<PAGE> 1
Securities and Exchange Commission
Washington, D. C. 20549
FORM 10-K
Annual Report Pursuant to Section 13 or 15 (d) of
the Securities Exchange Act of 1934
For the fiscal year ended Commission File Number 2-39729
December 31, 1995
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 RULE 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 applicable to the registrant and is not contained
herein.
[ X ]
The aggregate market value of voting stock held by non-affiliates was
$18,961,432 based on the average bid and asked price of $9.37 on January 31,
1996, as reported on the NASDAQ national market system.
As of January 31, 1996, there were 3,396,264 shares of registrant's common
stock outstanding.
The Exhibit Index is located on Page 46.
The total number of pages in this document is 54.
<PAGE> 2
Cross-Reference Sheet
<TABLE>
<CAPTION>
Caption Page No.
------- --------
<S> <C> <C>
ITEM 1. BUSINESS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
ITEM 2. PROPERTIES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
ITEM 3. LEGAL PROCEEDINGS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
ITEM 5. MARKET FOR COMPANY'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
ITEM 6. SELECTED FINANCIAL DATA. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
ITEM 9. DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. . . . . . . . . . . . . . . . . . . . . . . . . . . 33
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34
ITEM 11. EXECUTIVE COMPENSATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT . . . . . . . . . . . . . . . . . . . . . 43
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES,
AND REPORTS ON FORM 8-K . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45
</TABLE>
<PAGE> 3
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 and individual annuities. The Company ceased writing
new individual accident and health insurance policies in 1988. The Company
wrote group insurance only for its employees and agents through January 1,
1996.
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. ("CSMRI"). During
1992, the Company acquired the remaining 40% of CSMRI stock. CSMRI brokers
through the Company's exclusive agents other insurance companies' life and
accident and health products not underwritten by the Company.
FINANCIAL INFORMATION ABOUT INDUSTRY SEGMENTS
The financial information about industry segments applicable to the
Company is as follows:
<TABLE>
<CAPTION>
-------------------------------------------------------------
1995 1994 1993
-------------- ------------- --------------
<S> <C> <C> <C>
Individual:
Premiums:
Life $ 4,808,860 4,126,459 3,630,450
Accident and health 209,372 273,971 360,263
------------ ----------- -----------
Total premium income 5,018,232 4,400,430 3,990,713
Mortality and expense charges 7,218,946 7,136,723 5,529,950
Net investment income 6,987,699 6,377,909 6,101,301
Other income - - 137,534
Realized investment gains (losses) 139,438 (198,894) (234,412)
------------ ----------- -----------
Total income 19,364,315 17,716,168 15,525,086
------------ ----------- -----------
Policyholder benefits 8,936,276 8,289,418 8,212,436
Allocated operating expenses 4,569,194 4,318,205 4,015,653
------------ ----------- -----------
Total benefits and expenses 13,505,470 12,607,623 12,228,089
------------ ----------- -----------
Operating profit 5,858,845 5,108,545 3,296,997
------------ ----------- -----------
Group:
Premiums:
Life 687,943 706,645 778,122
Accident and health 2,136,420 2,884,731 3,236,622
------------ ----------- -----------
Total premium income 2,824,363 3,591,376 4,014,744
Net investment income - - -
------------ ----------- -----------
Total income 2,824,363 3,591,376 4,014,744
------------ ----------- -----------
Policyholder benefits 2,705,781 3,460,209 3,690,939
Allocated operating expenses 77,590 254,341 258,887
------------ ----------- -----------
Total benefits and expenses 2,783,371 3,714,550 3,949,826
------------ ----------- -----------
Operating profit (loss) 40,992 (123,174) 64,918
------------ ----------- -----------
Combined operating profit 5,899,837 4,985,371 3,361,915
Unallocated corporate expenses 1,420,099 1,240,028 1,201,942
Brokerage and other income 847,717 646,625 497,037
Earnings before federal income taxes
and accounting changes $ 5,327,455 4,391,968 2,657,010
============ =========== ===========
</TABLE>
NARRATIVE DESCRIPTION OF BUSINESS SEGMENTS
INDIVIDUAL LIFE
The major forms of individual life insurance presently offered by the
Company include universal life, graded premium whole life, whole life,
participating whole life, annuities, various supplemental riders including, but
not limited to, accidental death, disability waiver and guaranteed
insurability, and disability riders.
Unless the need for a medical examination is indicated by the
application or an investigation, the Company writes individual life insurance
without requiring a medical examination in the following maximum amounts:
<TABLE>
<CAPTION>
AGE GROUP MAXIMUM INSURANCE
--------- -----------------
<S> <C>
0-35 $150,000
36-40 100,000
41-45 74,000
46-50 50,000
51 and over 24,000
</TABLE>
3
<PAGE> 4
Substandard life insurance risks are accepted by the Company at
increased rates, which are determined on an actuarial basis that the Company
believes will adequately compensate it for the additional risk involved. The
Company's retention of substandard policies varies with its classification of
the risk and age of the insured, but in no event exceeds $100,000 on any life
through age 65 or $35,000 for issue ages over 65. 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 requires a medical
examination on the majority of all substandard risks. As of December 31, 1995,
less than 1% of the Company's individual life premiums and mortality and
expense charges were represented by substandard risks.
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. As of December 31, 1995, the
aggregate amount of individual life insurance in force ceded by the Company
under its various reinsurance treaties totaled $801,111,000. The Company may
have a total retention of $150,000 on a life if the insured is covered by an
individual life policy and group life coverage.
The following tabulation sets forth information pertaining to the
Company's individual life insurance in-force for the three years ended December
31, 1995:
<TABLE>
<CAPTION>
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
In-force ($000 omitted) $3,255,762 2,990,215 2,669,189
---------- --------- ---------
Reinsurance ceded ($000 omitted) 801,111 722,262 644,335
---------- --------- ---------
In-force net of reinsurance
($000 omitted) 2,454,651 2,267,953 2,024,854
---------- --------- ---------
Number of policies in-force 52,041 48,159 42,358
---------- --------- ---------
Average size of policy in-force $ 63,000 62,000 63,000
---------- --------- ---------
Ratio of voluntary terminations
to mean of insurance in-force 12.24% 11.66% 11.64%
---------- --------- ---------
</TABLE>
GROUP LIFE AND ACCIDENT AND HEALTH
The Company wrote group insurance policies covering its employees,
employees of Cotton States Mutual Insurance Company ("Mutual"), agents of the
Company and Mutual. The Company ceased writing this coverage January 1, 1996.
Based on 1995 results, premium income and benefits will decrease approximately
$2,136,000 in 1996. In addition, the Company participates in federally
sponsored group pools.
Mutual's premiums are based on actual claims experience plus an
expense and profit allowance of 10%.
The Company presently retains, with respect to group life insurance,
no more than $50,000 on any one life. In addition, the Company has reinsurance
treaties covering certain disaster provisions, disability income provisions and
accidental death provisions.
The Company does not act as a reinsurer except with respect to its
participation in two federal programs. As of December 31, 1995, $11,403,000 of
group life insurance had been assumed by the Company from Metropolitan Life
Insurance Company ("Metropolitan") as the Company's pro rata share of the
Federal Employees' Group Life Insurance Program written by Metropolitan. As of
the same date, $628,084,000 of group life insurance had been assumed from
Prudential Life Insurance Company of
4
<PAGE> 5
America ("Prudential") as the Company's pro rata share of the Servicemen's
Group Life Insurance Program written by Prudential. The Company's reinsurance
participation in these two programs accounted for 99% of the Company's group
life insurance in force as of December 31, 1995. Participation in these
programs has an insignificant effect on the Company's earnings.
AGENCY FORCE
The Company offers its insurance through independent agents who also
write all lines of property and casualty insurance for 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.
Because its agents write all major lines of insurance, the Company's commission
rates are less than the prevailing industry rate. Approximately 230 agents are
under contract to the Company, Mutual and Shield, and are paid on a commission
basis.
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.
EMPLOYEES
In addition to its principal officers, the Company shares
approximately 111 salaried employees with Shield and Mutual. The Company pays
an allocated portion of the shared employee's salaries, either based upon the
Company's premium income in relation to the premium income of Mutual and Shield
or to actual time expended on each company's affairs. The Company and its
subsidiaries have 35 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. The Company believes that its employee relations are
good.
5
<PAGE> 6
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 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, develop new products faster, and develop economies of scale.
Mutual companies may also have an additional advantage compared to
stock insurers because all of their profits accrue to the policyholder.
Furthermore, the Company's annuities compete with annuities offered by banks,
thrifts, brokerage firms and other financial institutions. Many of these
institutions enjoy a competitive advantage in that they do not incur commission
costs.
The Company has certain advantages that enables 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 insurance they have the advantage of
"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
frequently 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. 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 will result
in any material loss to the Company.
6
<PAGE> 7
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
PART II
ITEM 5. MARKET FOR COMPANY'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
COMMON STOCK DATA
On January 1, 1996, there were approximately 680 record holders of the
Company's common stock. The stock (symbol CSLI) is traded
over-the-counter. Price history as provided by Nasdaq and dividends
declared during the past two years are presented below:
1995 Bid Prices
High Low Dividend Declared
First Quarter $ 7.80 6.58 .040
Second Quarter $ 7.80 6.90 .032
Third Quarter $ 9.90 7.20 .032
Fourth Quarter $ 9.75 8.75 .032
1994
First Quarter $ 6.50 5.90 .024
Second Quarter $ 6.40 5.20 .024
Third Quarter $ 7.80 5.40 .032
Fourth Quarter $ 7.80 6.40 .032
7
<PAGE> 8
ITEM 6. SELECTED FINANCIAL DATA.
TEN-YEAR SUMMARY
OF SELECTED
FINANCIAL DATA
<TABLE>
<CAPTION>
-----------------------------------------------------------
1995 1994(1) 1993(1)
--------------- ------------ ------------
<S> <C> <C> <C>
As of December 31
Total assets $ 139,381,979 124,412,468 116,237,515
Total liabilities $ 99,694,942 90,855,648 85,285,402
Total stockholders' equity $ 39,687,037 33,556,820 30,952,113
Book value per share $ 11.69 9.90 9.56
Bid price per share $ 9.00 6.80 6.00
=============== =========== ===========
Years ended December 31
Premium income $ 7,842,595 7,991,806 8,005,457
Mortality and expense charges earned $ 7,218,946 7,136,723 5,529,950
Net investment income, realized
investment gains and other income $ 8,814,035 7,597,136 7,271,267
Total income $ 23,875,576 22,725,665 20,806,674
Benefits and expenses $ 18,548,121 18,333,697 18,149,664
Net earnings $ 4,070,871 3,303,024 2,435,355
=============== =========== ===========
Net earnings per share $ 1.20 1.01 .75
=============== =========== ===========
Dividends per share $ .136 .112 .096
=============== =========== ===========
</TABLE>
(1) All share and per share amounts have been adjusted for the October, 1995
five-for-four stock split.
8
<PAGE> 9
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------
1992(1) 1991(1) 1990(1) 1989(1) 1988(1) 1987(1) 1986(1)
- ----------- ----------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
111,133,117 102,258,764 94,837,003 89,058,288 80,680,249 73,499,773 69,221,596
82,346,176 75,210,219 68,395,286 62,061,677 55,993,144 51,264,085 47,362,044
28,786,941 27,048,545 26,441,717 26,996,611 24,687,105 22,235,688 21,859,552
8.89 8.35 7.86 7.86 7.18 6.47 6.37
5.20 5.20 5.80 6.20 4.30 4.20 4.60
=========== =========== ========== ========== ========== ========== ==========
9,671,662 9,444,004 8,778,515 8,559,692 8,027,527 9,160,889 9,325,079
4,803,708 4,314,299 3,962,877 2,992,291 2,912,562 2,430,987 2,132,883
7,111,110 7,069,597 6,291,331 6,575,258 6,257,920 5,962,544 5,968,435
21,586,480 20,827,900 19,032,723 18,127,241 17,198,009 17,554,420 17,426,397
19,122,883 19,182,874 17,027,478 15,913,687 14,459,976 14,765,557 14,824,504
2,108,597 1,292,026 1,655,245 2,506,426 2,429,623 2,372,863 2,255,618
=========== =========== ========== ========== ========== ========== ==========
.62 .39 .49 .73 .70 .69 .66
=========== =========== ========== ========== ========== ========== ==========
.128 .224 .224 .192 .192 .192 .192
=========== =========== ========== ========== ========== ========== ==========
</TABLE>
9
<PAGE> 10
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF CONSOLIDATED FINANCIAL
CONDITION AND CONSOLIDATED RESULTS OF OPERATIONS.
LIQUIDITY AND CAPITAL RESOURCES
Premiums, mortality and expense charges and investment income are the Company's
major sources of cash flow used to meet its short-term and long-term cash
requirements.
The Company's 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 and cash equivalents. The Company does not
anticipate that it will become necessary to sell long-term investments to meet
short-term obligations.
The Company's principal long-term obligations are fixed contractual obligations
incurred in the sale of its life insurance and certain accident and health
products. The premiums charged for these products are based on conservative and
actuarially sound assumptions as to mortality, morbidity, 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 a major entry into the debt or equity markets.
INVESTMENTS
Investment Securities and Securities Available for Sale
Effective, January 1, 1994, the Company changed its method of valuing fixed
maturities available for sale from lower of aggregate amortized cost or market
value to market value, as required by Statement of Financial Accounting
Standards No. 115 "Accounting for Certain Investments in Debt and Equity
Securities." Also, on January 1, 1994 and December 1, 1995, the Company
transferred an additional $20,898,578 and $11,193,866, respectively, in
securities from its held-for-investment portfolio to its held-for-sale
portfolio.
Following is a summary of fixed maturities held for investment and available
for sale by rating class as of December 31, 1995.
<TABLE>
<CAPTION>
Held for Investment Available for Sale
- ----------------------------------------------------------------
<S> <C> <C>
U. S. GOVERNMENT $ 1,987,280 26,231,643
"A" OR BETTER 18,645,188 44,096,529
-------------------------------------------
$ 20,632,468 70,328,172
-------------------------------------------
</TABLE>
In 1995, 1994 and 1993, the Company provided loss provisions of approximately
$300,000, $580,000 and $320,000, respectively, for U.S. government agency
derivative securities whose decline in value was deemed to be other than
temporary. These securities are U.S. government agency securities whose
principal repayments are linked to the valuation of foreign currencies. Three
of these securities matured in 1995, the remaining security matures in 1996.
The Company does not anticipate any further significant write-downs.
Mortgage Loans
The Company's mortgage loan policy stipulates that the Company will loan no
more than 80% of the value on residential loans and no more than 75% of the
value on commercial loans. For the past five years, the Company has granted
loans only to employees (excluding officers and directors), agents, agents'
relatives, employees of Gold Kist and current mortgagees.
10
<PAGE> 11
MANAGEMENT'S
DISCUSSION AND
ANALYSIS | continued
The geographic distribution of the loan portfolio as of December 31, 1995 is:
<TABLE>
<CAPTION>
No. of Loans State Book Value
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
6 Alabama $ 483,325
7 Florida 564,237
93 Georgia 4,376,910
- -------------------------------------------------------------------------------
106 $ 5,424,472
===============================================================================
</TABLE>
The Company has a large concentration of loans in Georgia; however, only one
loan for $148,966 is past due more than three months. Because the loan-to-value
ratio on these delinquent loans is 62%, the Company does not anticipate any
loss should it choose to foreclose. The Company has foreclosed on only one loan
since 1985 and incurred no loss on the sale of the underlying collateral.
Policy Loans
All policy loans are secured by the cash surrender value of the policies.
Short-term Investments
All short-term investments are in U.S. Treasury Bills.
RESULTS OF OPERATIONS
Premium Income
Premium income on traditional life contracts has increased 17% in 1995 and 14%
in 1994. Prior to 1994, premium income on these contracts was unchanged. The
increase in 1995 and 1994 came from the sales of the Company's new
participating whole life policies.
Individual accident and health premiums decreased 24% in 1995 and 1994, and 8%
in 1993. In 1988, the Company ceased writing new individual accident and health
policies. The Company anticipates that premium income from the line will
continue to decrease.
Group premiums from the Company's agents and employees are based on actual
claims experience and participation in government pools. Group premiums
decreased approximately $767,000 in 1995 and $423,000 in 1994 and increased
$1,616,000 in 1993. The fluctuation in group premiums has no effect on the
Company's earnings, because those premiums were based on actual claims
experience plus a modest expense allowance. On January 1, 1996, the Company
ceased writing group health insurance on its agents and employees.
This will result in a decrease in premium income and benefits in 1996 of
approximately $2,136,000, based on 1995 experience.
11
<PAGE> 12
MANAGEMENT'S
DISCUSSION AND
ANALYSIS | continued
Mortality and Expense Charges Earned
Mortality and expense charges earned on universal life contracts increased 1%,
29% and 15% in 1995, 1994 and 1993, respectively. In 1994 and 1993, the Company
changed its classification of reserve credits on reinsured universal life
contracts. This reclassification resulted in additional mortality and expense
charges earned of $328,000 and $430,000 in 1994 and 1993, respectively, and had
an insignificant effect on net income. Without this reclassification, mortality
and expense charges earned would have increased 6%, 33% and 6%, respectively.
The increase for 1994 resulted from the addition of a large payroll deduction
universal life case during the year, plus an increase in cost of insurance
charges on all 1994 new business cases. The Company expects future growth rates
to be in the 6-8% range.
Investment Income
Investment income increased 10% in 1995, 5% in 1994 and was flat in 1993. The
increase in 1995 and 1994 is due to a larger investment portfolio.
Realized Investment Gains/Losses
Realized investment gains/losses during the past three years resulted primarily
from the sale of bonds and write-down of bonds. During 1995, 1994 and 1993, the
Company booked provisions for possible investment losses of $300,000, $580,000
and $320,000 respectively. (See previous discussion of investment securities.)
Brokerage and Other Income
CSI Brokerage Services provided 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. CSI earned $438,707 in 1995, $368,700 in 1994 and $321,150 in 1993.
Another subsidiary, Cotton States Marketing Resources, Inc. provides the
Company with commission income from brokerage agreements with other life and
health insurance companies. These companies supply the Company's multi-line
agents with life and health products that the Company does not want to
underwrite. Marketing Resources earned $183,010 in 1995 and $88,000 in 1994 and
$10,400 in 1993.
Benefits
Individual benefits as a percentage of individual life premiums and mortality
and expense charges were 70%, 64% and 78% for 1995, 1994 and 1993,
respectively. The large decrease in 1994 was due to lower mortality experience.
Individual accident and health benefits as a percentage of accident and health
premiums were 19%, 129% and 127% for 1995, 1994 and 1993, respectively. Even
though experience on this line improved in 1995, the Company anticipates that
even with rate increases, the loss ratio on this closed block of business will
continue to be in the 110%-130% range.
Operating Expenses
Operating expenses and amortization of policy acquisition costs as a percentage
of total premium
12
<PAGE> 13
MANAGEMENT'S
DISCUSSION AND
ANALYSIS | continued
income, mortality and expense charges, and brokerage income were 41%, 40% and
42% for 1995, 1994 and 1993, respectively. The Company anticipates the expense
ratio will remain at approximately 40% in future years.
Federal Income Taxes
The effective tax rates were 24% for 1995, 25% for 1994 and 8% for 1993. The
effective tax rate should remain at approximately 25%. On January 1, 1993, the
Company adopted SFAS 109, "Accounting for Income Taxes." Deferred income taxes
reflect the net tax effects of temporary differences between the carrying
values of assets and liabilities (principally deferred policy acquisition costs
and life future policy benefit liabilities) for financial reporting purposes
and federal income tax purposes. The tax effect of these differences created a
deferred tax benefit of $317,043 in 1993 versus deferred tax expense of
$381,477 in 1994. This change in accounting principle contributed significantly
to the decrease in effective tax rate for 1993.
Quarterly Results
Quarterly earnings fluctuated significantly during the three years ending
December 31, 1995. These fluctuations are due, in the most part, to irregular
claims occurrences and the timing of certain investment transactions during the
year.
Inflation
Prolonged inflation can adversely affect insurance operations. Expenses and
certain benefits tend to increase while premiums are generally fixed for the
life of the policy. Real and nominal interest rates have fluctuated
considerably over the past several years, causing major swings in investments'
market values and their income growth. In an effort to control these effects,
management is continuing to emphasize cost control and to invest in short-term
and intermediate-term investments. Both inflation and interest rate
fluctuations narrowed in the past three years in comparison to the immediately
preceding years.
13
<PAGE> 14
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
--------------------------------------
1995 1994
-------------- -----------
<S> <C> <C>
ASSETS
Investments:
Fixed maturities, held for investment, at amortized cost $ 20,632,468 33,637,095
Fixed maturities, available for sale, at market value 70,328,172 44,450,362
First mortgage loans on real estate 5,424,472 5,916,625
Policy loans 6,675,954 6,543,751
Short-term investments 3,774,989 1,962,140
-------------- -----------
Total investments 106,836,055 92,509,973
Cash 1,721,911 2,173,651
Accrued investment income 1,637,817 1,439,721
Amounts receivable, principally premiums 2,076,227 3,007,599
Amount due from reinsurers 1,885,779 1,876,843
Deferred policy acquisition costs 24,171,011 21,953,463
-------------- -----------
Other assets 1,053,179 1,451,218
$ 139,381,979 124,412,468
============== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Policy liabilities and accruals:
Future policy benefits $ 89,532,469 84,687,257
Policy claims and benefits payable 1,774,740 1,453,553
-------------- -----------
Total policy liabilities and accruals 91,307,209 86,140,810
Federal income taxes:
Current 151,561 101,910
Deferred 3,140,915 1,357,311
Other liabilities 5,095,257 3,255,617
-------------- -----------
Total liabilities 99,694,942 90,855,648
-------------- -----------
Stockholders' equity:
Common stock of $1 par value. Authorized 5,000,000
shares; issued 3,602,775 shares 3,602,775 3,602,775
Additional paid-in capital 1,292,207 1,295,922
Net unrealized gains (losses) on fixed maturities available
for sale 1,354,897 (1,128,107)
Retained earnings 34,680,468 31,071,160
Less treasury stock, at cost (207,011 shares in
1995 and 213,839 shares in 1994) (1,243,310) (1,284,930)
-------------- -----------
Total stockholders' equity 39,687,037 33,556,820
-------------- ----------
$ 139,381,979 124,412,468
============== ===========
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
14
<PAGE> 15
CONSOLIDATED STATEMENTS OF EARNINGS
<TABLE>
<CAPTION> Years ended December 31,
-------------------------------------------------------
1995 1994 1993
--------------- ---------- ----------
<S> <C> <C> <C>
REVENUES
Premium income:
Life $ 5,496,803 4,833,104 4,408,072
Accident and health 2,345,792 3,158,702 3,597,385
--------------- ---------- ----------
Total premium income 7,842,595 7,991,806 8,005,457
Mortality and expense charges 7,218,946 7,136,723 5,529,950
Net investment income 7,022,551 6,377,909 6,101,301
Realized investment gains (losses) 139,438 (198,894) (234,412)
Brokerage and other income 1,652,046 1,418,121 1,404,378
--------------- ---------- ----------
Total revenues 23,875,576 22,725,665 20,806,674
--------------- ---------- ----------
BENEFITS AND EXPENSES
Life benefits and claims 9,450,073 8,666,090 8,450,658
Accident and health benefits and claims 2,191,984 3,083,537 3,452,717
Amortization of deferred policy acquisition costs 1,475,963 1,134,555 1,317,787
Other operating expenses 5,430,101 5,449,515 4,928,502
--------------- ---------- ----------
Total benefits and expenses 18,548,121 18,333,697 18,149,664
--------------- ---------- ----------
Earnings before federal income taxes and cumulative
effect of changes in accounting principles 5,327,455 4,391,968 2,657,010
Federal income taxes (benefits):
Current 579,650 707,467 535,698
Deferred 676,934 381,477 (317,043)
--------------- ---------- ----------
Total federal income taxes 1,256,584 1,088,944 218,655
--------------- ---------- ----------
Net earnings before cumulative effect of changes
in accounting principles 4,070,871 3,303,024 2,438,355
Cumulative effect on prior periods of a change
in method of accounting for income taxes - - 260,000
Cumulative effect on prior periods of a change in method
of accounting for retiree benefits, net of tax - - (263,000)
--------------- ---------- ----------
Net earnings $ 4,070,871 3,303,024 2,435,355
=============== ========== ==========
Per share:
Net earnings before cumulative effect of
changes in accounting principles $ 1.20 1.01 .75
Cumulative effect on prior periods of a change
in method of accounting for income taxes - - .08
Cumulative effect on prior periods of a change in method
of accounting for retiree benefits, net of tax - - (.08)
--------------- ---------- ----------
Net earnings $ 1.20 1.01 .75
=============== ========== ==========
Weighted average number of shares used in
computing earnings per share 3,393,529 3,264,539 3,238,655
=============== ========== ==========
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
15
<PAGE> 16
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Years ended December 31,
-------------------------------------------------------
1995 1994 1993
--------------- --------- ---------
<S> <C> <C> <C>
Common stock-balance at beginning and
end of year $ 3,602,775 3,602,775 3,602,775
--------------- ---------- ----------
Additional paid-in capital:
Balance at beginning of year 1,295,922 1,401,476 1,401,476
Treasury shares issued (3,715) (105,554) -
--------------- ---------- ----------
Balance at end of year 1,292,207 1,295,922 1,401,476
--------------- ---------- ----------
Netunrealized gains (losses) on equity securities
and fixed maturities available for sale:
Balance at beginning of year (1,128,107) _ (40,728)
Change in accounting principle:
Unrealized gains at January 1, 1994 - 582,955 -
Deferred tax expense - (198,205) -
--------------- ---------- ----------
Change in accounting principle, net (1,128,107) 384,750 (40,728)
--------------- ---------- ----------
Change in unrealized gains (losses):
Unrealized gains (losses) during year 4,137,852 (2,171,848) 40,728
Deferred (taxes) benefit (1,106,869) 438,428 -
Deferred acquisition cost adjustment (547,979) 220,563 -
--------------- ---------- ----------
Change in unrealized gains (losses), net 2,483,004 (1,512,857) 40,728
--------------- ---------- ----------
Balance at end of year 1,354,897 (1,128,107) -
--------------- ---------- ----------
Retained earnings:
Balance at beginning of year 31,071,160 28,135,674 26,011,230
Net earnings 4,070,871 3,303,024 2,435,355
Dividends of $.136 per share in 1995,
$.112 in 1994 and $.096 in 1993 (461,563) (367,538) (310,911)
--------------- ---------- ----------
Balance at end of year 34,680,468 31,071,160 28,135,674
--------------- ---------- ----------
Treasury stock:
Balance at beginning of year (1,284,930) (2,187,812) (2,187,812)
Cost of shares issued (6,828 shares in 1995
and 150,280 shares in 1994) 41,620 902,882 -
--------------- ---------- ----------
Balance at end of year (1,243,310) (1,284,930) (2,187,812)
--------------- ---------- ----------
Total stockholders' equity (note 9) $ 39,687,037 33,556,820 30,952,113
=============== ========== ==========
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
16
<PAGE> 17
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Years ended December 31,
-------------------------------------------------------
1995 1994 1993
---------------- ----------- -----------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net earnings $ 4,070,871 3,303,024 2,435,355
Adjustments to reconcile net earnings to net
cash provided from operating activities:
Increase in policy liabilities and accruals 5,166,399 5,646,988 4,998,835
Increase in deferred policy acquisition costs (2,765,527) (2,575,044) (2,223,030)
Change in federal income taxes 726,385 (28,659) (453,262)
Decrease (increase) in amounts receivable
and amounts due from reinsurers 922,436 (1,039,672) (644,615)
Other, net 1,828,589 2,476,899 1,709,873
---------------- --------- ---------
Net cash provided from operating activities 9,949,153 7,783,536 5,823,156
---------------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of fixed maturities held for investment - (4,284,222) (15,473,687)
Purchase of fixed maturities available for sale (33,550,517) (24,101,176) (1,015,500)
Sale of fixed maturities available for sale 20,469,828 17,791,175 -
Proceeds from maturity and redemption
of fixed maturities held for investment 1,780,728 575,093 6,806,181
Proceeds from maturity and redemption of
fixed maturities available for sale 2,876,731 2,519,530 3,073,091
First mortgage loans originated (346,600) (830,637) (555,756)
Principal collected on first mortgage loans 838,753 1,550,879 1,485,794
Policy loans (132,203) (132,122) (246,363)
Other, net (101,106) (56,924) 296,934
---------------- --------- ---------
Net cash used in investing activities (8,164,386) (6,968,404) (5,629,306)
---------------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Repayment of notes payable - (561,072) (1,888,928)
Cash dividends paid (461,563) (367,538) (310,911)
Sale of treasury stock 37,905 797,328 -
---------------- --------- ---------
Net cash provided from (used in)
financing activities (423,658) (131,282) (2,199,839)
---------------- --------- ---------
Net increase (decrease) in cash and
cash equivalents 1,361,109 683,850 (2,005,989)
---------------- --------- ---------
Cash and cash equivalents:
Beginning of year 4,135,791 3,451,941 5,457,930
---------------- --------- ---------
End of year $ 5,496,900 4,135,791 3,451,941
================ ========= =========
Supplemental disclosures of cash paid during the year:
Income taxes $ 530,000 827,156 221,660
================ ========= =========
Interest $ - 9,835 77,883
================ ========= =========
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
17
<PAGE> 18
NOTES TO
CONSOLIDATED
FINANCIAL
STATEMENTS
DECEMBER 31, 1995, 1994 AND 1993
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accompanying consolidated financial statements have been prepared in
conformity with generally accepted accounting principles (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 deems 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 defer from estimates. The significant accounting policies are as
follows:
Consolidation Policy
The consolidated financial statements include the accounts of Cotton States
Life Insurance Company, 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 Premium Income and Mortality and Expense Charges
Premiums on traditional life and accident and health insurance policies are
recognized as income when due. Mortality and expense charges on universal life
policies are recognized as income when earned.
Future Policy Benefits
Future policy benefits on traditional individual life insurance policies are
computed using a net level-premium method based upon conservative 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 plus credited interest.
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 as 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 $4,241,000 in 1995,
$3,710,000 in 1994 and $3,541,000 in 1993.
18
<PAGE> 19
NOTES | CONTINUED
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
maturity dates of less than three months.
Investments
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 estimated net realizable value. Unrealized gains and
losses on fixed maturities available for sale are accounted for as direct
increases or decreases in stockholders' equity, net of deferred taxes.
Income Taxes
The Company and CSI Brokerage Services, Inc. file a consolidated federal income
tax return. Cotton States Marketing Resources, Inc. files a separate 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.
Stockholders' Equity/Earnings Per Share
On August 22, 1995, the Company's Board of Directors authorized a five-for-four
stock split, effected in the form of a 25% stock dividend distributed on
October 16, 1995 to shareholders of record on October 2, 1995. Share equity has
been restated to give retroactive recognition to the stock split in prior
periods by reclassifying from retained earnings to common stock the par value
of the additional shares arising from the split. In addition, all references in
the financial statements to the number of shares, per share amounts, stock
option data and market prices of the Company's common stock have been restated.
Earnings per share of common stock are based on the weighted average number of
common shares outstanding, adjusted for the October 16, 1995 five-for-four
stock split, effected in the form of a 25% stock dividend. The effect of
unexercised stock options is not significant.
19
<PAGE> 20
NOTES | continued
NOTE 2 - INVESTMENTS
Effective January 1, 1994, the Company adopted the provisions of Statement of
Financial Accounting Standards No. 115 (SFAS No. 115), "Accounting for Certain
Investments in Debt and Equity Securities." The adoption of SFAS No. 115
resulted in reporting fixed maturities available for sale at fair value with
changes in unrealized gains and losses included in stockholders' equity, net of
applicable deferred taxes and deferred acquisition cost adjustments. The
adoption of SFAS No. 115 had no effect on net earnings in 1994.
In November 1995, the Financial Accounting Standards Board announced that for
the year ended December 31, 1995, companies that are subject to the reporting
requirements of SFAS No. 115 would have a one-time opportunity to reclassify
securities currently classified as held to maturity without the risk of
tainting the accounting for investments on a historical basis. The Company has
evaluated the securities contained in this portfolio and has determined under
which conditions it may dispose of such securities. In light of this review,
the Company has reclassified approximately $11,197,000 of securities which were
previously classified as held-to-maturity to the available-for-sale account.
The result of such reclassification was to increase shareholders' equity by
approximately $62,000, net of applicable deferred taxes.
<TABLE>
<CAPTION>
- ----------------------------------------------------- ---------- ---------- --------------
1995 Gross Gross
Amortized unrealized unrealized Estimated fair
cost gains losses value
-------------- ---------- ---------- --------------
<S> <C> <C> <C> <C>
Held for investment:
U.S. Treasury securities and
obligations of U.S. government
corporations and agencies $ 1,987,280 6,105 (7,385) 1,986,000
Debt securities issued by
foreign governments 1,987,190 209,520 - 2,196,710
Corporate securities 16,657,998 643,251 (7,193) 17,294,056
-------------- --------- ------- ----------
Total $ 20,632,468 858,876 (14,578) 21,476,766
============== ========= ======= ==========
Available for sale:
U.S. Treasury securities and
obligations of U.S. government
corporations and agencies $ 3,794,917 201,299 - 3,996,216
Corporate securities 42,457,092 1,742,014 (102,577) 44,096,529
Mortgage-backed securities 21,527,204 709,335 (1,112) 22,235,427
-------------- --------- ------- ----------
Total $ 67,779,213 2,652,648 (103,689) 70,328,172
============== ========= ======= ==========
- ----------------------------------------------------------------------------------------------------------
1994 Gross Gross
Amortized unrealized unrealized Estimated fair
cost gains losses value
-------------- ---------- ---------- --------------
Held for investment:
U.S. Treasury securities and
obligations of U.S. government
corporations and agencies $ 3,275,552 817 (78,094) 3,198,275
Debt securities issued by
foreign governments 3,005,829 - (154,729) 2,851,100
Corporate securities 27,355,714 6,479 (2,075,564) 25,286,629
-------------- --------- ------- ----------
Total $ 33,637,095 7,296 (2,308,387) 31,336,004
============== ========= ======= ==========
Available for sale:
U.S. Treasury securities and
obligations of U.S. government
corporations and agencies $ 3,171,143 - (67,918) 3,103,225
Corporate securities 22,485,035 69,473 (805,646) 21,748,862
Mortgage-backed securities 20,383,077 - (784,802) 19,598,275
______________ _________ ___________ __________
Total $ 46,039,255 69,473 (1,658,366) 44,450,362
============== ========= =========== ==========
</TABLE>
20
<PAGE> 21
NOTES | continued
The amortized cost and estimated fair value of debt securities at December 31,
1995, 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.
<TABLE>
- ---------------------------------------------------------------------------------------------------------
<CAPTION>
1995 Amortized Estimated fair
cost value
-------------- --------------
<S> <C> <C>
Held for investment:
Due in one year or less $ 1,650,874 1,663,115
Due after one year through five years 4,043,742 4,137,471
Due after five years through 10 years 14,937,852 15,676,180
-------------- --------------
Total $ 20,632,468 21,476,766
============== ==============
Available for sale:
Due in one year or less $ 2,037,325 2,109,246
Due after one year through five years 15,105,279 15,465,305
Due after five years through 10 years 22,485,752 23,714,948
Due after 10 years 6,623,653 6,803,246
Mortgage-backed securities 21,527,204 22,235,427
-------------- --------------
Total $ 67,779,213 70,328,172
============== ==============
</TABLE>
Bonds with amortized cost of approximately $1,843,000 at December 31, 1995 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:
<TABLE>
<CAPTION> ---------- ---------- --------
1995 1994 1993
---------- ---------- --------
Realized gains (losses) on sales and
redemptions of investments:
<S> <C> <C> <C>
Fixed maturities held for investment:
Gross gains $ - 171 113,668
Gross losses - - (21,455)
--------- --------- ---------
Net realized gains - 171 92,213
--------- --------- ---------
Fixed maturities available for sale:
Gross gains 452,383 443,299 1,994
Gross losses (312,945) (642,364) (328,619)
--------- --------- ---------
Net realized gains (losses) 139,438 (199,065) (326,625)
--------- --------- ---------
Changes in unrealized gains (losses):
Fixed maturities held for investment 3,145,389 (5,719,289) 1,748,667
Fixed maturities available for sale 4,137,852 (2,171,848) 623,683
--------- --------- ---------
Net unrealized gains (losses) 7,283,241 (7,891,137) 2,372,350
--------- --------- ---------
Total realized and unrealized
gains (losses) $7,422,679 (8,090,031) 2,137,938
========== ========= =========
</TABLE>
21
<PAGE> 22
NOTES | continued
Included in investments available for sale are certain U.S. dollar denominated
U.S. government agency securities amounting to $292,500 at December 31, 1995,
which are payable in foreign currency. As a result of significant foreign
currency fluctuations, the Company has written these securities down to current
market value in 1995, 1994 and 1993 by recognizing losses of $300,000, $580,509
and $318,579, respectively.
Details of net investment income are as follows:
<TABLE>
<CAPTION>
---------- -------- --------
1995 1994 1993
---------- -------- --------
<S> <C> <C> <C>
Investment income:
Fixed maturities held for investment $1,504,117 2,095,318 3,521,446
Fixed maturities available for sale 4,627,543 3,367,984 1,806,836
First mortgage loans 498,084 573,008 648,879
Policy loans 434,184 424,266 400,332
Short-term investments 298,553 232,482 77,972
--------- --------- ---------
Total investment income 7,362,481 6,693,058 6,455,465
Less investment expenses 339,930 315,149 354,164
--------- --------- ---------
Net investment income $7,022,551 6,377,909 6,101,301
========== ========= =========
</TABLE>
NOTE 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
and fixed maturities available for sale), 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.
22
<PAGE> 23
NOTES | continued
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.
The estimated fair values and carrying value of the Company's financial
instruments at December 31, 1995 and 1994 are the same except for investment
securities which are detailed in footnote 2 and mortgage loans as follows:
<TABLE>
- -----------------------------------------------------------------------------------------------------------
<CAPTION>
MORTGAGE LOANS Carrying Fair
amount value
---------------------------------------
<S> <C> <C>
1995 $ 5,424,472 5,601,569
1994 $ 5,916,625 5,932,877
=======================================
</TABLE>
NOTE 4 - FUTURE POLICY BENEFITS AND REINSURANCE
The composition of future policy benefits and the significant assumptions used
in their development are as follows:
<TABLE>
<CAPTION>
Future policy benefits Assumptions
|----------------------| |------------------------------------------------------------------------|
(in thousands)
------------------------ -------------- -------------- ------------------ -----------
Line of business 1995 1994 Years of issue Interest rates Mortality Withdrawals
------ ------ -------------- -------------- ------------------ -----------
<S> <C> <C> <C> <C> <C> <C>
Life:
Individual $ 4,621 4,755 1956-65 4% 1955-60 Basic Table Company
Select and Ultimate experience
Individual 9,155 9,310 1966-79 6.5% - 5% (A) Same as above Same as above
Individual 5,521 5,525 1980-88 7.5% - 6% (A) 1965-70 Basic Table Same as above
Select and Ultimate
Individual 3,928 2,909 1989-95 7.5% - 6% (A) 1975-80 Basic Table Same as above
Select and Ultimate
Individual 3,584 3,427 Various 3.5% - 2.5% Statutory -
Annuities and
universal life 62,656 58,639 Various 6.25% - 4.5%Accumulated -
account value
Group 6 50 Various _ Unearned premiums _
------- ------ ------- ------------- ----------------- ------------
89,471 84,615
Accident and
health-
individual 61 72 Various 3% - -
------- ------ ------- ------------- ----------------- ------------
Total future
policy benefits $89,532 84,687
===================
</TABLE>
(A) INTEREST RATES ARE GRADED TO THE ULTIMATE RATE IN 25 YEARS.
23
<PAGE> 24
NOTES | continued
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
$50,000, major medical payments in excess of $35,000 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:
<TABLE>
<CAPTION>
----------- --------- ----------
1995 1994 1993
----------- --------- ----------
<S> <C> <C> <C>
Premium income:
Direct premiums $10,060,324 9,687,078 9,852,738
Reinsurance assumed 677,928 676,912 753,845
Reinsurance ceded (2,895,657) (2,372,184) (2,601,126)
----------- --------- ---------
Net premium income $ 7,842,595 7,991,806 8,005,457
=========== ========= =========
Benefits and claims:
Reinsurance assumed $ 655,789 668,409 742,055
=========== ========= =========
Reinsurance ceded $ 1,475,011 2,852,487 1,849,875
=========== ========= =========
</TABLE>
NOTE 5 - INCOME TAXES
Effective January 1, 1993, the Company changed its method of accounting for
income taxes from the deferred method to the asset and liability method, as
required by Statement of Financial Accounting Standards No. 109, "Accounting
for Income Taxes" (SFAS No. 109). As permitted by the new rules, prior years'
financial statements have not been restated. The cumulative effect of the
adoption of SFAS No. 109 as of January 1, 1993 was to increase 1993 net
earnings by $260,000.
24
<PAGE> 25
NOTES | continued
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, 1995 and 1994 is composed of the following:
<TABLE>
<CAPTION>
-----------------------------------
1995 1994
---------- ----------
<S> <C> <C>
Deferred tax assets:
Fixed maturities available for sale $ - 1,075,848
Deferred policy acquisition costs-tax 1,053,365 935,230
Life insurance reserves 4,107,971 3,856,145
Unearned mortality and expense charges 709,805 567,720
Postretirement health benefits liability 111,621 105,713
Alternative minimum tax credit carryforward 329,192 329,192
Other, net 33,156 38,112
---------- ---------
Total deferred tax assets 6,345,110 6,907,960
Valuation allowance (250,000) (600,000)
---------- ---------
Net deferred tax assets 6,095,110 1,357,312
---------- ---------
Deferred tax liabilities:
Fixed maturities available for sale 826,425 -
Deferred policy acquisition costs-financial statements 8,329,465 7,389,186
Due and unpaid premiums 66,425 273,984
Other, net 13,710 2,101
---------- ---------
Total deferred tax liabilities 9,236,025 7,665,271
---------- ---------
Net deferred tax liability $3,140,915 1,357,311
========== =========
</TABLE>
The Company has established a valuation allowance for deferred tax assets of
$250,000 in 1995 and $600,000 in 1994 of which $300,000 was recorded through
equity due to the initial establishment of the deferred tax asset associated
with unrealized losses on available-for-sale securities. The valuation
allowance established through equity in 1994 was taken down through equity in
1995 as a result of an increase in the value of the securities.
SFAS No. 109 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, 1995 was $4,203,000. The
balance in the "shareholders' surplus" account at December 31, 1995 was
$28,400,000. The Company does not anticipate any of the "policyholders'
surplus" account becoming taxable in the foreseeable future.
25
<PAGE> 26
NOTES | continued
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:
<TABLE>
<CAPTION>
----------- --------- --------
1995 1994 1993
----------- --------- --------
<S> <C> <C> <C>
Federal income tax expense at
statutory rate $1,864,609 1,537,189 929,953
Special deductions available to small
life insurance companies (610,107) (560,305) (546,737)
Alternative minimum taxes - - 88,520
Net losses (gains) of subsidiaries not
currently includable (64,054) (30,802) (3,552)
Tax rate differential 84,214 147,983 (223,942)
Surtax exemption (34,481) (27,675) (47,864)
Other, net 16,403 22,554 22,277
----------- --------- --------
Total federal income taxes $1,256,584 1,088,944 218,655
========== ========= =======
</TABLE>
NOTE 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 pays all
benefits on a current basis and the plan is not funded.
On January 1, 1993, the Company adopted Statement of Financial Accounting
Standards No. 106 "Employers' Accounting for Postretirement Benefits Other than
Pensions" (SFAS No. 106). The cumulative effect of this change in accounting
resulted in a charge to earnings net of tax of $263,000. The components of the
net periodic postretirement benefit cost for the years ended December 31 are as
follows:
<TABLE>
<CAPTION>
------- ------ ------
1995 1994 1993
------- ------ ------
<S> <C> <C> <C>
Service cost $ 8,124 9,770 8,669
Interest cost 22,000 21,376 21,710
Amortization of unrecognized gain (997) - -
------- ------ ------
Net periodic postretirement benefit cost $29,127 31,146 30,379
======= ====== ======
</TABLE>
26
<PAGE> 27
NOTES | continued
The following table sets forth the plan's funded status reconciled with the
amount shown in the Company's statement of financial position at December 31,
1995 and 1994:
<TABLE>
<CAPTION>
---------------------------------
1995 1994
--------- --------
<S> <C> <C>
Accumulated postretirement benefit obligation:
Retirees $(151,075) (231,709)
Other active participants (103,805) (61,129)
--------- -------
Accumulated postretirement benefit
obligation in excess of plan assets (254,880) (292,838)
Unrecognized net loss (gain) (73,417) (18,083)
--------- --------
Accrued postretirement benefit cost $(328,297) (310,921)
========= =======
</TABLE>
The postretirement benefit obligation was determined by application of the
terms of the plan using relevant actuarial assumptions. Health care costs are
projected to increase at annual rates ranging from 10% in 1995 down to 6% in
2000 and thereafter. A 1% annual increase in these assumed cost trend rates
would increase the accumulated postretirement benefit obligation at December
31, 1995 by approximately $12,000 and the service and interest cost components
of the net periodic postretirement benefit cost for 1995 by approximately
$1,400. The assumed discount rate used in determining the accumulated
postretirement obligation was 7.25% at December 31, 1995 and 8.50% at December
31, 1994.
NOTE 7 - TRANSACTIONS WITH AFFILIATES
Cotton States Mutual Insurance Company, through its wholly owned subsidiary,
Shield Insurance Company, controls approximately 40% of the Company's
outstanding common stock. Most officers and directors of the Company hold
similar positions with Cotton States Mutual.
Certain general expenses are allocated to the Company by Cotton States Mutual.
These expenses, such as salaries, advertising, rents, etc., represent the
Company's share of expenses initially paid by Cotton States Mutual and are
allocated based on specific identification or, if undeterminable, generally on
the basis of each company's premium income. Expenditures allocated to the
Company amounted to $1,801,344 in 1995, $1,790,633 in 1994 and $1,737,914 in
1993. During 1995, 1994 and 1993, premiums earned on group policies with Cotton
States Mutual and its agents were $1,576,074, $1,821,114 and $1,616,085,
respectively. Premiums on the Cotton States Mutual policies were based on
actual claims experience plus an expense and profit allowance of 10%. As of
December 31, 1994, the Company's noninterest-bearing receivable from Cotton
States Mutual amounted to $599,032. At December 31, 1995, the Company owed
Cotton States Mutual $690,910.
Included in other assets are deferred software costs totaling approximately
$464,000 and $1,204,000 in 1995 and 1994, respectively. The deferred software
costs relate to various system development projects of the Company and Cotton
States Mutual and are being amortized over five years. Rent, for use of the
software, of approximately $644,000, $732,000 and $732,000 in 1995, 1994 and
1993, respectively, is being charged to Cotton States Mutual and Shield. The
Company recorded amortization expense of approximately $625,000 in 1995, 1994
and 1993, respectively, relating to deferred software costs.
Certain directors of the Company are either directors or advisory directors of
Gold Kist Inc. However, Gold Kist has no equity ownership in the Company.
27
<PAGE> 28
NOTES | continued
NOTE 8 - STOCK OPTIONS
The Company has an incentive stock option plan for the Company's officers and
key employees. Under the plan, options are granted to purchase up to 500,000
shares of the Company's stock at a per share price of not less than 100% of
fair market value at date of grant. A summary of options follows:
<TABLE>
<CAPTION>
--------------------------------------------------------------------
1995 1994 1993 Option price
------- -------- -------- ------------
<S> <C> <C> <C> <C>
Shares under option 67,912 74,740 240,648 $4.45 - 6.20
Options exercisable 67,912 74,740 240,648 $4.45 - 6.20
Options exercised 6,828 150,280 - $4.45 - 6.20
======= ======= ============
</TABLE>
NOTE 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 earnings and stockholders' 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, 1995 is as follows:
<TABLE>
<CAPTION>
----------- --------- ---------
1995 1994 1993
----------- --------- ---------
<S> <C> <C> <C>
Statutory net earnings $ 2,147,387 748,352 1,551,994
=========== ========== ==========
Statutory stockholders' equity $21,057,615 18,799,523 18,545,325
=========== ========== ==========
</TABLE>
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 stockholders are further limited by the Georgia
Insurance Code to unassigned statutory surplus, which at December 31, 1995 was
approximately $18,000,000. The excess of retained earnings, determined in
accordance with generally accepted accounting principles, over unassigned
statutory surplus is not available for payment of dividends. The Company may
pay a dividend amounting to $2,147,387 in 1996 without approval.
28
<PAGE> 29
NOTES | continued
NOTE 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.
29
<PAGE> 30
INDEPENDENT AUDITORS' REPORT
TO THE BOARD OF DIRECTORS AND STOCKHOLDERS OF 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, 1995
and 1994, and the related consolidated statements of earnings, stockholders'
equity and cash flows for each of the years in the three-year period ended
December 31, 1995. 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 generally accepted auditing
standards. 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, 1995 and 1994, and the
results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 1995, in conformity with generally
accepted accounting principles.
As described in note 2, effective January 1, 1994, the Company changed its
method of accounting for certain investment securities. As described in notes 5
and 6, effective January 1, 1993, the Company changed its method of accounting
for income taxes and post-retirement benefits other than pensions.
February 23, 1996
/s/ KPMG Peat Marwick L.L.P.
- ---------------------------
KPMG Peat Marwick L.L.P.
30
<PAGE> 31
MANAGEMENT'S REPORT TO
STOCKHOLDERS
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
generally accepted accounting principles and, where appropriate, are based on
management's best estimates and judgements. Other financial data about the
Company contained in this annual report is consistent with that presented in
the consolidated financial statements.
The Company's consolidated financial statements have been audited by
independent auditors, KPMG Peat Marwick LLP. Their role is to audit the
consolidated financial statements in accordance with generally accepted
auditing standards and render an independent and professional opinion on
management's consolidated financial statements. The auditors' report on the
Company's consolidated financial statements appears above.
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.
J. RIDLEY HOWARD GARY W. MEADER
PRESIDENT AND CHIEF EXECUTIVE OFFICER CHIEF FINANCIAL OFFICER
31
<PAGE> 32
The following is a summary of the quarterly results of operations for the three
years ended December 31, 1995:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------
1995 Quarter ended
March 31 June 30 September 30 December 31
------------- ---------- ------------ --------------
<S> <C> <C> <C> <C>
Premium income $ 1,906,915 1,845,851 1,862,046 2,227,783
Mortality and expense charges earned (1) 1,614,811 1,704,283 1,941,909 1,957,943
Net investment income, realized
investment gains and other income 2,069,235 2,012,850 2,129,451 2,602,499
------------ --------- --------- ---------
Total income (1) $ 5,590,961 5,562,984 5,933,406 6,788,225
------------ --------- --------- ---------
Benefits and expense (1) $ 4,135,594 4,204,056 4,605,037 5,603,434
------------ --------- --------- ---------
Net earnings $ 1,048,446 1,021,489 1,022,798 978,138
=================================================================
Earnings per share of common stock $ .31 .30 .30 .29
=================================================================
</TABLE>
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------
1994 Quarter ended
March 31 June 30 September 30 December 31
------------ ------------ -------------- --------------
<S> <C> <C> <C> <C>
Premium income $ 2,058,010 1,829,691 1,638,554 2,465,551
Mortality and expense charges earned 1,698,331 1,585,543 1,719,713 2,133,136
Net investment income, realized
investment gains and other income 1,700,648 1,837,276 1,817,106 2,242,106
------------ --------- --------- ---------
Total income $ 5,456,989 5,252,510 5,175,373 6,840,793
------------ --------- --------- ---------
Benefits and expenses $ 4,256,457 3,617,000 4,349,394 6,110,846
------------ --------- --------- ---------
Net earnings $ 927,770 1,151,810 620,918 602,526
=================================================================
Earnings per share of common stock $ .29 .35 .19 .18
=================================================================
</TABLE>
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------
1993 Quarter ended
March 31 June 30 September 30 December 31
------------ ------------- -------------- --------------
<S> <C> <C> <C> <C>
Premium income $ 1,891,300 1,959,002 1,846,888 2,308,267
Mortality and expense charges earned 1,284,010 1,407,124 1,434,849 1,403,967
Net investment income, realized
investment gains and other income 1,762,072 1,737,035 1,648,667 2,123,493
------------ --------- --------- ---------
Total income $ 4,937,382 5,103,161 4,930,404 5,835,727
------------ --------- --------- ---------
Benefits and expenses $ 3,912,265 4,458,024 4,084,601 5,694,774
------------ --------- --------- ---------
Net earnings $ 879,878 543,411 597,633 414,433
=================================================================
Earnings per share of common stock $ .27 .17 .18 .13
=================================================================
</TABLE>
The fourth quarter results for the three years include participation in
federally sponsored group pools as follows:
<TABLE>
<CAPTION>
1995 1994 1993
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Premiums $ 677,928 676,912 753,845
------------------------------------------------
Benefits $ 655,789 668,409 742,055
================================================
</TABLE>
See previous discussion on Results of Operations.
(1) Differs from amounts previously reported due to reclassifications
32
<PAGE> 33
ITEM 9. DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.
NONE.
33
<PAGE> 34
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY.
IDENTIFICATION OF DIRECTORS
Each director is elected to hold office for a term of three years or
until his successor has been duly elected and has qualified or until he attains
the age of 72.
TERMS EXPIRING 1996 ANNUAL MEETING-NOMINATED FOR RE-ELECTION
- --------------------------------------------------------------------------------
GAYLORD O. COAN
Director Since 1995
Age 60
Mr. Coan is the Chief Executive Officer of Gold Kist Inc., where he also serves
as the Chairman of the Management Executive Committee. Mr. Coan is a member of
the Compensation Committee and Audit Committee of the Board of Directors of the
Company. Mr. Coan serves on the boards of SunTrust Banks of Georgia, Inc.,
SunTrust Bank, Atlanta, Archer- Daniels-Midland Company, Georgians for Better
Transportation, Golden Poultry Company, and Alfred C. Toepfer International of
Hamburg, Germany.
- --------------------------------------------------------------------------------
CHAMPNEY A. MCNAIR
Director Since 1987
Age 71
Mr. McNair is a retired banker. Mr. McNair was Executive Vice President, Chief
Financial Officer and Director of SunTrust Banks, Inc., prior to December,
1985. Mr. McNair is Chairman of the Investment Committee and serves as a
member of the Executive Committee of the Board of Directors of the Company.
Mr. McNair also serves as Trustee, STI Classic Fund, Inc., an investment
company which is registered under the Investment Company Act of 1940.
- --------------------------------------------------------------------------------
E. JENNER WOOD, III
Director Since 1991
Age 44
Mr. Wood is an Executive Vice President, Trust and Investment Services, of
SunTrust Banks, Inc. Mr. Wood was an 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 serves as a
director of Oxford Industries.
34
<PAGE> 35
- --------------------------------------------------------------------------------
TERMS EXPIRING 1997 ANNUAL MEETING
- --------------------------------------------------------------------------------
WILLIAM W. GASTON, III
Director Since 1973
Age 69
Mr. Gaston is Chairman of the Board of Directors of the Company. Mr. Gaston
retired as the Chief Executive Officer of Gold Kist Inc., effective December
31, 1988, and was President of Gold Kist Inc., prior to July 1, 1984. Mr.
Gaston is Chairman of the Executive Committee and serves as a member of the
Compensation Committee and the Investment Committee of the Board of Directors
of the Company. Mr. Gaston also serves as a director of Trust Company of
Georgia, SunTrust Bank, Atlanta, Golden Poultry Company, inc., Alfred C. Toefer
International, Gaston Development Company, Inc., Gaston & Gaston, and Gaston
Properties, Inc.
- --------------------------------------------------------------------------------
ROBERT C. McMAHAN
Director Since 1987
Age 55
Mr. McMahan is 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 Compensation Committee and serves as a
member of the Executive Committee of the Board of Directors of the Company.
Mr. McMahan also serves as a director of First Union National Bank of Georgia,
First Southern Bank, Nova Financial Corporation, Legacy Homes, Inc., and Golden
Point Group, Inc.
- --------------------------------------------------------------------------------
THOMAS A. HARRIS
Director Since 1995
Age 47
Mr. Harris is the President and Chief Executive Officer of Merchant Capital
Investments, Inc., a Montgomery, Alabama investment and merchant banking firm.
Mr. Harris is a member of the Investment Committee and Audit Committee of the
Board of Directors of the Company. Mr. Harris also serves on the Board of
Directors of Corral Southeast, American Chalkboard Company, Evergreen
Industries and MWC Developers.
- --------------------------------------------------------------------------------
35
<PAGE> 36
TERMS EXPIRING 1998 ANNUAL MEETING
================================================================================
J. RIDLEY HOWARD
Director Since 1989
Age 48
Mr. Howard is President and Chief Executive Officer of the Company, Cotton
States Mutual Insurance Company and Shield Insurance Company. 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 and Investment
Committee of the Board of Directors of the Company.
================================================================================
F. ABIT MASSEY
Director Since 1965
Age 68
Mr. Massey is Chairman of the Board of Directors of Gainesville Bank and Trust
and is Executive Director of Georgia Poultry Federation, Inc., a trade
association working to improve the competitive position of the Georgia poultry
industry. Mr. Massey is a member of the Investment Committee and Audit
Committee of the Board of Directors of the Company.
================================================================================
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.
OTHER INFORMATION ABOUT THE BOARD AND ITS COMMITTEES
During 1995, 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 was a member. The Board of Directors has
four standing committees. Certain information regarding the function of the
Board's committees, their present membership, and the number of meetings held
by each committee during 1994 is presented below.
AUDIT COMMITTEE
The Audit Committee annually reviews and recommends to the Board of
Directors the firm to be engaged as independent auditors of the Company for the
next calendar year, reviews the plan and results of the audit engagement with
the independent auditors, inquires as to the adequacy of the Company's internal
accounting controls, and considers each professional service provided by the
independent auditors and whether the providing of each service impairs the
independence of the auditors. Gary W. Meader participated in the Audit
Committee meetings during the year ended December 31, 1995. During 1995, 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
1995, the Compensation Committee held two meetings.
36
<PAGE> 37
INVESTMENT COMMITTEE
The Investment Committee reviews the Company's investments and advises
the Board of Directors with respect to such investments. Gary W. Meader
participated in the Investment Committee meetings during the year ended
December 31, 1995. During 1995, 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. Gary W. Meader participated in the
Executive Committee Meetings during the year ended December 31, 1995. During
1995, 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:
<TABLE>
<CAPTION>
YEAR ELECTED
NAME AGE AS AN OFFICER POSITION OR OFFICE
---- --- ------------- ------------------
<S> <C> <C> <C>
J. Ridley Howard 48 1984 President
Gary W. Meader 49 1976 Senior Vice President/Treasurer/
Chief Financial Officer
Robert L. Fincher 53 1979 Senior Vice President
L. B. Holcombe 64 1984 Senior Vice President
</TABLE>
Each of the foregoing executive officers has been an officer with the
Company or its affiliates, Mutual and Shield, during the previous five years.
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.
37
<PAGE> 38
ITEM 11. EXECUTIVE COMPENSATION
CASH COMPENSATION
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG TERM COMPENSATION
----------------------
ANNUAL COMPENSATION
------------------- SHARES
NAME AND RESTRICTED UNDERLYING
PRINCIPAL POSITION YEAR SALARY BONUS STOCK AWARDS(#) OPTIONS(#)
- ------------------ ---- ------ ----- --------------- ----------
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
J. Ridley Howard, CEO 1995 $30,200 $30,800 77,140(2) --
1994 $25,200 $ 3,960 -- --
1993 $23,400 $ 5,760 -- 18,011 (1)
</TABLE>
Mr. Howard's salary is prorated among the Company, Mutual and Shield
based upon the premium income of each entity.
(1) Adjusted for the five for four stock split that occurred on October 2,
1995
(2) The restricted stock holdings are subject to the approval of the
Performance Share Awards Plan of the Company at the 1995 annual meeting of the
shareholders. The aggregate restricted stock holdings at the end of 1995 for
Mr. Howard were 10,714 shares with a value of $96,426, based upon the value of
the Company's common stock at the end of 1995. Dividends on stock awards are
paid at the same rate as paid to all share owners. All restrictions will lapse
and the shares will vest between April 24, 1998 and 2002. The shares awarded
have been adjusted, as necessary, to reflect the 5 for 4 stock split that
occurred on October 2, 1995.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
AND
FY-END OPTION VALUES
The following table shows stock options exercises by the named
executive officer during 1995, 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,
1995. 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.
<TABLE>
<CAPTION>
Number of Value of
Unexercised Unexercised
Number of Value Options Options at In-the-Money
Shares Realized 12/31/95 12/31/95
Acquired on Upon Exercisable/ Exercisable/
Name Exercise Exercise Unexercisable(1) Unexercisable(1)
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
J. Ridley Howard 18,011/0 $62,138/$0
</TABLE>
(1) Adjusted for the five for four stock split that occurred on October 2, 1995
38
<PAGE> 39
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 as adopted, was amended and restated effective January 1,
1989 in order to bring it into compliance with the Tax Reform Act of 1986. The
IRS made a favorable determination for continued qualification, approving the
amended Plan on January 5, 1995.
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 10 years of employment)
in which the earnings are highest. Age 65 retirement benefit is derived as the
sum of (a) the product of the number of years of service times .85% of average
earnings and (b) 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 85. If the
employee has not obtained 85 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 or attains age 55.
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 effected as a result of
amendments to the Internal Revenue Code of 1986, as amended ("IRC"). 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.
39
<PAGE> 40
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
<TABLE>
<CAPTION>
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
-- -- -- --
<S> <C> <C> <C> <C>
$100,000 $21,559 28,745 35,932 43,118
$120,000 26,559 35,412 44,265 53,118
$140,000 31,559 42,079 52,598 63,118
$160,000 36,559 48,745 60,932 73,118
$180,000 41,559 55,412 69,265 83,118
$200,000 46,559 62,079 77,598 93,118
$250,000 59,059 78,745 98,432 118,118
$300,000 71,559 95,412 119,265 143,118
</TABLE>
The benefits reflected in the preceding table are in addition to an
employee's social security benefits.
The estimated annual retirement benefits under the Plans for all
executive officers of the Company as a group from the participating companies
aggregate $408,661. This estimate assumes no change from 1994 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.
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 that 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 matches the employees contribution up to 6% of their
compensation based on the return on equity for all 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 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.
40
<PAGE> 41
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 CSMRI (the
"ISO Plan"). During 1995, no options were granted under the ISO plan.
During 1995, 6,828 options were exercised pursuant to the ISO Plan.
At December 31, 1995, options to purchase 67,912 shares at $5.55 per share were
outstanding.
As of December 31, 1995, the following executive officers held
options with regard to the stated number of shares:
<TABLE>
<CAPTION>
Number of
Name Options
--------------------- -----------
<S> <C>
J. Ridley Howard 18,011
Gary W. Meader 14,008
Robert L. Fincher 12,607
L. B. Holcombe 13,507
</TABLE>
DIRECTORS' DISCOUNTED STOCK OPTION PLAN
On April 24, 1995, the Board of Directors adopted, subject to
approval by the Company's shareholders, the 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. The Board believes the DSOP will be
beneficial to the Company and its shareholders by encouraging and enabling
non-employee directors to have personal financial stake in the Company, in
addition to emphasizing their common interest with the shareholders in
increasing the value of the Common Stock in the long term.
If approved by the Company's shareholders, the DSOP will provide for
automatic yearly grants of options to purchase shares of Common Stock 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
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 the irrevocable election to
participate in the DSOP.
The number of shares of Common Stock 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 on the date of
grant, minus the option exercise price. The fair market value of the Common
Stock 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, on the date the option is granted, to be paid in
cash by the director upon exercise. All options granted under the DSOP will
expire 10 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.
41
<PAGE> 42
A total of 150,000 shares of Cotton States Life Insurance Company
common stock is reserved for issuance under the Plan (subject to adjustment for
subsequent stock splits, stock dividends and certain other changes in the
Common Stock). Upon the exercise of an option, the Company will issue
authorized but unissued shares. If an option issued under the Plan is
terminated or cancelled without having been exercised, the share which were not
purchased thereunder will again become available for issuance under the Plan.
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 outstanding as a result of a stock split
or stock dividend, recapitalization, merger, consolidation, or other similar
corporate change.
PERFORMANCE SHARE AWARDS PLAN
On April 24, 1995 the Board of Directors adopted, subject to approval
by the Company's shareholders, the 1995 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 the Company's behalf, to encourage such
employees to remain with the Company, and to provide them with an ownership
interest in the Common Stock. The Board believes the PAR Plan will be
beneficial to the Company and its shareholders by encouraging and enabling
employees to have personal financial stake in the Company.
If approved by the Company's shareholders, the PAR Plan would
authorize the Compensation Committee of the Board of Directors to grant awards
of shares of Common Stock of the Company to regular 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, except that the Compensation Committee may provide for a
partial payment where it determines that an exception is necessary of
appropriate.
An aggregate of 150,000 shares of Common Stock will be 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. In the event of a change of
control of the Company, as defined in the PAR Plan, all performance share
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.
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. Four officers are
reimbursed for country club dues. The Company, Mutual and Shield are allocated
these expenses on the same formula on which salaries are prorated. The total
cost of these expenses does not exceed 10% of any officer's cash compensation.
42
<PAGE> 43
COMPENSATION OF DIRECTORS
During 1995, no director of the Company received any remuneration
from the Company in his capacity as a director except for fees and
reimbursement for expenses incurred in connection with attending directors' and
committee meetings. No director received cash compensation in excess of
$17,850 for his services as a director during 1995. Each director, other than
William W. Gaston, III and J. Ridley Howard, is paid an annual stipend of
$5,000. Mr. Gaston received an annual stipend of $10,000 in 1995. Mr. Howard
did not receive an annual stipend in 1995. In addition, each director was paid
$700 plus travel expenses for each meeting of directors and $550 for each
committee meeting of directors attended. Each committee member receives an
additional $2,000 as an annual stipend and each committee chairman receives
$3,500 as an annual stipend. The aggregate directors' fees for 1995 totaled
$70,920. 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 $4,000 annually up to 15
years after the date of retirement.
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, 1995.
<TABLE>
<CAPTION>
Amount and Nature of Percent
Name and Address Beneficial Ownership of Class
- ---------------- -------------------- --------
<S> <C> <C>
Shield Insurance Company 1,372,632 40.4
244 Perimeter Center Parkway
Atlanta, Georgia 30346
Marvin Schwartz 337,625 9.9
605 Third Avenue
New York, New York 10158
</TABLE>
43
<PAGE> 44
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 January 1, 1996.
All shares are owned outright without shared voting and investment power except
as set forth below.
<TABLE>
<CAPTION>
AMOUNT AND NATURE OF
NAME OF BENEFICIAL OWNER BENEFICIAL OWNERSHIP PERCENT OF CLASS(1)
- ------------------------ -------------------- ----------------
DIRECTORS
- ---------
<S> <C> <C>
Gaylord O. Coan ______ (2) N/A
William W. Gaston, III 22,518 N/A
Thomas A. Harris 100 (3) N/A
J. Ridley Howard 13,388 (4) N/A
F. Abit Massey 6,805 (5) N/A
Robert C. McMahan 125 (6) N/A
Champney A. McNair 625 N/A
E. Jenner Wood, III 750 N/A
EXECUTIVE OFFICERS
- ------------------
Gary W. Meader 10,799 (7) N/A
Robert L. Fincher 6,010 (8) N/A
L. B. Holcombe 3,800 (9) N/A
All Officers and Directors as a Group
(17 persons) 75,006 (10) 2.21
</TABLE>
- -----------------------------
(1) Less than 1% not applicable.
(2) Shares acquired after December 31, 1995. Does not include options to
acquire 195 shares granted under the DSOP.
(3) Shares acquired after December 31, 1995. Does not include options to
acquire 445 shares granted under the DSOP.
(4) Does not include either options to acquire 18,011 shares or 10,714
shares awarded under the PAR plan that have not vested.
(5) Does not include options to acquire 959 shares granted under the DSOP.
(6) Does not include options to acquire 540 shares granted under the DSOP.
(7) Does not include either options to acquire 14,008 shares or 3,168
shares awarded under the PAR plan the have not vested.
(8) Does not include either options to acquire 12,607 shares or 1,526
shares awarded under the PAR plan that have not vested.
(9) Does not include either options to acquire 13,507 shares or 2,586
shares awarded under the PAR plan that have not vested.
(10) Does not include either options to acquire 67,912 shares, which would
increase the percentage of outstanding shares for all officers and
directors as a group of 4.21%, or 22,137 shares awarded under the PAR
plan that have not vested. Also does not include options to acquire
2,139 shares granted under the DSOP.
44
<PAGE> 45
CHANGES IN CONTROL
None.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
TRANSACTIONS WITH MANAGEMENT AND OTHERS
Shield, which is wholly owned by Mutual, owns 1,372,632 shares or
40.4% of the outstanding Common Stock of the Company. See Item 12. During
1995, premiums earned on group policies with Mutual were $1,576,074. Premiums
on Mutual's policies were based on actual claims experience plus an expense and
profit allowance of 10%.
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 $1,821,022 in 1995. See Item 1.
Gaylord O. Coan, a director of the Company, is the President and CEO
of Gold Kist Inc. (Gold Kist). 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 Banks, Inc. SunTrust Banks, Inc., received
fees from the Company in 1995 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 1995 for investment and custodial services.
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 have been incorporated by the reference in Part II, Item 8 of this
report:
Independent Auditors' Report
Consolidated Balance Sheets, December 31, 1995 and
1994
Consolidated Statements of Earnings, Years ended
December 31, 1995, 1994 and 1993
Consolidated Statements of Stockholders' Equity,
Years ended December 31, 1995, 1994 and 1993
Consolidated Statements of Cash Flows, Years ended
December 31, 1995, 1994 and 1993
Notes to Consolidated Financial Statements
45
<PAGE> 46
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, 1995
Schedule V - Supplementary Insurance Information,
December 31, 1995 and 1994 and Years ended December
31, 1995, 1994 and 1993
Schedule VI - Reinsurance, Years ended December 31,
1995, 1994 and 1993
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
10.1 Directors Discounted Stock Option Plan - Filed in S-8 Registration
January, 1996
10.2 Performance Shares Awards Plan - Filed in S-8 Registration January,
1996
21. Subsidiaries of the registrant. -
23. Consents of experts and counsel. -
All other exhibits are omitted as the required documents are
inapplicable.
27. Financial data schedule. (for SEC use only)
REPORT ON FORM 8-K
No report on Form 8-K was filed for the fourth quarter of 1994.
46
<PAGE> 47
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
Cotton States Life Insurance Company
Under date of February 23, 1996, we reported on the consolidated balance sheets
of Cotton States Life Insurance Company and subsidiaries (the "Company") as of
December 31, 1995 and 1994, and the related consolidated statements of
earnings, stockholders' equity and cash flows for each of the years in the
three-year period coded December 31, 1995, as contained in the 1995 annual
report to stockholders. Those consolidated financial statements and our
report thereon are incorporated by reference in the annual report on Form 10-K
for the year 1995. 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.
As described in note 2 in the consolidated financial statements, effective
January 1, 1994, the Company changed its method of accounting for certain
investment securities. As described in notes 5 and 6, effective January 1,
1993, the Company changed its method of accounting for income taxes and post
retirement benefits other than pensions.
Atlanta, Georgia /s/ KPMG Peat Marwick LLP
February 23, 1996 __________________________
KPMG Peat Marwick LLP
47
<PAGE> 48
Schedule I
Cotton States Life Insurance Company and Subsidiaries
Consolidated Summary of Investments
December 31, 1995
<TABLE>
<CAPTION>
AMOUNT AT WHICH
SHOWN IN THE
TYPE OF INVESTMENTS COST VALUE BALANCE SHEET
- ------------------- ----------- ---------- ------------------
<S> <C> <C> <C>
Fixed maturities, held for investment:
Bonds:
United States Government and government
agencies and authorities $ 1,987,280 1,986,000 1,987,280
Foreign governments 1,987,190 2,196,710 1,987,190
Public utilities 5,357,413 5,459,235 5,357,413
All other corporate bonds 11,300,585 11,834,821 11,300,585
------------ ----------- -----------
Total fixed maturities held for investment 20,632,468 21,476,766 20,632,468
Fixed maturities, available for sale:
Bonds:
United States Government and government
agencies and authorities 3,794,917 3,896,216 3,896,216
Public utilities 10,576,003 10,932,085 10,932,085
All other corporate bonds 53,408,293 55,499,871 55,499,871
------------ ----------- -----------
Total fixed maturities available for sale 67,779,213 70,328,172 70,328,172
First mortgage loans on real estate 5,424,472 5,601,569 5,424,472
Policy loans 6,675,954 6,675,954 6,675,954
Short-term investments 3,774,989 3,774,989 3,774,989
------------ ----------- -----------
Total investments $104,287,096 107,857,450 106,836,055
============ =========== ===========
</TABLE>
48
<PAGE> 49
Schedule V
Cotton States Life Insurance Company and Subsidiaries
Supplementary Insurance Information
December 31, 1995 and 1994
<TABLE>
<CAPTION>
DEFERRED POLICY
POLICY FUTURE CLAIMS AND
ACQUISITION POLICY BENEFITS
SEGMENT COSTS BENEFITS PAYABLE
------- ------------ -------- ------------
<S> <C> <C> <C>
At December 31, 1995
Individual $24,171,011 89,459,232 1,189,936
Group - 73,237 584,804
----------- ---------- ---------
Total 24,171,011 89,532,469 1,774,740
=========== ========== =========
At December 31, 1994
Individual $21,953,463 84,637,635 864,833
Group - 49,622 588,720
----------- ---------- ---------
Total $21,953,463 84,687,257 1,453,553
=========== ========== =========
</TABLE>
49
<PAGE> 50
Schedule V - Cont.
Cotton States Life Insurance Company and Subsidiaries
Supplementary Insurance Information
Years ended December 31, 1995, 1994 and 1993
<TABLE>
<CAPTION>
PREMIUM AMORTIZATION
INCOME AND NET BROKERAGE BENEFITS OF POLICY OTHER
OTHER INVESTMENT AND OTHER AND ACQUISITION OPERATING
CONSIDERATION INCOME (1) INCOME CLAIMS COSTS EXPENSES(2)
------------- ---------- ---------- ------- ------------ -----------
<S> <C> <C> <C> <C> <C> <C>
Year ended December 31, 1995
Individual insurance $12,237,178 7,161,989 8,936,276 1,475,963 3,093,231
Group Insurance 2,824,363 2,705,781 77,590
Brokerage and
other income 1,652,046 839,181
Unallocated corporate
expenses 1,420,099
----------- --------- --------- ---------- --------- ---------
Total $15,061,541 7,161,989 1,652,046 11,642,057 1,475,963 5,430,101
=========== ========= ========= ========== ========= =========
Year ended December 31, 1994
Individual insurance $11,537,153 6,179,015 8,289,418 1,134,555 3,183,650
Group Insurance 3,591,376 3,460,209 254,341
Brokerage and
other income 1,418,121 771,496
Unallocated corporate
expenses 1,240,028
----------- --------- --------- ---------- --------- ---------
Total $15,128,529 6,179,015 1,418,121 11,749,627 1,134,555 5,449,515
=========== ========= ========= ========== ========= =========
Year ended December 31, 1993
Individual insurance $ 9,520,663 5,866,889 8,212,436 1,317,787 2,697,866
Group Insurance 4,014,744 3,690,939 258,887
Brokerage and 1,404,378 769,807
other income
Unallocated corporate
expenses 1,201,942
----------- --------- --------- ---------- --------- ---------
Total $13,535,407 5,866,889 1,404,378 11,903,375 1,317,787 4,928,502
=========== ========= ========= ========== ========= =========
</TABLE>
(1) Net investment income is allocated to the insurance segments based upon the
relative cash flow of each segment. Net investment income includes
realized investment gains (losses).
(2) Expenses that can be directly charged to a segment are allocated to that
segment.
50
<PAGE> 51
Schedule VI
Cotton States Life Insurance Company and Subsidiaries
Reinsurance
Years ended December 31, 1995, 1994 and 1993
<TABLE>
<CAPTION>
PERCENTAGE
CEDED TO ASSUMED OF AMOUNT
GROSS OTHER FROM OTHER NET ASSUMED
AMOUNT COMPANIES COMPANIES(1) AMOUNT TO NET(1)
------ --------- ------------ ------ ----------
<S> <C> <C> <C> <C> <C>
Year ended December 31, 1995
Life insurance inforce $3,690,663,000 801,111,000 206,456,000 3,096,008,000 6.7
-------------- ----------- ----------- ------------- ----
Premiums:
Life insurance* $ 14,575,836 2,538,015 677,928 12,715,749
Accident/health insurance 2,703,434 357,642 - 2,345,792
-------------- ----------- ----------- -------------
Total $ 17,279,270 2,895,657 677,928 15,061,541
============== =========== =========== =============
Year ended December 31, 1994
Life insurance inforce $2,993,085,000 722,262,000 636,132,000 2,906,955,000 21.9
-------------- ----------- ----------- ------------- ----
Premiums:
Life insurance* $ 13,434,310 2,141,395 676,912 11,969,827
Accident/health insurance 3,389,491 230,789 - 3,158,702
-------------- ----------- ----------- -------------
Total $ 16,823,801 2,372,184 676,912 15,128,529
============== =========== =========== =============
Year ended December 31, 1993
Life insurance inforce $2,672,808,000 644,335,000 674,820,000 2,703,293,000 29.3
-------------- ----------- ----------- ------------- ----
Premiums:
Life insurance* $ 11,579,071 2,394,894 753,845 9,938,022
Accident/health insurance 3,803,617 206,232 - 3,597,385
-------------- ----------- ----------- -------------
Total $ 15,382,688 2,601,126 753,845 13,535,407
============== =========== =========== =============
</TABLE>
(1) All reinsurance assumed results from participation in federally sponsored
group pools.
*Includes mortality and expense charges earned on universal life contracts.
51
<PAGE> 52
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
William Wylie Gaston, III 2/28/96
- ------------------------------------
Chairman of Board of Directors
John Ridley Howard 2/28/96 Gary Warrington Meader 2/28/96
- ------------------------------------ -----------------------------------
President Treasurer,
Chief Financial and Accounting
Officer
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.
<TABLE>
<S> <C>
Gaylord O. Coan 2/28/96 Francis Abit Massey 2/28/96
- ------------------------------------ -----------------------------------
Director Director
William Wylie Gaston, III 2/28/96 Robert Chandler McMahan 2/28/96
- ------------------------------------ ------------------------------------
Director Director
Thomas A. Harris 2/28/96 Champney Adams McNair 2/28/96
- ------------------------------------ -----------------------------------
Director Director
John Ridley Howard 2/28/96 Edward Jenner Wood, III 2/28/96
- ------------------------------------ -----------------------------------
Director Director
</TABLE>
52
<PAGE>
<PAGE> 53
EXHIBIT 21
SUBSIDIARIES OF THE REGISTRANT
CSI was organized in the State of Georgia and is doing business in various
states under the name of CSI Brokerage Services, Inc.
CSMRI was organized in the State of Florida and is doing business in
various states under the name CSMRI.
53
<PAGE> 54
EXHIBIT 23
INDEPENDENT AUDITORS' CONSENT
The Board of Directors and Stockholders
Cotton States Life Insurance Company:
We consent to incorporation by reference in the Registration Statement (No.
33-30696) on Form S-8 of Cotton States Life Insurance Company and subsidiaries
of our reports dated February 23, 1996, relating to the consolidated balance
sheets of Cotton States Life Insurance Company and subsidiaries as of December
31, 1995 and 1994, and the related consolidated statements of earnings,
stockholders' equity, and cash flows, and the related schedules for each of the
years in the three-year period ended December 31, 1995, which reports appear or
are incorporated by reference in the December 31, 1995 annual report on Form
10-K of Cotton States Life Insurance Company.
As described in note 2 to the consolidated financial statements, effective
January 1, 1994, the Company changed its method of accounting for certain
investment securities. As described in notes 5 and 6, effective January 1,
1993, the Company changed its method of accounting for income taxes and
postretirement benefits other than pensions.
/s/ KPMG Peat Marwick LLP
KPMG PEAT MARWICK LLP
Atlanta, Georgia
March 27, 1996
<TABLE> <S> <C>
<ARTICLE> 7
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF COTTON STATES LIFE INSURANCE COMPANY FOR THE
FISCAL YEAR ENDED DECEMBER 31, 1995, AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-END> DEC-31-1995
<DEBT-HELD-FOR-SALE> 70,328,172
<DEBT-CARRYING-VALUE> 20,632,468
<DEBT-MARKET-VALUE> 21,476,766
<EQUITIES> 0
<MORTGAGE> 5,424,472
<REAL-ESTATE> 0
<TOTAL-INVEST> 106,836,055
<CASH> 1,721,911
<RECOVER-REINSURE> 1,885,779
<DEFERRED-ACQUISITION> 24,171,011
<TOTAL-ASSETS> 139,381,979
<POLICY-LOSSES> 91,307,209
<UNEARNED-PREMIUMS> 0
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 0
0
0
<COMMON> 3,602,775
<OTHER-SE> 36,084,262
<TOTAL-LIABILITY-AND-EQUITY> 139,381,979
15,061,541
<INVESTMENT-INCOME> 7,022,551
<INVESTMENT-GAINS> 139,438
<OTHER-INCOME> 1,652,046
<BENEFITS> 11,642,057
<UNDERWRITING-AMORTIZATION> 1,475,963
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