FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
Quarterly Report Under Section 13 or 15(d) of
the Securities Exchange Act of 1934
For the quarter ended September 30, 1997
Commission File Number 2-39729
COTTON STATES LIFE INSURANCE COMPANY
(Exact name of registrant as specified in its charter)
GEORGIA 58-0830929
(State or other jurisdiction of (I.R.S. Employer Identification Number)
incorporation or organization)
244 Perimeter Center Parkway, N. E., Atlanta, Georgia 30346
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (770) 391-8600
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding twelve months (or for such shorter period that the
Registrant was required to file such reports) and (2) has been subject to the
filing requirements for at least the past 90 days.
YES X NO______
The Registrant, as of September 30, 1997, has 4,267,343 shares of
common stock outstanding. All shares and per share amounts have been
retroactively restated to reflect the April 30, 1997 five for four stock
dividend.
PART I - CONSOLIDATED FINANCIAL STATEMENTS
The following consolidated statements have been prepared by management.
In management's opinion, all adjustments and certain reclassifications
necessary to a fair statement of position at September 30, 1997 and
December 31, 1996 and statement of results for the nine months ended
September 30, 1997 and 1996 have been made.
COTTON STATES LIFE INSURANCE COMPANY
Unaudited Consolidated Condensed Balance Sheets
September 30, 1997 and December 31, 1996
ASSETS 1997 1996
Investments
Fixed maturities, held for investment, at amortized
cost (market value $18,315,152 in 1997 and
$20,397,039 in 1996) $18,129,957 $20,245,783
Fixed maturities, available for sale, at market
(amortized cost $86,465,967 in 1997 and
$80,071,698 in 1996) 88,075,946 80,622,249
First mortgage loans on real estate 4,225,669 4,770,277
Policy loans 7,594,408 7,037,745
Short-term investments 4,374,791 2,250,551
Total investments 122,400,771 114,926,605
Cash 216,614 279,742
Accrued investment income 1,837,901 1,791,048
Accounts receivable, principally premiums 1,443,883 2,371,562
Amount due from reinsurers 2,708,432 2,027,229
Deferred policy acquisition costs 28,712,082 26,790,307
Refundable Federal Income Taxes 406,242 100,439
Other assets 1,139,516 537,255
$158,865,441 $148,824,187
LIABILITIES AND STOCKHOLDERS' EQUITY
Policy liabilities and accruals:
Future policy benefits $102,125,100 $96,935,660
Policy and contract claims 1,349,608 1,319,416
Deferred Federal income taxes 3,396,027 2,650,383
Other liabilities 4,489,350 5,004,876
Total liabilities 111,360,085 105,910,335
Stockholders' Equity:
Common Stock 4,503,096 4,503,096
Additional paid-in capital 1,283,745 1,283,969
Net unrealized gains on fixed maturities
available for sale 874,478 297,609
Retained earnings 41,976,718 37,964,849
Less treasury stock, at cost,(235,753 shares in
1997 and 236,376 in 1996) (1,132,681) (1,135,671)
Total stockholders' equity 47,505,356 42,913,852
$158,865,441 $148,824,187
COTTON STATES LIFE INSURANCE COMPANY
Unaudited Consolidated Summary of Earnings
<TABLE>
<S>
Nine months ended Three months end
September 30, September 30,
<C> <C> <C> <C>
1997 1996 1997 1996
Income:
<S> <C> <C> <C> <C>
Premium income $5,528,270 $4,334,934 1,969,344 $1,585,757
Mortality and expense charges earned 7,106,874 6,507,896 2,481,680 2,265,965
Investment income 6,013,521 5,663,378 2,022,011 1,912,940
Realized investment gains 50,505 105,776 2,244 51,130
Brokerage and other income 1,623,525 1,017,041 556,205 343,674
Total income 20,322,695 17,629,025 7,031,484 6,159,466
Benefits and expenses:
Life benefits and claims 7,969,595 7,265,548 2,861,374 2,635,763
A & H benefits and claims 182,496 110,100 50,692 42,438
Amortization of policy acquisition costs 2,014,582 1,825,233 796,050 591,252
Operating expenses 4,223,390 3,762,052 1,300,648 1,213,596
Total benefits and expenses 14,390,063 12,962,933 5,008,764 4,483,049
Earnings before income tax expense 5,932,632 4,666,092 2,022,720 1,676,417
Federal income taxes:
Current tax expense 935,613 781,333 333,244 236,874
Deferred tax expense 385,438 273,707 61,575 209,885
Total Federal income taxes 1,321,051 1,055,040 394,819 446,759
Net Earnings $4,611,581 $3,611,052 $1,627,901 $1,229,658
Earnings per share of common stock * $1.08 $0.85 $0.38 $0.29
Weighted average number of shares
used in computing earnings per share 4,266,763 4,256,938 4,266,763 4,256,938
* 1996 share and per share amounts have been adjusted for the April 30, 1997
five-for-four stock split.
</TABLE>
COTTON STATES LIFE INSURANCE COMPANY
Unaudited Consolidated Statements of Cash Flows
Nine months ended September 30, 1997 and 1996
1997 1996
Cash flows from operating activities:
Net Earnings $4,611,581 $3,611,052
Adjustments to reconcile net earnings to net
cash provided from operating activities:
Increase in policy liabilities and accruals 5,219,632 4,865,157
Increase in deferred policy acquisition costs (2,043,932) (1,932,665)
Change in Federal income taxes 79,635 353,056
Decrease (increase) in accounts receivable and
amounts due from reinsurers 246,476 (529,282)
Other, net (649,113) 444,969
Net cash provided from operating activities 7,464,279 6,812,287
Cash flows from investing activities:
Purchase of fixed maturities held for investments 0 (1,495,781)
Purchase of fixed maturities available for sale (12,577,589) (16,158,364)
Sale of fixed maturities available for sale 3,973,090 1,009,332
Proceeds from maturity and redemption of fixed
maturities held for investment 2,115,827 1,575,581
Proceeds from maturity and redemption of fixed
maturities available for sale 2,210,230 5,987,328
First mortgage loans originated (237,000) 0
Principal collected on first mortgage loans 781,608 531,278
Policy Loans, net (556,663) (317,726)
Other, net (515,724) 90,865
Net cash (used) in investing activities (4,806,221) (8,777,487)
Cash flows from financing activities:
Cash dividends paid (599,712) (477,197)
Proceeds from exercise of stock options 2,766 99,400
Net cash (used) by financing activities (596,946) (377,797)
Net increase (decrease) in cash and cash equivalents: $2,061,112 ($2,342,997)
Cash and cash equivalents:
Beginning of period 2,530,293 5,496,900
End of period $4,591,405 $3,153,903
MANAGEMENT'S DISCUSSION AND ANALYSIS OF CONSOLIDATED
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Liquidity and Capital Resources Operations
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
Since December 31, 1996, there has not been a material change in the mix or
credit quality of the Company's investment portfolio. All purchases have
been fixed maturities available for sale and over 95% of the holdings at
September 30, 1997 are rated "A" or better.
Mortgage Loans
The Company's mortgage loan policy stipulates that the Company will lend no
more than 80% of the value on residential loans and no more than 75% 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, Inc. ( a related party), and current mortgagees.
The geographic distribution of the loan portfolio as of September 30, 1997
and December 31, 1996 is:
No. of Loans Book Value
09/30/97 12/31/96 State 09/30/97 12/31/97
5 5 Alabama 264,437 313,697
6 6 Florida 424,444 443,165
71 81 Georgia 3,536,788 4,013,415
82 92 4,225,669 4,770,277
The Company has a large concentration of loans in Georgia. Because the
loan-to-value ratio on delinquent loans is 47%, 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.
Results of Operations
Premium Income
Total premium income was up 28% year to date and 24% for the third quarter of
1997. The increase is attributable to increased sales of the Company's new
guaranteed-issue simplified-issue and participating whole life policies.
The Company has contracted with over 1000 independent agents to market these
products across the Southeast. During 1997, the Company has expanded its
multi-line exclusive agency distribution system into Kentucky and Tennessee.
Individual accident and health premiums are flat when compared to 1996.
The Company has not written any new individual health premiums since 1988
and anticipates continued declines on this closed block of business.
Mortality and Expense Charges Earned
Universal Life contract deposits increased 6% year to date. Mortality and
expense charges earned on these deposits increased 9% year to date and 10% for
the third quarter. Mortality and expense charges earned on the Company's
payroll deduction universal life product continue to grow as new cases are
added and other inforce cases mature through re-enrollments. On an overall
annual basis, the Company expects increases in the 8% to 10% range. Annuity
contract deposits continue to decrease as the Company does not actively solicit
annuity business.
Investment Income
Investment income was up 6% over the year earlier quarter and year to date.
The increase is due to a larger investment portfolio and favorable market
conditions.
Brokerage and Other Income
Brokerage and other income increased 60% year to date and 62% for the third
quarter of 1997. As previously discussed in the Company's Annual Report to
Stockholders, CSI Brokerage Services, a subsidiary of the Company, in
conjunction with Cotton States Mutual Insurance Company, finalized a contract
to transfer management of Mutual's multi-peril crop and crop hail insurance to
Blakely Crop Hail, a Kansas based company. Through a brokerage agreement with
Blakely, CSI Brokerage Services will receive an override commission based on
premium volume generated by Cotton States Mutual's multi-line exclusive agents.
At September 30, 1997 approximately $478,000 of gross income has been realized
under this agreement. This equates to approximately $287,000 after tax or
$.07 per share. This agreement will continue to have a positive impact on
Company earnings for the remainder of 1997 when compared to previous quarters.
Excluding this effect, brokerage and other income is up 12% year to date which
is in line with the Company's expectations for both CSI Brokerage Services and
CS Marketing Resources, Inc. Both Companies receive override commissions from
other insurance carriers and their revenues may fluctuate based on the timing
of receipt of the overrides.
Benefits and Operating Expenses
Ordinary benefits as a percentage of premium income and mortality and
expense charges earned decreased 4% over the year earlier quarter and year
to date. Year to date traditional and universal life death benefits were
comparable to 1996 levels. The small amount of accident and health benefits
is due to the runoff of individual accident and health that the Company
ceased writing in 1988. Expenses (including amortization of policy acquisition
costs) as a percentage of premium income, mortality and expenses charges and
brokerage income decreased 1% from the year earlier quarter. Without the
effect of the additional brokerage commission previously discussed, the
percentage for the third quarter was flat. Continued emphasis on cost controls
enables the Company to keep this ratio relatively stable.
Federal Income Taxes
Current taxes are provided based on estimates of the projected effective
annual tax rate. Deferred taxes are provided on the basis of SFAS 109
adopted January 1, 1993.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
The Company is a defendant in various actions incidental to the conduct of
its business. The Company intends to vigorously defend the litigation and
while the ultimate outcome of these matters cannot be estimated with certainty,
management does not believe the actions will results in any material loss to
the Company.
Item 2. Changes in Securities
NONE
Item 3. Defaults Upon Senior Securities
NONE
Item 4. Submission of Matters to a Vote of Security Holders
NONE
Item 5. Other Information
NONE
Item 6. Exhibits and Reports on Form 8-K.
NONE
Pursuant to the requirements 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
Registrant
Date 11/12/97
Gary W. Meader
Chief Financial Officer/Treasurer
Date 11/12/97
William J. Barlow
Vice President/Controller
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<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> SEP-30-1997
<DEBT-HELD-FOR-SALE> 88,075,946
<DEBT-CARRYING-VALUE> 18,129,957
<DEBT-MARKET-VALUE> 18,315,152
<EQUITIES> 0
<MORTGAGE> 4,225,669
<REAL-ESTATE> 0
<TOTAL-INVEST> 122,400,771
<CASH> 216,614
<RECOVER-REINSURE> 2,708,432
<DEFERRED-ACQUISITION> 28,712,082
<TOTAL-ASSETS> 158,865,441
<POLICY-LOSSES> 102,125,100
<UNEARNED-PREMIUMS> 0
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 0
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0
0
<COMMON> 4,503,096
<OTHER-SE> 43,002,260
<TOTAL-LIABILITY-AND-EQUITY> 158,865,441
12,635,144
<INVESTMENT-INCOME> 6,013,521
<INVESTMENT-GAINS> 50,505
<OTHER-INCOME> 1,623,525
<BENEFITS> 8,152,091
<UNDERWRITING-AMORTIZATION> 2,014,582
<UNDERWRITING-OTHER> 4,223,390
<INCOME-PRETAX> 5,932,632
<INCOME-TAX> 1,321,051
<INCOME-CONTINUING> 4,611,581
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