153
Reinsurance ceded (4,295,714) (3,919,707) (3,550,795)
------------ ----------- -----------
Net premiums $ 26,816,523 23,302,097 19,935,354
============ =========== ===========
Benefits and claims:
Reinsurance assumed $ 751,279 660,555 662,918
============ =========== ===========
Reinsurance ceded $ 4,230,022 4,381,820 2,966,909
============ =========== ===========
(5) INCOME TAXES
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:
2000 1999
----------- ----------
Deferred tax assets:
Fixed maturities available for sale $ 1,097,793 2,219,557
Life insurance reserves 5,840,261 5,145,152
Unearned mortality and expense charges 860,596 854,378
Postretirement health benefits liability 84,945 95,673
Deferred compensation 145,834 191,332
Other, net 280,477 205,445
----------- ----------
Total deferred tax assets 8,309,906 8,711,537
----------- ----------
Deferred tax liabilities:
Equity securities 35,765 31,064
Deferred policy acquisition costs 13,808,705 12,001,739
Due and unpaid premiums 95,963 80,717
Other, net 58,755 33,395
----------- ----------
Total deferred tax liabilities 13,999,188 12,146,915
----------- ----------
Net deferred tax liability $ 5,689,282 3,435,378
=========== ==========
26
27
COTTON STATES LIFE INSURANCE COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2000, 1999, and 1998
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 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.
Federal income tax expense is less than amounts determined by
multiplying earnings before Federal income taxes by the Federal tax
rate of 35%. The reason for such difference and the tax effect of each
are as follows:
2000 1999 1998
----------- ---------- ----------
Federal income tax expense at
statutory rate $ 3,798,645 3,564,167 3,634,870
Special deductions available to small
Life insurance companies (559,193) (572,553) (584,724)
Surtax exemption (92,163) (87,946) (92,581)
Other, net 99,768 (48,278) 187,193
----------- ---------- ----------
Total Federal income taxes $ 3,247,057 2,855,390 3,144,758
=========== ========== ==========
(6) POSTRETIREMENT BENEFITS OTHER THAN PENSIONS
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:
2000 1999 1998
------- ------- -------
Service cost $ 2,575 394 439
Interest cost 9,634 12,541 13,808
Amortization of unrecognized gain (12,209) (12,609) (9,425)
------- ------- -------
Net periodic postretirement benefit cost $ -- 326 4,822
======= ======= =======
27
28
COTTON STATES LIFE INSURANCE COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements
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:
2000 1999
--------- --------
Accumulated postretirement benefit obligation:
Retirees $ 141,832 126,767
Other active participants 10,676 9,538
--------- --------
Accumulated postretirement benefit
obligation in excess of plan assets 152,508 136,305
Unrecognized net gain 97,330 145,087
--------- --------
Accrued postretirement benefit liability $ 249,838 281,392
========= ========
Accrued postretirement benefit liability
at beginning of year $ 281,392 302,178
Net periodic cost -- 326
Amounts paid by Company (31,554) (21,112)
--------- --------
Accrued postretirement benefit liability
at end of year $ 249,838 281,392
========= ========
Accumulated postretirement benefit obligation
at beginning of year $ 136,305 162,417
Service cost 2,575 394
Interest cost 9,634 12,541
Amounts paid by Company (31,554) (21,112)
Actuarial loss (gain) 35,548 (17,935)
--------- --------
Accumulated postretirement benefit obligation
at end of year $ 152,508 136,305
========= ========
The postretirement benefit obligation was determined by application of
the terms of the plan using various actuarial assumptions. Health care
costs are projected to increase at annual rates of 5% in 2000 and
thereafter. A 1% annual increase in these assumed cost trend rates
would increase the accumulated postretirement benefit obligation at
December 31, 2000 by approximately $5,896 and the service and interest
cost components of the net periodic postretirement benefit cost for
2000 by approximately $457. A 1% annual decrease in these assumed cost
trends would decrease the accumulated postretirement benefit obligation
at December 31, 2000 by approximately $5,312 and the service and
interest components of the net periodic postretirement benefit cost by
$412. The assumed discount rate used in determining the accumulated
postretirement obligation was 7.50% at December 31, 2000 and 7.75% at
December 31, 1999.
(7) TRANSACTIONS WITH AFFILIATES
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.
28
29
COTTON STATES LIFE INSURANCE COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2000, 1999, and 1998
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.
Rent for use of software of $106,000 in 2000, 1999, and 1998, has been
charged to the affiliated companies.
(8) STOCK-BASED COMPENSATION
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:
2000 1999 1998
--------------------- --------------------- -------------------
WEIGHTED- WEIGHTED- WEIGHTED- ALL YEARS
AVERAGE AVERAGE AVERAGE RANGE OF
EXERCISE EXERCISE EXERCISE EXERCISE
OPTIONS PRICE OPTIONS PRICE OPTIONS PRICE PRICES
------- --------- ------- --------- ------- --------- -----------
Shares under option 70,535 $ 4.41 91,544 $ 3.82 107,673 $ 3.32 $ 1.92 - 7.63
Options exercisable 70,535 4.41 91,544 3.82 107,673 3.32 1.92 - 7.63
Options granted 17,541 4.13 8,736 7.44 8,949 7.63 1.92 - 7.63
Options exercised 38,550 2.96 24,865 2.96 29,400 2.96 2.96
====== ====== ======= ===========
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.
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:
29
30
COTTON STATES LIFE INSURANCE COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2000, 1999, and 1998
YEARS ENDED DECEMBER 31,
-------------------------------------------
2000 1999 1998
----------- --------- ---------
Net income:
As reported $ 7,606,215 7,327,945 7,240,585
Pro forma 7,545,989 7,272,938 7,215,424
Basic net income per share:
As reported 1.20 1.16 1.13
Pro forma 1.19 1.15 1.13
Diluted net income per share:
As reported 1.18 1.14 1.10
Pro forma 1.17 1.13 1.10
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.
(9) STATUTORY FINANCIAL STATEMENTS
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, deferred Federal income taxes and
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 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, 2000 is as
follows:
2000 1999 1998
----------- ---------- ----------
Statutory net income $ 8,109,372 2,686,569 3,071,087
Statutory shareholders' equity $33,330,254 28,607,689 27,736,410
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.
30
31
COTTON STATES LIFE INSURANCE COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2000, 1999, and 1998
(10) LITIGATION
The Company is a defendant in various actions incidental to the conduct
of its business. While the ultimate outcome of these matters cannot be
estimated with certainty, management does not believe the actions will
result in any material loss to the Company.
31
32
COTTON STATES LIFE INSURANCE COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2000, 1999, and 1998
(11) BUSINESS SEGMENTS
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.
2000 1999 1998
------------ ----------- -----------
Individual life insurance:
Premiums $ 17,816,354 16,653,463 15,334,599
Net investment income 9,403,578 8,837,008 8,461,988
Realized investment gains 160,104 254,052 358,000
------------ ----------- -----------
Total revenue 27,380,036 25,744,523 24,154,587
Policyholder benefits 13,337,303 12,173,031 10,429,767
Operating expenses 7,103,512 7,525,275 6,292,769
------------ ----------- -----------
Total benefits and expenses 20,440,815 19,698,306 16,722,536
------------ ----------- -----------
Operating profit 6,939,221 6,046,217 7,432,051
------------ ----------- -----------
Guaranteed and simplified life insurance:
Premiums 8,106,634 5,843,177 3,794,585
Net investment income 540,200 316,301 159,182
Realized investment gains 9,670 9,093 6,735
------------ ----------- -----------
Total revenue 8,656,504 6,168,571 3,960,502
Policyholder benefits 5,728,786 3,358,022 2,317,006
Operating expenses 2,368,914 1,616,158 890,787
------------ ----------- -----------
Total benefits and expenses 8,097,700 4,974,180 3,207,793
------------ ----------- -----------
Operating profit 558,804 1,194,391 752,709
------------ ----------- -----------
Brokerage:
Brokerage commissions 4,197,173 3,828,087 3,214,216
Net investment income 147,003 99,061 62,698
Realized investment gains 236,160 211,483 103,180
------------ ----------- -----------
Total revenue 4,580,336 4,138,631 3,380,094
Operating expenses 1,154,992 1,086,777 1,006,605
------------ ----------- -----------
Operating profit 3,425,344 3,051,854 2,373,489
------------ ----------- -----------
Combined operating profit 10,923,369 10,292,462 10,558,249
Group life insurance and individual
accident and health results (70,097) (109,127) (172,906)
------------ ----------- -----------
Income before Federal income taxes $ 10,853,272 10,183,335 10,385,343
============ =========== ===========
32
33
INDEPENDENT AUDITORS' REPORT
THE BOARD OF DIRECTORS AND SHAREHOLDERS
COTTON STATES LIFE INSURANCE COMPANY:
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.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
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.
/s/KPMG LLP
KPMG LLP
Atlanta, Georgia
February 21, 2001
33
34
MANAGEMENT'S REPORT TO SHAREHOLDERS OF COTTON STATES LIFE INSURANCE COMPANY AND
SUBSIDIARIES
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.
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 Board of Directors, through its audit committee composed 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.
/s/ J. Ridley Howard /s/ Roger W. Fisher /s/ William J. Barlow
---------------------- -------------------- ----------------------
J. Ridley Howard Roger W. Fisher William J. Barlow, CPA
Chairman of the Board, Senior Vice President Vice President/Controller
President and Chief Chief Financial Officer and and Assistant Treasurer
Executive Officer Treasurer
34
35
QUARTERLY RESULTS
The following is a summary of the unaudited quarterly results of operations for
the three years ended December 31, 2000.
=========================================================================================================================
2000 quarter ended March 31 June 30 September 30 December 31
-------------------------------------------------------------------------------------------------------------------------
Premiums $6,125,550 6,384,463 6,772,298 7,534,212
Net investment income, realized
investment gains and brokerage income $3,425,803 3,621,825 3,542,674 4,103,584
---------- ---------- ---------- ----------
Total revenue $9,551,353 10,006,288 10,314,972 11,637,796
---------- ---------- ---------- ----------
Benefits and expenses $7,127,072 7,056,698 7,353,474 9,119,893
---------- ---------- ---------- ----------
Net income $1,523,615 2,061,165 2,124,910 1,896,525
===================================================================
=========================================================================================================================
Basic income per share of common stock $ .24 .32 .34 .30
Diluted income per share of common stock $ .24 .31 .33 .29
=========================================================================================================================
1999 quarter ended March 31 June 30 September 30 December 31
-------------------------------------------------------------------------------------------------------------------------
Premiums $5,356,327 5,632,482 5,813,507 6,499,781
Net investment income, realized
investment gains and brokerage income $3,289,533 3,078,423 3,460,705 3,726,424
---------- ---------- ---------- ----------
Total revenue $8,645,860 8,710,905 9,274,212 10,226,205
---------- ---------- ---------- ----------
Benefits and expenses $6,829,999 6,316,498 6,555,077 6,972,273
---------- ---------- ---------- ----------
Net income $1,207,422 1,681,506 2,103,386 2,335,631
========== ========== ========== ==========
=========================================================================================================================
Basic income per share of common stock $ .19 .26 .33 .37
Diluted income per share of common stock $ .19 .26 .32 .36
=========================================================================================================================
1998 quarter ended March 31 June 30 September 30 December 31
-------------------------------------------------------------------------------------------------------------------------
Premiums $4,632,037 4,872,303 5,165,923 5,265,091
Net investment income, realized
investment gains and brokerage income $2,909,654 2,969,254 3,213,171 3,273,920
---------- ---------- ---------- ----------
Total revenue $7,541,691 7,841,557 8,379,094 8,539,011
---------- ---------- ---------- ----------
Benefits and expenses $5,305,058 5,655,469 5,635,458 5,320,025
---------- ---------- ---------- ----------
Net income $1,556,251 1,572,097 2,023,381 2,088,856
========== ========== ========== ==========
=========================================================================================================================
Basic income per share of common stock $ .25 .25 .31 .33
Diluted income per share of common stock $ .24 .24 .30 .32
=========================================================================================================================
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.
The fourth quarter results for the three years include participation in
federally sponsored group pools as follows:
2000 1999 1998
---- ---- ----
==============================================================================================
Premiums $766,213 667,688 672,153
Benefits $751,279 660,555 662,918
==============================================================================================
See previous discussion on Results of Operations.
35
36
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
NONE.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY
IDENTIFICATION OF DIRECTORS
The By-laws of the Company provide that the Board of Directors shall be divided
into three classes with approximately one-third of the Board of Directors
elected each year. Each director is elected to hold office for a term of three
years or until his or her successor has been duly elected and has qualified or
until he or she attains the age of 72.
TERMS EXPIRING 2001 ANNUAL MEETING - NOMINATED FOR RE-ELECTION
--------------------------------------------------------------------------------
J. RIDLEY HOWARD
Director Since 1989
Age 53
Since 1998, Mr. Howard has been the Chairman of the Board of Directors of the
Company, Mutual, CSI, CSMR and Shield. He has served as President and Chief
Executive Officer since 1989. Mr. Howard held various other offices with the
Company and its affiliates prior to January 1, 1989. Mr. Howard is a member of
the Executive Committee of the Board of Directors of the Company.
--------------------------------------------------------------------------------
CAROL D. CHERRY
Director Since 1996
Age 53
Since 1976, Ms. Cherry has been Chairman of the Board of Directors of Shop'n
Chek, Inc., an international marketing service company providing clients with
information relative to the verbal and physical presentation of their products
and/or services at the retail level. From 1976 to 1998, Ms. Cherry was also the
President of Shop'n Chek, Inc. Ms. Cherry also is a member of the Compensation
Committee and the Investment Committee of the Board of Directors of the Company.
Ms. Cherry also is a member of the Board of Directors of Mutual, CSI, and Cherry
Convention Services, Inc.
--------------------------------------------------------------------------------
DARRELL D. PITTARD
Director Since 2001
Age 52
Since November 2000, Mr. Pittard has been the Managing Partner, Chairman and
Chief Executive Officer of Currahee Bridge Development, LLC, a mixed-use resort
development on Lake Hartwell, Georgia. From January 2000 through November 2000,
Mr. Pittard served as Executive Vice President, Branch Banking and Trust. From
1993 through 1999, Mr. Pittard was Chairman and Chief Executive Officer of
Premier Bancshares. Mr. Pittard is also a member of the Board of Directors of
Mutual, and Branch Banking and Trust Company, an affiliate of BB&T Corporation.
--------------------------------------------------------------------------------
36
37
TERMS EXPIRING 2002 ANNUAL MEETING
--------------------------------------------------------------------------------
GAYLORD O. COAN
Director Since 1995
Age 65
Since 1995, Mr. Coan has been Chief Executive Officer of Gold Kist, Inc., where
he also serves as the Chairman of the Management Executive Committee. Mr. Coan
is Chairman of the Executive Committee and serves as a member of the Audit
Committee and the Compensation Committee of the Board of Directors of the
Company. Mr. Coan also is a member the Board of Directors of Mutual, SunTrust
Banks of Georgia, Inc., SunTrust Bank, Atlanta, Archer-Daniels-Midland Company,
and 1st Ag.
--------------------------------------------------------------------------------
E. JENNER WOOD, III
Director Since 1991
Age 49
Since October 2000, Mr. Wood has been President, SunTrust Bank, Atlanta. Prior
to his current position, Mr. Wood has been Executive Vice President, Trust and
Investment Services, of SunTrust Banks, Inc., a position he held from October
1993 to October 2000. Mr. Wood was the Executive Vice President, Trust and
Investment Management, of SunTrust Bank, Atlanta prior to October, 1993. Mr.
Wood is Chairman of the Audit Committee and serves as a member of the Executive
Committee of the Board of Directors of the Company. Mr. Wood also is a member of
the Board of Directors of Mutual, CSI, Oxford Industries and Crawford & Company.
--------------------------------------------------------------------------------
MATHEWS D. SWIFT
Director Since 1997
Age 53
Since 1998, Mr. Swift has been the President and Chief Operating Officer of W.
C. Bradley Co., Real Estate Division and President of Developers-Investors,
Inc., a subsidiary of W. C. Bradley Co. From 1986 to 1997, Mr. Swift was the
Vice President and General Manager of W. C. Bradley Co., Real Estate Division.
Mr. Swift serves as a member of the Audit Committee and the Investment Committee
of the Board of Directors. Mr. Swift also is a member of the Board of Directors
of Mutual, CSMR, Swift-Illges Foundation, Northstar Industries, Inc., and serves
as a director of the Advisory Board of Columbus Bank & Trust Company, an
affiliate of Synovus Financial Corporation.
--------------------------------------------------------------------------------
37
38
TERMS EXPIRING 2003 ANNUAL MEETING
--------------------------------------------------------------------------------
ROBERT C. McMAHAN
Director Since 1987
Age 60
Since 1994, Mr. McMahan has been President and Chief Executive Officer of Golden
Point Group, Inc. Mr. McMahan was President and CEO of Fernbank, Inc., d/b/a
Fernbank Museum of Natural History through November, 1994. Mr. McMahan was Vice
Chairman of First Union National Bank of Georgia through September 1993. Mr.
McMahan was Chairman, Chief Executive Officer and a director of DF Southeastern
Inc., prior to January 15, 1993 and of Decatur Federal Savings & Loan
Association prior to March 1, 1993, and was President of each entity prior to
April, 1989. Mr. McMahan is Chairman of the Compensation Committee and serves as
a member of the Executive Committee of the Board of Directors of the Company.
Mr. McMahan also is a member of the Board of Directors of Mutual, CSMR, First
Union National Bank of Georgia, Golden Point Group, Inc., Media Team Link, Inc.,
and Integration Solutions Group, LLC.
--------------------------------------------------------------------------------
THOMAS A. HARRIS
Director Since 1995
Age 52
Since 1987, Mr. Harris has been the President and Chief Executive Officer of
Merchant Capital Investments, Inc., a Montgomery, Alabama investment and
merchant banking firm. Mr. Harris is Chairman of the Investment Committee and a
member of the Executive Committee and the Audit Committee of the Board of
Directors of the Company. Mr. Harris also serves on the Board of Directors of
Mutual, Corral Southeast, and the Capital Partnership.
--------------------------------------------------------------------------------
There are no family relationships among the directors or between any director
and any executive officer of the Company. All directors have served continuously
since their first election or appointment.
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OTHER INFORMATION ABOUT THE BOARD AND ITS COMMITTEES
During 2000, the Board of Directors held four meetings. Each Director
attended at least 75% of the aggregate meetings of the Board of Directors and
meetings of committees of which he or she was a member. The Board of Directors
has four standing committees. Certain information regarding the function of the
Board's committees, and the number of meetings held by each committee during
2000 is presented below.
AUDIT COMMITTEE
The Audit Committee annually reviews and recommends to the Board of
Directors the certified public accounting firm to be engaged as independent
auditors of the Company for the next calendar year. Management is responsible
for the Company's internal controls, financial reporting process and compliance
with the laws and regulations and ethical business standards. The independent
accountants are responsible for performing an independent audit of the financial
statements and to issue a report thereon. The Committee's responsibility is to
monitor and oversee these processes. Each member of the Audit Committee is
independent, as such term is defined under applicable NASD rules. During 2000,
the Audit Committee held three meetings.
COMPENSATION COMMITTEE
The Compensation Committee periodically reviews the compensation and
other benefits provided to officers of the Company and advises the Board of
Directors with respect to compensation for the officers of the Company. During
2000, the Compensation Committee held three meetings.
INVESTMENT COMMITTEE
The Investment Committee reviews the Company's investments and advises
the Board of Directors with respect to such investments. During 2000, the
Investment Committee held four meetings.
EXECUTIVE COMMITTEE
The Executive Committee is authorized to act on behalf of the Board of
Directors on all matters that may arise between regular meetings of the Board of
Directors upon which the Board of Directors would be authorized to act,
including the nomination of directors. During 2000, the Executive Committee held
five meetings.
IDENTIFICATION OF EXECUTIVE OFFICERS
The executive officers of the Company, their respective ages and all
positions and offices with the Company held by each are as follows:
YEAR ELECTED
NAME AGE AS AN OFFICER POSITION OR OFFICE
---- --- ------------- ------------------
J. Ridley Howard 53 1984 Chairman of the Board/President
and Chief Executive Officer
Robert L. Fincher 58 1979 Senior Vice President
Roger W. Fisher 48 2000 Senior Vice President, Chief Financial Officer/Treasurer
Norma Y. Christopher 51 1987 Vice President and Actuary
J. Ridley Howard was elected Chairman of the Board of Directors of the
Company, Mutual, Shield, CSI, and CSMR, effective January 1, 2000. Mr. Howard
continues to hold the offices of President and Chief Executive Officer of the
Company, Mutual, Shield, CSI, and CSMR, which he has held since 1989.
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Robert L. Fincher holds the office of Senior Vice President with the
Company, Mutual and Shield, and has held that position during the previous five
years.
Roger W. Fisher holds the office of Senior Vice President, Chief
Financial Officer and Treasurer with the Company, Mutual, Shield, CSI, and CSMR,
which he has held since April 2000. Mr. Fisher previously served as Senior Vice
President at Horace Mann Educators Group from 1998 through March 2000. From 1995
through 1997, Mr. Fisher was Vice President-Controller at Horace Mann Educators
Group.
Officers are elected at the meeting of the Board of Directors following
the Annual Meeting of Shareholders to serve for one year or until their
successors are elected.
ITEM 11. EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE
LONG TERM COMPENSATION
---------------------------------
ANNUAL COMPENSATION(1)
--------------------------------------
NAME AND RESTRICTED ALL OTHER
PRINCIPAL POSITION YEAR SALARY BONUS STOCK AWARDS(2) COMPENSATION(3)
------------------ ---- -------- -------- --------------- ---------------
=========================================================================================================================
J. Ridley Howard 2000 $ 46,873 $104,700 $253,037 $ 735
CEO 1999 42,370 83,723 203,015 558
1998 32,400 115,255 205,145 513
Robert L. Fincher 2000 $ 26,818 $ 51,303 $ 79,046 $ 735
Senior Vice President 1999 24,697 40,612 50,875 558
1998 18,630 57,405 60,108 513
Roger W. Fisher(4) 2000 $ 16,548 -- $ 73,088 --
Senior Vice President, 1999 -- -- -- --
CFO/Treasurer 1998 -- -- -- --
Norma Y. Christopher 2000 $123,000 $ 21,987 $ 13,698 $5,976
Vice President and Actuary 1999 117,500 18,744 10,895 5,000
1998 111,000 24,920 11,799 5,700
(1) The salaries of certain executive officers of the Company are prorated
among the Company, Mutual and Shield, based upon the premium income of
each entity. Ms. Christopher's compensation is allocated entirely to
the Company. Total compensation of the Company's executive officers for
2000 from all affiliated corporations was $1,619,938 of which the
Company paid $713,206.
(2) The aggregate restricted stock holdings at the end of 2000 for Messrs.
Howard, Fincher, and Fisher were 63,656 18,581, and 17,386 shares with
values of $732,042, $213,681, and $199,939 respectively, based upon the
value of the Company's Common Stock at December 31, 2000. Dividends on
stock awards are paid at the same rate as paid to all share owners.
(3) This amount equals the Company's 401(k) matching contribution, which is
allocated on the same prorated basis as salaries.
(4) Mr. Fisher joined the Company in April 2000.
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AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
AND
FISCAL YEAR END OPTION VALUES
The following table shows stock options exercised by the named
executive officer during 2000, including the aggregate value of gains on the
date of exercise. In addition, this table includes the number of shares covered
by both exercisable and non-exercisable options as of December 31, 2000. Also
reported are the values for "In-the-Money" options, which represent the positive
spread between the exercise price of any such existing options and the year end
price of the Common Stock of the Company.
NUMBER OF
SECURITIES VALUE OF
UNDERLYING UNEXERCISED
UNEXERCISED IN-THE-MONEY
NUMBER OF VALUE OPTIONS AT OPTIONS AT
SHARES REALIZED 12/31/00 12/31/00
ACQUIRED ON UPON EXERCISABLE/ EXERCISABLE/
NAME EXERCISE EXERCISE UNEXERCISABLE UNEXERCISABLE
----------------------------------------------------------------------------------------------------------
J. Ridley Howard 10,769 $ 52,256 0/0 $ 0/0
Robert L. Fincher 22,887 $ 111,059 0/0 $ 0/0
Roger W. Fisher 0 $ 0 0/0 $ 0/0
Norma Y. Christopher 4,894 $ 23,748 0/0 $ 0/0
COMPENSATION PURSUANT TO PLANS
PENSION PLAN
The Company is a participating employer in the Cotton States Employee
Retirement Income Plan (the "Plan"), which is a qualified pension plan sponsored
jointly with Mutual. The Plan covers all of the Company's salaried employees.
The Plan provides a retirement income benefit at age 65 which is based
on the employee's number of years of service (maximum 35 years) and average
earnings during the five consecutive years (in the last ten years of employment)
in which the earnings are highest. Age 65 retirement benefit is derived as the
sum of (i) the product of the number of years of service times 85% of average
earnings and (ii) the product of the number of years of service times 55% of
"excess average earnings." Excess average earnings is the amount, if any, by
which the average earnings for a participant exceeds the 35 year average maximum
social security taxable wage base for all persons born in the same year as the
participant. The Plan also provides an early retirement benefit after age 55,
with no reduction in benefit entitlement due to age, when the sum of the
employee's age and years of credited service equals or exceeds 80. If the
employee has not obtained 80 points at retirement, the benefits are reduced 5%
for each year the retiree's age is less than 65. The Plan also contains a death
benefit for the surviving spouse of an employee (who had at least five years of
credited service) which is equal to 50% of the deceased employee's accrued
benefit. If the death occurs after termination from employment and prior to an
early retirement date, the spouse's benefit is reduced as for early retirement
income benefits. Accrued benefits under the Plan vest after the employee accrues
five years of service.
SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN
The Company adopted the Cotton States Supplement Executive Retirement
Plan ("SERP") effective January 1, 1992 in order to provide for a supplement
pension plan to replace pension benefits which were affected as a result of
amendments to the Internal Revenue Code of 1986, as amended ("IRC").
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42
The SERP is an agreement between the Company and employees meeting the
qualification provisions of the SERP in which the Company provides benefits in
excess of the limitations on benefits imposed by the IRC regarding highly
compensated employees. The SERP also replaces the pension accruals set forth
under the Plan as a result of the new benefit formulas mandated by the IRC which
resulted in amendments to the Plan. The SERP incorporates all of the terms and
conditions of the Plan and future amendments to the Plan.
The following table sets forth the estimated annual benefits payable
upon retirement at age 65 under the plans.
PENSION PLAN AND SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN
INCOME ANNUAL BENEFITS PAYABLE UPON RETIREMENT AT AGE 65
FINAL AVERAGE REMUNERATION FROM
THE COMPANY AND MUTUAL FOR THE YEARS OF SERVICE WITH THE
HIGHEST FIVE YEARS COMPANY AND MUTUAL
------------------------------- ---------------------------------------------------------------------------
15 20 25 30 35
------- ------- -------- -------- --------
$125,000 27,128 36,171 45,213 54,256 54,886
$150,000 33,378 44,504 55,630 66,756 67,136
$175,000 39,628 52,837 66,047 79,256 79,386
$200,000 45,878 61,171 76,463 91,756 91,756
$225,000 52,128 69,504 87,880 104,256 104,256
$250,000 58,378 77,837 97,297 116,756 116,756
$300,000 70,878 94,504 118,130 141,756 141,756
$350,000 83,378 111,171 139,963 166,756 166,756
$400,000 95,878 127,837 159,797 191,756 191,756
$450,000 108,378 144,504 180,630 216,756 216,756
$500,000 120,878 161,171 201,463 241,756 241,756
The benefits reflected in the preceding table are in addition to an
employee's social security benefits. The Company has allocated its proportionate
share of retirement costs for the officers it shares with Mutual and Shield.
Officers named in the summary Compensation Table have been credited
with the following years of service: J. Ridley Howard, 19 years; Roger W.
Fisher, 1 year; Robert L. Fincher, 39 years; and Norma Y. Christopher, 13 years.
The estimated annual retirement benefits under the plans for all
executive officers of the Company as a group from the participating companies
aggregate $362,456. This estimate assumes no change from 2000 salaries,
retirement at age 65, and continuous employment with the Company. Estimated
annual retirement benefits under the plans attributable solely to service with
the Company cannot be stated due to the allocation of service and compensation
among the Company and its affiliates.
The Company is allocated its proportionate share of retirement costs
for the officers it shares with Mutual and Shield.
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INCENTIVE SAVINGS PLAN
The Company participates in the Cotton States Incentive Savings and
Investment 401(k) Plan (the "401(k) Plan"). The 401(k) Plan is a qualified
savings incentive plan sponsored by the same companies that sponsor the
Company's Plan. The 401(k) Plan is open to all employees who have completed one
year of service and have reached their twenty-first birthday. Eligible employees
may contribute from 2% to 10% of their compensation to the 401(k) Plan. The
Company makes its matching contribution based only on the first 6% of an
employee's compensation, which is not to exceed a maximum contribution of
$10,500 per employee. The match is based on the return on equity of the
sponsoring companies. The Company's contribution will not be less than 20% nor
more than 60% of the employees contribution eligible for matching. Employees are
fully vested in the Company's contribution after five years of service.
Employees are not permitted to withdraw their account before age 59 1/2 except
in the event of death, disability, termination of employment or financial
hardship.
INCENTIVE STOCK OPTIONS
The Company has a qualified incentive stock option plan for its
officers and key employees and those of its subsidiaries, CSI and CSMR (the "ISO
Plan"). During 2000, no options were granted under the ISO Plan.
During 2000, 38,550 options were exercised pursuant to the ISO Plan. At
December 31, 2000, there were no options outstanding.
DIRECTORS' DISCOUNTED STOCK OPTION PLAN
The Company has a Directors' Discounted Stock Option Plan (the "DSOP").
The DSOP is designed to assist the Company in attracting, retaining and
compensating highly qualified individuals who are not employees of the Company
for service as members of the Board and to provide them with a proprietary
interest in the common stock of the Company. The Board believes the DSOP will be
beneficial to the Company and its shareholders by encouraging and enabling
non-employee directors to have a personal financial stake in the Company, in
addition to emphasizing their common interest with the shareholders in
increasing the value of the common stock of the Company in the long term.
The DSOP provides for automatic yearly grants of options to purchase
shares of common stock of the Company to each director who elects to participate
in the DSOP. Each director who is not an employee of the Company or any of its
subsidiaries or affiliates may participate by filing with the Company an
irrevocable election to receive the grant of a stock option in lieu of part or
all of the fees which the director would have been entitled to receive for the
immediately preceding year for his or her service on the Board. Options will be
granted automatically on the date of the annual meeting of the Board as to any
director who, prior to the date of such annual meeting, has filed with the
Company an irrevocable election to participate in the DSOP.
The number of shares of common stock of the Company subject to each
option granted to a director shall be determined by dividing (i) the director's
fee due to a director, by (ii) the fair market value of the common stock of the
Company on the date of grant, minus the option exercise price. The fair market
value of the common stock of the Company under the DSOP shall be the closing
price as reported on the Nasdaq National Market and the option exercise price
for each option granted shall be 50% of the fair market value, to be paid in
cash by the director upon exercise. All options granted under the DSOP will
expire ten years after the date of grant, subject to DSOP provisions relating to
the retirement of the director because of death, disability, or age. That
portion of an option granted under the DSOP which is attributable to any portion
of the directors' fees which is not earned due to termination as a director,
shall automatically abate and be canceled. In the event of the death of the
holder of any unexercised option, all of the holder's outstanding options will
become immediately exercisable upon the date of death by his or her legal
representative. No option may be exercised under the DSOP before the 12 month
anniversary of the date of grant.
A total of 281,250 shares of Company common stock is reserved for
issuance under the DSOP (subject to adjustment for subsequent stock splits,
stock dividends and certain other changes in the common stock of the Company).
The Company has granted 56,118 options under the DSOP, including 17,541 options
to be granted automatically at the 2001 Annual Meeting. Upon the exercise of an
option, the Company will issue authorized but previously unissued shares.
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44
If an option issued under the DSOP is terminated or canceled without having been
exercised, the shares which were not purchased thereunder will again become
available for issuance under the DSOP.
Adjustments will be made in the number of shares subject to the DSOP
and in the purchase price of outstanding options in the event of any change in
the number of shares of common stock of the Company outstanding as a result of a
stock split or stock dividend, recapitalization, merger, consolidation, or other
similar corporate change.
PERFORMANCE SHARE AWARDS PLAN
The Company has a Performance Share Awards Plan (the "PAR Plan"). The
PAR Plan is designed to reward employees of the Company, its subsidiaries and
affiliates for services performed on behalf of the Company, to stimulate
employees' efforts on behalf of the Company, to encourage such employees to
remain with the Company, and to provide them with an ownership interest in the
common stock of the Company. The Board believes the PAR Plan will be beneficial
to the Company and its shareholders by encouraging and enabling employees to
have a personal financial stake in the Company.
The PAR Plan authorizes the Compensation Committee of the Board of
Directors to grant awards of shares of common stock of the Company to employees
of the Company designated by the Compensation Committee. The Compensation
Committee may grant performance share awards in shares of the common stock if
the performance of the Company, or any subsidiary, division or affiliate of the
Company selected by the Compensation Committee meets certain goals established
by the Compensation Committee during an award period. The Compensation Committee
would determine the goals, the maximum payment value of an award, and the length
of an award. In order to receive payment, a recipient of a performance share
award must remain in the employ of the Company until the completion of the award
period.
An aggregate of 281,250 shares of common stock of the Company are
subject to the PAR Plan. Adjustments will be made in the number of shares
subject to an award in the event of any change in the number of shares of common
stock outstanding as a result of a stock split or stock dividend,
recapitalization, merger, consolidation, or other similar corporate change. The
Company has granted 211,870 shares under the PAR Plan of which 0 vested in 2000.
In the event of a change of control of the Company, as defined in the PAR Plan,
all awards granted prior to the change of control shall immediately vest and the
shares subject to the award shall be issued to the recipient of the award.
Awards granted under the PAR Plan provide the recipients with the right
to acquire shares of Common Stock as follows:
NUMBER OF SHARES DATE GRANTED EARLIEST VESTING LATEST VESTING
---------------- ------------ ---------------- --------------
23,256 2/25/98 2/23/01 2/23/05
29,298 2/24/99 2/24/02 2/24/06
63,225 2/22/00 2/23/03 2/23/07
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As of December 31, 2000, the following executive officers had been granted
awards to receive shares pursuant to the PAR Plan:
NUMBER OF SHARES VESTED
NAME 1 INCLUDING DIVIDENDS NUMBER OF SHARES UNVESTED
------ ----------------------- -------------------------
J. Ridley Howard 0 63,656
Robert L. Fincher 0 18,581
Roger W. Fisher 0 17,386
Norma Y. Christopher 0 3,480
OTHER COMPENSATION
Each executive officer is provided the use of one automobile by the
Company, Mutual and Shield, but is required to reimburse the Company, Mutual and
Shield for the personal use of the automobile. Officers are reimbursed for club
dues. The Company, Mutual and Shield are allocated these expenses under the same
formula on which salaries are prorated. The total cost of these expenses does
not exceed 10% of any executive officer's salary and bonus compensation.
COMPENSATION OF DIRECTORS
During 2000, no director of the Company received any remuneration from
the Company in his capacity as a director except for fees, or options to receive
common stock in lieu of fees pursuant to the DSOP, and reimbursement for
expenses incurred in connection with attending directors' and committee
meetings. No director received cash compensation in excess of $23,600 for his
services as a director during 2000. Each director, other than J. Ridley Howard
is paid an annual stipend of $7,000. Mr. Howard did not receive an annual
stipend in 2000. In addition, each director was paid $850 plus travel expenses
for each meeting of directors and $700 for each committee meeting of directors
attended. Each committee member, other than J. Ridley Howard, receives an
additional $1,400 as an annual stipend and each committee chairman receives
$2,000 as an annual stipend. The aggregate directors' fees for 2000 totaled
$171,390. There were no retirement benefits accrued or set aside during the year
for any director for his services as director. Upon reaching the mandatory
retirement age of 72, directors of the Company become directors emeritus and
receive stipends ranging from $600 to $11,000 annually for periods ranging from
15 years to life after the date of retirement. In February, 2000, the Board of
Directors eliminated the retirement stipends for any director retiring after
that date.
In addition to the director compensation payable by the Company as
disclosed above, directors who are not employees of the Company are eligible to
participate in the Directors' Discounted Stock Option Plan ("DSOP") which was
approved by the shareholders of the Company at the 1996 annual meeting. The
DSOP, which is administered by the Compensation Committee, permits the grant of
stock options to directors of the Company who are not employees of the Company
at an exercise price less than market value at the date of grant as an
alternative to the payment of retainer and meeting fees in cash to the
directors. Fractional shares are paid in cash. During 2000, directors of the
Company deferred fees in exchange for remuneration in the form of stock options
in lieu of cash as follows:
OPTION OPTIONS
FEES PRICE PER TO BE EXPIRATION
NAME DEFERRED SHARE GRANTED DATE
---- -------- --------- ------- ---------
Cherry, Carol D $ 9,050 $4.313 2,259 01/02/11
Coan, Gaylord O $ 22,900 $4.313 5,307 01/02/11
Harris, Thomas A $ 11,800 $4.313 2,733 01/02/11
McMahan, Robert C $ 20,100 $4.313 4,983 01/02/11
Swift, Mathews D $ 9,050 $4.313 2,259 01/02/11
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COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The members of the Compensation Committee of the Board of Directors
during the fiscal year were Messrs. McMahan and Coan and Ms. Cherry. None of
these directors are or have been officers or employees of the Company or its
subsidiaries. No executive officer of the Company serves on the board of any
other company other than an affiliate of the Company.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
The table below sets forth certain information about persons or
entities known by the Company to own beneficially more than 5% of the Company's
common stock, as of December 31, 2000. Except as noted below, the Company
believes that each of the persons or entities listed has sole investment and
voting power with respect to the shares included in the table.
PERCENT
NAME AND ADDRESS NUMBER OF SHARES OWNED(1) OF CLASS
---------------- ------------------------- --------
Shield Insurance Company 2,102,385(2) 33.1
244 Perimeter Center Parkway
Atlanta, Georgia 30346
Marvin Schwartz 477,982 7.5
605 Third Avenue
New York, New York 10158
Fidelity Management & Research Company,
a wholly owned subsidiary of
FMR Corporation
82 Devonshire Street
Boston, Massachusetts 02109 572,300 9.0
(1) Under the rules of the U. S. Securities and Exchange Commission, a
person is deemed to be beneficial owner of a security if he or she has
or shares the power to vote or to direct the voting of such security,
or the power to dispose or to direct the disposition of such security.
A person is also deemed to be a beneficial owner of any securities that
such a person has the right to acquire beneficial ownership of within
60 days as well as any securities owned by such person's spouse,
children or relatives living in the same household. Accordingly, more
than one person may be deemed to be a beneficial owner of the same
securities.
(2) Shield is a wholly owned subsidiary of Mutual. The Board of Directors
of Mutual is identical to the Board of Directors of the Company.
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SECURITY OWNERSHIP OF MANAGEMENT
The following table sets forth certain information about beneficial
ownership of the Company's common stock of each director and executive officer
of the Company and directors and officers as a group as of December 31, 2000.
All shares are owned outright without shared voting and investment power except
as set forth below.
NAME OF BENEFICIAL OWNER: AMOUNT AND NATURE OF
DIRECTORS BENEFICIAL OWNERSHIP PERCENT OF CLASS
------------------------- -------------------- ----------------
Carol D. Cherry 675(1) *
Gaylord O. Coan 500(2) *
Thomas A. Harris 5,187(3) *
J. Ridley Howard 81,994(4) 1.3
Robert C. McMahan 2,109(5) *
Darrell D. Pittard 1,000 *
Mathews D. Swift 875(6) *
E. Jenner Wood, III 1,405 *
EXECUTIVE OFFICERS
Robert L. Fincher 32,459(7) *
Roger W. Fisher 10,000(8) *
Norma Y. Christopher 16,503(9) *
ALL EXECUTIVE OFFICERS AND DIRECTORS AS A GROUP (10)
(15 persons) 166,134 2.6
(*) Less than 1% not applicable
(1) Does not include options to acquire 4,628 shares previously granted or
options to acquire 2,259 shares to be granted automatically at the 2001
Annual Meeting under the DSOP.
(2) Does not include options to acquire 13,056 shares previously granted or
options to acquire 5,307 shares to be granted automatically at the 2001
Annual Meeting under the DSOP.
(3) Does not include options to acquire 8,157 shares previously granted or
options to acquire 2,733 shares to be granted automatically at the 2001
Annual Meeting under the DSOP.
(4) Does not include 63,656 shares plus accrued dividends awarded under the
PAR Plan that have not vested.
(5) Does not include options to acquire 8,911 shares previously granted or
options to acquire 4,983 shares to be granted automatically at the 2001
Annual Meeting under the DSOP.
(6) Does not include options to acquire 3,825 shares preciously granted or
options to acquire 2,259 shares to be granted automatically at the 2001
Annual Meeting under the DSOP.
(7) Does not include 18,581 shares plus accrued dividends awarded under the
PAR Plan that have not vested.
(8) Does not include 17,386 shares plus accrued dividends awarded under the
PAR plan that have not vested.
(9) Does not include 3,480 shares plus accrued dividends awarded under the
PAR plan that have not vested.
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(10) Does not include 115,779 shares plus accrued dividends awarded under
the PAR Plan that have not vested which would increase the percentage
of outstanding shares for all officers and directors as a group to
4.4%. Also does not include options to acquire 38,578 shares previously
granted or options to acquire 17,541 shares to be granted automatically
at the 2001 Annual Meeting under the DSOP.
CHANGES IN CONTROL
None.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
TRANSACTIONS WITH MANAGEMENT AND OTHERS
Shield, which is wholly owned by Mutual, owns 2,102,385 shares or 33.1%
of the outstanding common stock of the Company. See Item 12.
Certain general expenses are allocated to the Company by Mutual. These
expenses such as salaries, advertising, rents, and related expenses, represent
the Company's share of expenses initially paid by Mutual and are allocated based
on specific identification or, if indeterminable, generally on the basis of each
company's premium income. Expenditures allocated to the Company amounted to
$3,386,739 in 2000. See Item 1.
Gaylord O. Coan, a director of the Company, is CEO of Gold Kist, where
he also serves as the Chairman of the Management Executive Committee. Gold Kist
owns no stock of the Company. The Company shares offices with Mutual and Shield
in a building owned by a partnership of Mutual and Gold Kist. The Company is not
a partner in the partnership which owns the building and has no equity interest
in the building.
Gaylord O. Coan, a director of the Company, serves as a director of
SunTrust Banks, Inc. E. Jenner Wood, III, a director of the Company, serves as
an executive officer of SunTrust Bank, Atlanta. SunTrust Banks, Inc. received
fees from the Company in 2000 for services rendered as the transfer agent of the
Company. SunTrust Bank, Atlanta, a subsidiary of SunTrust Banks, Inc., received
fees from the Company in 2000 for investment and custodial services and leases
of computer hardware.
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PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
FINANCIAL STATEMENTS
The following consolidated financial statements and independent
auditors' report are incorporated by reference to Part II, Item 8 of this
report:
Independent Auditors' Report
Consolidated Balance Sheets, December 31, 2000 and 1999
Consolidated Statements of Earnings, Years ended
December 31, 2000, 1999 and 1999
Consolidated Statements of Shareholders' Equity, Years ended
December 31, 2000, 1999 and 1998
Consolidated Statements of Cash Flows, Years ended
December 31, 2000, 1999 and 1998
Consolidated Statements of Comprehensive Income, Years ended
December 31, 2000, 1999 and 1998
Notes to Consolidated Financial Statements
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FINANCIAL STATEMENT SCHEDULES
The following consolidated financial statement schedules and
independent auditors' report thereon are included herein:
Independent Auditors' Report on Financial Statement Schedules
Schedule I - Consolidated Summary of Investments,
December 31, 2000
Schedule IV - Reinsurance, Years ended December 31, 2000,
1999 and 1998
Schedule V - Supplementary Insurance Information, Years
ended December 31, 2000, 1999 and 1998
All other schedules are omitted as the required information is
inapplicable, or the information is presented in the consolidated financial
statements or related notes.
EXHIBITS
3.1 Amended and Restated Articles of Incorporation of the Registrant
(incorporated by reference to Exhibit 3 to the Registrant's Annual
Report on Form 10-K for the year ended December 31, 1994, File No.
95074277).
3.2 Bylaws, as amended, of the Registrant (incorporated by reference to
Exhibit 3 to the Registrant's Annual Report on Form 10-K for the year
ended December 31, 1994, File No. 95074227).
10.1.1 Amended and Restated Directors' Discounted Stock Option Plan
(incorporation by reference to Exhibit 10.1.1 to the Registrant's
Annual Report on form 10-K for the year ended December 31, 1999, File
No. 2-39729).
10.2 Performance Shares Awards Plan (incorporated by reference to Exhibit
10.2 to the Registrant's Registration Statement on Form S-8,
Registration No. 333-00795).
10.3.1 Amended and Restated 1983 Incentive Stock Option Plan (incorporated by
reference to Exhibit 10.3.1 to the Registrant's Annual Report on Form
10-K for the year ended December 31, 1999, File No. 2-39729).
10.3.2 Form of Incentive Stock Option Agreement pursuant to the 1983 Incentive
Stock Option Plan (incorporated by reference to Exhibit 10.3.2 to the
Registrant's Annual Report on Form 10-K for the year ended December 31,
1999, File No. 2-39729).
21. Subsidiaries of the Registrant.
All other exhibits are omitted as the required documents are
inapplicable.
REPORT ON FORM 8-K
No report on Form 8-K was filed for the fourth quarter of 2000.
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THE BOARD OF DIRECTORS AND SHAREHOLDERS
COTTON STATES LIFE INSURANCE COMPANY
Under date of February 21, 2001, we reported on the 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, as contained in the 2000
annual report to shareholders. Those consolidated financial statements and our
report thereon are included in the annual report on Form 10-K for the year 2000.
In connection with our audits of the aforementioned consolidated financial
statements, we also have audited the related financial statement schedules as
listed in Item 14. The financial statement schedules are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statement schedules based on our audits.
In our opinion, such financial statement schedules, when considered in relation
to the basic consolidated financial statements taken as a whole, present fairly,
in all material respects, the information set forth therein.
/s/KPMG LLP
KPMG LLP
Atlanta, Georgia
February 21, 2001
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SCHEDULE I
COTTON STATES LIFE INSURANCE COMPANY AND SUBSIDIARIES
CONSOLIDATED SUMMARY OF INVESTMENTS
DECEMBER 31, 2000
Amount at Which
Fair Shown on the
Type of Investments Cost Value Balance Sheet
------------------- ------------- ------------ ----------------
Fixed maturities, held for investment:
Bonds:
United States government and government
agencies and authorities $ 1,499,749 1,501,410 1,499,749
Foreign governments 1,997,221 2,030,730 1,997,221
Public utilities 3,345,212 3,336,596 3,345,212
All other corporate bonds 8,214,910 8,345,192 8,214,910
------------- ------------ ------------
Total fixed maturities held for investment 15,057,092 15,213,928 15,057,092
Fixed maturities, available for sale:
Bonds:
United States government and government
agencies and authorities 26,789,267 27,198,678 27,198,678
Foreign governments 2,870,498 3,049,680 3,049,680
Public utilities 15,472,632 15,007,510 15,007,510
All other corporate bonds 74,680,650 71,328,375 71,328,375
------------- ------------ ------------
Total fixed maturities available for sale 119,813,047 116,584,243 116,584,243
Equity securities 3,671,233 3,776,423 3,776,423
First mortgage loans on real estate 2,097,616 2,126,289 2,097,616
Policy loans 8,841,008 8,841,008 8,841,008
Short-term investments 3,538,856 3,538,856 3,538,856
Other investments 1,000,000 1,000,000 1,000,000
------------- ------------ ------------
Total investments $ 154,018,852 151,080,747 150,895,238
============= ============ ============
See accompanying independent auditors' report.
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SCHEDULE IV
COTTON STATES LIFE INSURANCE COMPANY AND SUBSIDIARIES
REINSURANCE
YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
PERCENTAGE
CEDED TO ASSUMED OF AMOUNT
GROSS OTHER FROM OTHER NET ASSUMED
AMOUNT COMPANIES COMPANIES(1) AMOUNT TO NET(1)
-------------- ------------- ------------ ------------- ----------
YEAR ENDED DECEMBER 31, 2000
Life insurance in force $4,794,431,000 1,251,895,000 780,840,000 4,223,376,000 18.1
-------------- ------------- ----------- ------------- ----
Premiums:
Life insurance 30,194,291 4,264,239 766,213 26,696,265
Accident/health insurance 151,733 31,475 -- 120,258
-------------- ------------- ----------- -------------
Total $ 30,346,024 4,295,714 766,213 26,816,523
============== ============= =========== =============
YEAR ENDED DECEMBER 31, 1999
Life insurance in force $4,444,114,000 1,113,206,000 733,058,000 4,063,966,000 18.0
-------------- ------------- ----------- ------------- ----
Premiums:
Life insurance $ 26,382,782 3,886,199 667,688 23,164,271
Accident/health insurance 171,334 33,508 -- 137,826
-------------- ------------- ----------- -------------
Total $ 26,554,116 3,919,707 667,688 23,302,097
============== ============= =========== =============
YEAR ENDED DECEMBER 31, 1998 $4,130,933,000 1,013,619,000 725,749,000 3,843,063,000 18.9
-------------- ------------- ----------- ------------- ----
Life insurance in force
Premiums:
Life insurance $ 22,636,479 3,507,295 672,153 19,801,337
Accident/health insurance 177,517 43,500 -- 134,017
-------------- ------------- ----------- -------------
Total $ 22,813,996 3,550,795 672,153 19,935,354
============== ============= =========== =============
(1) All reinsurance assumed results from participation in Federally
sponsored group pools.
See accompanying independent auditors' report.
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SCHEDULE V
COTTON STATES LIFE INSURANCE COMPANY AND SUBSIDIARIES
SUPPLEMENTARY INSURANCE INFORMATION
DECEMBER 31, 2000 AND 1999
DEFERRED POLICY
POLICY FUTURE CLAIMS AND
ACQUISITION POLICY BENEFITS
COSTS BENEFITS PAYABLE
------------ ----------- ----------
Segment
At December 31, 2000
Individual $ 46,856,705 132,612,776 2,083,581
Group -- 41,811 214,643
------------ ----------- ---------
Total $ 46,856,705 132,654,587 2,298,224
============ =========== =========
At December 31, 1999
Individual $ 41,263,817 122,562,510 1,249,914
Group -- 43,467 205,163
------------ ----------- ---------
Total $ 41,263,817 122,605,977 1,455,077
============ =========== =========
See accompanying independent auditors' report.
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
COTTON STATES LIFE INSURANCE COMPANY
J. Ridley Howard 02/21/01 Roger W. Fisher 02/21/01 William J. Barlow 02/21/01
------------------------------------- ------------------------------ ---------------------------------
DATE DATE DATE
Chairman of the Board of Directors/ Senior Vice President Vice President/Controller
President and Chief Executive Officer Chief Financial Officer and and Assistant Treasurer
Treasurer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
Carol Cherry 02/21/01 Robert McMahan 02/21/01
---------------------------------------------------- ----------------------------------------------------
Director DATE Director DATE
Gaylord Coan 2/21/01 Darrell Pittard 02/21/01
---------------------------------------------------- ----------------------------------------------------
Director DATE Director DATE
Thomas Harris 02/21/01 Mathews Swift 02/21/01
---------------------------------------------------- ----------------------------------------------------
Director DATE Director DATE
J. Ridley Howard 02/21/01 Jenner Wood, III 02/21/01
---------------------------------------------------- ----------------------------------------------------
Director DATE Director DATE
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