<PAGE> 1
Securities and Exchange Commission
Washington, D. C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1998
Commission File Number 2-39729
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
COTTON STATES LIFE INSURANCE COMPANY
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
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)
</TABLE>
Registrant's telephone number, including area code: (404)39l-8600
Securities registered pursuant to Section 12(b) of the Act:
NONE
Securities registered pursuant to Section 12(g) of the Act:
EXEMPT-UNDER SECTION 12(g)(2)(G)
Indicate by check mark whether the registrant has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months and has been subject to the filing requirements for at
least the past 90 days.
YES X NO _____
Indicate by check mark if the disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ X ]
The aggregate market value of voting stock held by non-affiliates was
$52,956,663 based on the closing price of $12.50 February 1, 1999, as reported
on the NASDAQ National Market.
As of February 1, 1999, there were 6,370,918 shares of registrant's common stock
outstanding.
The Exhibit Index is located on Page 53.
The total number of pages in this document is 61.
<PAGE> 2
Cross-Reference Sheet
<TABLE>
<CAPTION>
Caption Page No.
------- --------
<S> <C> <C>
ITEM 1. BUSINESS ............................................................................................. 3
ITEM 2. PROPERTIES ........................................................................................... 8
ITEM 3. LEGAL PROCEEDINGS .................................................................................... 8
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS .................................................. 8
ITEM 5. MARKET FOR THE COMPANY'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS .................................................................................. 8
ITEM 6. SELECTED FINANCIAL DATA .............................................................................. 9
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS .................................................................. 10
ITEM 7a. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK .......................................................................................... 16
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA .......................................................... 18
ITEM 9. DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE ................................................. 42
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY ...................................................... 42
ITEM 11. EXECUTIVE COMPENSATION ............................................................................... 46
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT ........................................................................................... 51
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS ....................................................... 53
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES,
AND REPORTS ON FORM 8-K .............................................................................. 53
</TABLE>
2
<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, guaranteed- simplified issue life insurance and
individual annuities. The Company wrote group insurance only for its employees
and agents through January 1, 1996. The Company wrote individual annuities
through December 31, 1998.
In July of 1989, the Company formed CSI Brokerage Services, Inc.
("CSI"). CSI brokers insurance products for the Company's exclusive agents not
offered by the Company's affiliated property and casualty companies.
In November of 1989, the Company acquired 60% of the outstanding common
stock of Cotton States Marketing Resources, Inc. ("CSMR"). During 1992, the
Company acquired the remaining 40% of CSMR stock. CSMR brokers through the
Company's exclusive agents other insurance companies' life and accident and
health products not underwritten by the Company.
3
<PAGE> 4
FINANCIAL INFORMATION ABOUT INDUSTRY SEGMENTS
The Company's operations can be grouped into three major segments,
individual life insurance, guaranteed issue and simplified issue life insurance,
and brokerage operations. These segments are differentiated primarily by their
respective methods of distribution and the nature of related products, as the
Company's operations in each segment are concentrated within its southeastern
state geographic market. Individual life insurance products are distributed
through the Company's multi-line exclusive agents, guaranteed issue and
simplified issue products are distributed through independent agents as well as
exclusive agents, and brokerage operations all involve third party products
distributed through the Company's exclusive and independent agents.
<TABLE>
<CAPTION>
1998 1997 1996
----------- ----------- -----------
<S> <C> <C> <C>
Individual life insurance:
Premiums .............................. $ 5,572,243 5,426,473 5,212,243
Mortality and expense charges ......... 9,762,356 9,430,814 8,697,621
Net investment income ................. 8,461,988 7,860,143 7,471,977
Realized investment gains ............. 358,000 109,881 106,766
----------- ----------- -----------
Total revenue ............. 24,154,587 22,827,311 21,488,607
Policyholder benefits ................. 10,429,767 9,964,268 9,724,458
Operating expenses .................... 6,292,769 7,063,553 6,754,608
----------- ----------- -----------
Total benefits and expenses 16,722,536 17,027,821 16,479,066
----------- ----------- -----------
Operating profit ................ 7,432,051 5,799,490 5,009,541
----------- ----------- -----------
Guaranteed and simplified life insurance:
Premiums .............................. 3,794,585 1,922,379 613,178
Net investment income ................. 159,182 58,524 12,619
Realized investment gains ............. 6,735 818 180
----------- ----------- -----------
Total revenue ............. 3,960,502 1,981,721 625,977
Policyholder benefits ................. 2,317,006 1,107,883 399,070
Operating expenses .................... 890,787 388,653 249,938
----------- ----------- -----------
Total benefits and expenses 3,207,793 1,496,536 649,008
Operating profit ................ 752,709 485,185 (23,031)
----------- ----------- -----------
Brokerage:
Brokerage income ...................... 3,214,216 3,141,695 1,785,761
Investment income ..................... 165,878 137,733 81,172
----------- ----------- -----------
Total revenue ............. 3,380,094 3,279,428 1,866,933
Operating expenses .................... 1,006,605 1,047,407 695,943
----------- ----------- -----------
Operating profit ................ 2,373,489 2,232,021 1,170,990
----------- ----------- -----------
Combined operating profit ...................... 10,558,249 8,516,696 6,157,500
Group life insurance and individual
accident and health results ........... (172,906) (39,602) (34,346)
----------- ----------- -----------
Earnings before Federal income taxes ........... $10,385,343 8,477,094 6,123,154
=========== =========== ===========
</TABLE>
4
<PAGE> 5
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, participating whole
life, various supplemental riders including, but not limited to, accidental
death, disability waiver and guaranteed insurability, and disability income
riders. These products are sold by the Company's 272 multi-line exclusive agents
in Alabama, Florida, Georgia, Kentucky and Tennessee.
The Company offers its insurance through multi-line exclusive agents
who also write all lines of property and casualty insurance for Cotton States
Mutual Insurance Company ("Mutual") and its subsidiary, Shield Insurance Company
("Shield"). See Item 13 of this report for an explanation of the relationship
between the Company, Mutual and Shield. Because its agents write all major lines
of insurance, the Company's commission rates are usually less than the
prevailing industry rate. Multi-line exclusive agents are under contract to the
Company, Mutual and Shield, and are paid on a commission basis. The Company's
multi-line exclusive agents are located in the following states:
<TABLE>
<CAPTION>
Number of. Agents State
----------------- -----
December 31,
------------
1998 1997
---- ----
<S> <C> <C> <C>
48 46 Alabama
25 25 Florida
163 164 Georgia
26 21 Kentucky
10 5 Tennessee
--- ---
Total 272 261
=== ===
</TABLE>
Unless the need for a medical examination is indicated by the
application or an investigation, the Company writes individual life insurance
based on age without requiring blood and specimen in the following maximum
amounts:
<TABLE>
<CAPTION>
AGE GROUP MAXIMUM INSURANCE
--------- -----------------
<S> <C>
0-17 $100,000
18-45 74,000
46-50 50,000
51 and over 24,000
</TABLE>
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, 1998,
less than 2.7% 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.
5
<PAGE> 6
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, 1998, the
aggregate amount of individual life insurance in force ceded by the Company
under its various reinsurance treaties totaled $1,013,618,885.
GUARANTEED ISSUE AND SIMPLIFIED ISSUE WHOLE LIFE INSURANCE
The Company offers guaranteed issue and simplified issue whole life
insurance through its multi-line agency force and 1,900 independent agents. The
independent agents sell these products in all ten states in which the Company is
licensed.
Both plans are level-premium, cash value permanent life insurance
products issued from $2,500 to $25,000 face amounts. Both plans are frequently
used by individuals to cover final expenses. They are designed to be sold as
companion plans using a simple application and no medical exams or tests. If all
health questions can be answered "NO", the Simplified Issue Policy may be
issued. Otherwise, the Guaranteed Issue Policy will be issued.
Guaranteed Issue Whole Life is available for issue ages 46-80. The
death benefit in policy years one to three is limited to a return of premium
plus 10%. However, the full death benefit is payable in all years in case of
accidental death. After three years, the full death benefit is payable for any
cause of death.
Simplified Issue Whole Life is available for issue ages 0-80. The full
death benefit is payable from the issue date.
BROKERAGE
The Company owns two brokerage subsidiaries, CSI and CSMR. CSI provides
the Company with commission income from brokerage agreements with other property
and casualty insurance carriers. These carriers supply the Company's multi-line
crop agents with property and casualty products that the Company's affiliated
property and casualty companies do not underwrite, such as non-standard auto
insurance, crop hail insurance, multi-peril crop insurance, mobile home
insurance, poultry house insurance and flood insurance.
41% and 16% of the CSI's brokerage revenues come from the sale of
non-standard auto insurance through two carriers. 27% of CSI's revenue comes
from the sale of crop hail and multi-peril crop insurance through one carrier.
The contract with this carrier expires on June 30, 2006.
CSMR provides the Company with commission income from brokerage
agreements with other life and health insurance companies. These companies
supply the Company's multi-line agents with life and health products that the
Company does not choose to underwrite, such as individual major-medical
policies, impaired risk life insurance, first to die life insurance, group life
and health insurance. CSMR has contracted with 1,900 independent agents to write
the Company's guaranteed issue and simplified issue whole life insurance.
REGULATION
The Company, like other insurance companies, is subject to regulation
and supervision by the states in which it transacts business. The insurance laws
of these states confer upon supervisory authorities broad administrative powers
relating to (i) the regulation and revocation of licenses to transact business,
(ii) the regulation of trade practices, (iii) the licensing of agents, (iv) the
approval of the form and content of policies and advertising, (v) the depositing
of securities for the benefit of policyholders, (vi) the type and amount of
investments permitted, and (vii) the maintenance of specified reserves and
capital for the protection of policyholders. In general, insurance laws and
regulations are designed primarily to protect policyholders rather than
shareholders.
6
<PAGE> 7
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
113 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 the
actual time expended on each company's affairs. The Company and its subsidiaries
have 37 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.
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 policyholders.
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 may utilize
"account" selling. Account selling enables insureds to contact
one agent regarding their total insurance needs; and
3. The Company shares certain facilities, equipment and personnel
with Mutual and Shield. The Company believes that sharing
these expenses has a favorable impact on the ratio of expenses
to premium income and enables the Company to enjoy economies
of scale.
In order to keep pace with trends in the industry, the Company
introduces new products with premium rates and benefits that it believes are
competitive with the industry.
7
<PAGE> 8
ITEM 2. PROPERTIES
The Company, Mutual and Shield occupy offices located at 244 Perimeter
Center Parkway, Atlanta, Georgia. The building is owned by a general partnership
composed of Mutual and Gold Kist Inc. ("Gold Kist"). The Company has no
ownership interest in the partnership. The facility consists of a three-story
office building containing approximately 260,000 square feet of space of which
the Company, Mutual and Shield share approximately 90,000 square feet. The
Company believes that the facility is suitable to its business. Rental expense
is allocated to the Company based on its proportionate share of square footage
occupied.
ITEM 3. LEGAL PROCEEDINGS
The Company is a defendant in various actions incidental to the conduct
of its business. While the ultimate outcome of these matters cannot be estimated
with certainty, management does not believe the actions will result in any
material loss to the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
PART II
ITEM 5. MARKET FOR THE COMPANY'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
On January 1, 1999, there were approximately 1,625 stockholders of the
Company's common stock. The stock (symbol CSLI) is traded over-the-counter on
the NASDAQ National Market System. Price history as provided by NASDAQ and
dividends declared during the past two years are presented below:
<TABLE>
<CAPTION>
Stock Price(1) Dividend
High Low Declared
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
1998
First Quarter $18.75 14.38 .04
Second Quarter 18.25 13.75 .04
Third Quarter 15.50 9.63 .04
Fourth Quarter 16.75 9.00 .04
- --------------------------------------------------------------------------------
1997
First Quarter $ 7.69 6.69 .027
Second Quarter 11.00 6.31 .033
Third Quarter 11.50 9.75 .033
Fourth Quarter 15.44 11.18 .033
- --------------------------------------------------------------------------------
</TABLE>
(1) The prices presented above are sale prices which represent price
between broker-dealers and do not include mark-ups or mark-downs or any
commission to the broker-dealer. Therefore, the prices presented above
do not reflect prices in actual transactions.
8
<PAGE> 9
ITEM 6. SELECTED FINANCIAL DATA
TEN-YEAR SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
1998 1997 1996 1995 1994
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
AS OF DECEMBER 31
Total assets $180,773,289 165,337,309 148,824,187 139,381,979 124,412,468
------------ ------------ ------------ ------------ ------------
Total liabilities $126,282,437 115,941,296 105,910,335 99,694,942 90,855,648
------------ ------------ ------------ ------------ ------------
Total shareholders' equity $ 54,490,852 49,396,013 42,913,852 39,687,037 33,556,820
------------ ------------ ------------ ------------ ------------
Book value per share $ 8.56 7.72 6.71 6.23 5.28
------------ ------------ ------------ ------------ ------------
Closing price per share $ 14.88 15.25 7.60 4.80 3.63
------------ ------------ ------------ ------------ ------------
YEARS ENDED DECEMBER 31
Premium income $ 10,172,998 8,189,370 6,702,922 7,842,595 7,991,806
------------ ------------ ------------ ------------ ------------
Mortality and expense
charges $ 9,762,356 9,430,814 8,697,621 7,218,946 7,136,723
------------ ------------ ------------ ------------ ------------
Net investment income, realized
investment gains and brokerage
income $ 12,365,999 11,308,794 9,458,474 8,814,035 7,597,136
------------ ------------ ------------ ------------ ------------
Total revenue $ 32,301,353 28,928,978 24,859,017 23,875,576 22,725,665
------------ ------------ ------------ ------------ ------------
Benefits and expenses $ 21,916,010 20,451,884 18,735,863 18,548,121 18,333,697
------------ ------------ ------------ ------------ ------------
Net earnings $ 7,240,585 6,304,558 4,832,577 4,070,871 3,303,024
------------ ------------ ------------ ------------ ------------
Basic net earnings per share $ 1.13 .99 .76 .64 .54
------------ ------------ ------------ ------------ ------------
Diluted net earnings per share $ 1.10 .96 .74 .63 .51
------------ ------------ ------------ ------------ ------------
Dividends per share $ .160 .126 .102 .072 .060
------------ ------------ ------------ ------------ ------------
<CAPTION>
AS OF DECEMBER 31 1993 1992 1991 1990 1989
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Total assets $116,237,515 111,133,117 102,258,764 94,837,003 89,058,288
------------ ------------ ------------ ------------ ------------
Total liabilities $ 85,285,402 82,346,176 75,210,219 68,395,286 62,061,677
------------ ------------ ------------ ------------ ------------
Total shareholders' equity $ 30,952,113 28,786,941 27,048,545 26,441,717 26,996,611
------------ ------------ ------------ ------------ ------------
Book value per share $ 5.10 4.74 4 .46 4.20 4.19
------------ ------------ ------------ ------------ ------------
Closing price per share $ 3.20 2.77 2.77 3.09 3.31
------------ ------------ ------------ ------------ ------------
YEARS ENDED DECEMBER 31
Premium Income $ 8,005,457 9,671,662 9,444,004 8,778,515 8,559,692
------------ ------------ ------------ ------------ ------------
Mortality and expense
charges $ 5,529,950 4,803,708 4,314,299 3,962,877 2,992,291
------------ ------------ ------------ ------------ ------------
Net investment income, realized
investment gains and brokerage
income $ 7,271,267 7,111,110 7,069,597 6,291,331 6.575,258
------------ ------------ ------------ ------------ ------------
Total revenue $ 20,806,674 21,586,480 20,827,900 19,032,723 18,127,241
------------ ------------ ------------ ------------ ------------
Benefits and expenses $ 18,149,664 19,122,882 19,182,874 17,027,478 15,913,687
------------ ------------ ------------ ------------ ------------
Net earnings $ 2,435,355 2,108,597 1,292,026 1,655,245 2,506,426
------------ ------------ ------------ ------------ ------------
Basic net earnings per share $ .40 .33 .21 .26 .39
------------ ------------ ------------ ------------ ------------
Diluted net earnings per share $ .39 .33 .20 .25 .38
------------ ------------ ------------ ------------ ------------
Dividends per share $ .051 .068 .119 .119 .103
------------ ------------ ------------ ------------ ------------
</TABLE>
Note: All share and per share amounts have been adjusted for the following
stock splits:
October 1995 five-for-four
April 1997 five-for-four
January 1998 three-for-two
9
<PAGE> 10
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
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 products. The premiums and mortality
and expense charges billed for these products are based on conservative and
actuarially sound assumptions as to mortality, persistency and interest. The
Company believes these assumptions will produce revenues sufficient to meet its
future contractual benefit obligations and operating expenses, and provide an
adequate profit margin to finance future growth without a major entry into the
debt or equity markets.
INVESTMENT SECURITIES AND SECURITIES AVAILABLE FOR SALE
Following is a summary of fixed maturities held for investment and available for
sale by rating class:
<TABLE>
<CAPTION>
HELD FOR INVESTMENT AVAILABLE FOR SALE
------------------- ------------------
12/31/98 12/31/97 12/31/98 12/31/97
-------- -------- -------- --------
<S> <C> <C> <C> <C>
U. S. Government $ 1,497,876 1,497,025 28,943,831 29,728,865
A or better 15,092,152 16,607,415 62,320,885 55,898,026
BBB or better -- -- 9,589,060 6,264,380
----------- ----------- ----------- -----------
$16,590,028 18,104,440 100,853,776 91,891,271
----------- ----------- ----------- -----------
</TABLE>
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. The Company grants loans only to employees
(excluding officers and directors) and agents.
The loan-to-value ratio on delinquent loans is 40%. Therefore, the
Company does not anticipate any loss should it choose to foreclose.
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.
10
<PAGE> 11
OTHER INVESTMENTS
Other investments consist of the Company's equity in a limited
partnership. The partnership invests in other insurance companies and related
industries.
RESULTS OF OPERATIONS
The Company's operations can be grouped into three major segments,
individual life insurance, guaranteed issue and simplified issue life insurance,
and brokerage operations. These segments are differentiated primarily by their
respective methods of distribution and the nature of related products, as the
Company's operations in each segment are concentrated within its southeastern
state geographic market. Individual life insurance products are distributed
through the Company's multi-line exclusive agents, guaranteed issue and
simplified issue products are distributed through independent agents as well as
exclusive agents, and brokerage operations all involve third party products
distributed through the Company's exclusive and independent agents.
PREMIUM INCOME AND MORTALITY AND EXPENSES CHARGES:
INDIVIDUAL LIFE INSURANCE
Premium income and mortality and expense charges produced by the
Company's multi-line exclusive agency force for the last three years are as
follows:
<TABLE>
<CAPTION>
1998 1997 1996
----------- ----------- -----------
<S> <C> <C> <C>
Premium income $ 5,572,243 5,426,473 5,212,243
Mortality and expense charges 9,762,356 9,430,814 8,697,621
----------- ----------- -----------
$15,334,599 14,857,287 13,909,864
=========== =========== ===========
</TABLE>
The total income amount for 1998 represents a 3.2% increase over 1997,
compared with a 6.8% increase in 1997 over 1996. The Company anticipates
increased growth in these lines in 1999 as a result of improvements made in two
key products in 1998.
GUARANTEED ISSUE AND SIMPLIFIED ISSUE LIFE INSURANCE
Guaranteed issue and simplified issue products are distributed by
approximately 1,900 independent agents and the Company's multi-line exclusive
agents. The Company began selling this products in 1996. Premium income from
these products were $3,794,585, $1,922,379 and $613,178 in 1998, 1997 and 1996,
respectively. These increases represent growth of 97.4% and 213.5% for 1998 and
1997, respectively. The Company expects continued growth in this line of
business.
The Company also receives premium income from individual accident and
health policies and group life premiums from participation in the Federal
employee and servicemen pools. The earnings effect from these sources of premium
income is not significant.
11
<PAGE> 12
INVESTMENT INCOME
Investment income increased 9%, 6% and 8% in 1998, 1997 and 1996,
respectively. Growth in the overall investment portfolio, fluctuations in
interest rates on new investments, and the mix of securities account for the
variance in yearly increases.
REALIZED INVESTMENT GAINS
Realized investment gains during the past three years resulted from the
sale of bonds. The Company anticipates that future gains will be approximately
$120,000 per year. Larger gains in 1998 resulted from the Company taking
advantage of market conditions to increase its overall portfolio yield.
BROKERAGE INCOME
CSI provides the Company with commission income from brokerage
agreements with other property and casualty insurance carriers. These carriers
supply the Company's multi-line agents with property and casualty products that
the Company's affiliated property and casualty companies do not underwrite. CSI
earned $1,274,450 in 1998, $1,236,114 in 1997 and $561,555 in 1996. In late
1996, CSI in conjunction with its property and casualty affiliate, finalized a
contract to transfer management of its property and casualty affiliate's
multi-peril crop and crop hail insurance to Blakely Crop Hail, a Kansas based
company. Through the brokerage agreement with Blakely, CSI will receive an
override commission based on premium volume generated by sales of multi-peril
crop and crop hail insurance. During 1998 and 1997, $537,000 and $780,000,
respectively, of gross income was realized under this agreement.
CSI also received over-ride commissions of $819,000, $855,000 and
$606,000 from a non-standard auto insurer during 1998, 1997 and 1996,
respectively. In 1998, CSI added an additional non-standard automobile insurer.
Another subsidiary, CSMR provides the Company with commission income
from brokerage agreements with other life and health insurance companies. These
companies supply the Company's multi- line agents with life and health products
that the Company does not want to underwrite. CSMR earned $295,053 in 1998,
$305,086 in 1997 and $320,148 in 1996. The decline in CSMR earnings in 1998
resulted from the utilization of all of its tax loss carry forwards during 1997.
On an overall basis, total brokerage revenues amounted to $3,214,216, $3,141,695
and $1,785,761 in 1998, 1997 and 1996, respectively.
BENEFITS
Benefits including reserve increases for the last three years on
individual life and guaranteed issue/simplified issue products are as follows:
<TABLE>
<CAPTION>
1998 1997 1996
----------- ----------- -----------
<S> <C> <C> <C>
Individual $10,429,767 9,964,268 9,724,458
Guaranteed issue
simplified issue $ 2,317,006 1,107,883 399,070
</TABLE>
Benefits for individual life and guaranteed issued simplified issue as
a percentage of premiums and mortality and expense charges for those products
were 67% in 1998 and 66% for 1997 and 1996. The Company expects the ratio to
range between 65% and 70%.
12
<PAGE> 13
OPERATING EXPENSES
Operating expenses and amortization of policy acquisition costs as a
percentage of total premium income, mortality and expense charges, and brokerage
income were 35%, 41% and 45% for 1998, 1997 and 1996, respectively. The higher
percentage in 1996 was due to the elimination of group health premiums received
from the Company's agents and employees. In addition, during the fourth quarters
of 1998 and 1997, the Company adjusted downward per policy costs and mortality
assumptions on interest sensitive products to reflect improvement in actual
costs and mortality. The effect of these adjustments was to lower the
amortization of deferred acquisition costs.
FEDERAL INCOME TAXES
The effective tax rates were 30% for 1998, 26% for 1997 and 21% for
1996. The increase in effective tax rates in the last two years, was due to CSMR
utilizing all of its tax loss carry forwards in the fourth quarter of 1997 and
the increase in deferred acquisition costs and other temporary differences which
are taxed at a rate of 34% and do not reflect the impact of the small company
deduction. The Company anticipates that future tax rates will range from 30% to
33%.
QUARTERLY RESULTS
Quarterly earnings may fluctuate significantly during the year. These
fluctuations are due to irregular claims occurrences and the timing of certain
investment transactions.
INFLATION
Prolonged inflation can adversely affect insurance operations. Expenses
tend to increase while premiums are generally fixed for the life of the policy.
Real and nominal interest rates have fluctuated considerably over the years,
causing major swings in investment market values and growth in related
investment income. In an effort to control these effects, management is
continuing to emphasize cost control and to invest in short-term and
intermediate-term investments.
YEAR 2000
The Year 2000 issue refers generally to the data structure and
processing problem that may prevent systems from properly processing
date-sensitive information when the year changes to 2000. The Year 2000 issue
affects information technology ("IT") systems, such as computer programs and
various types of electronic equipment that process date information by using
only two digits rather than four digits to define the applicable year, and thus
may recognize a date using "00" as the year 1900 rather than the year 2000. The
issue also affects some non-IT systems, such as devices which rely on a
micro-controller to process date information. The Year 2000 issue could disrupt
a company's operations by generating erroneous data or causing system failures
or miscalculations.
The Company currently utilizes both IT and non-IT systems to conduct
its business. IT systems that the Company utilizes include third party business
application systems, computer hardware, and operating systems. Non-IT systems
that the Company utilizes include embedded technology such as micro-controllers,
which are critical in conducting its business. The Company also has several
material third party relationships that must address the Year 2000 issue of
their IT and non-IT systems, including the Company's related parties, reinsurers
and third party administrators.
13
<PAGE> 14
THE COMPANY'S STATE OF READINESS
In 1995, the Company initiated a three phased project to address the
business issues associated with Year 2000 and its impact on both IT and non-IT
systems. The project was designed to address both internal considerations and
external considerations affecting customers, business relationships, and the
resulting impact on Company operations. Project progress is regularly reviewed
by the Company's senior management and Board of Directors.
Phase 1: Business Applications Systems: This phase addresses the
evaluation, testing, and upgrading of the Company's
mission-critical business application systems, including the
Life administration systems, general ledger, accounts payable,
and business interfaces to and from these systems. This phase
of the project was completed and fully implemented as of
December 31, 1998. The costs of testing and replacing
non-compliant IT systems have totaled approximately $10,000,
in 1998 and have been expensed as incurred.
Phase 2: Information Technology Hardware/Operating Systems. This phase
addresses the evaluation, testing and upgrading of the
Company's mainframe hardware and operating systems. This phase
of the project is 25% complete, with an expected completion
date of September 30, 1999. The costs associated with this
compliance effort have totaled $62,500 in 1998, and have been
expensed as incurred. The remaining costs anticipated with
this phase of the project total $33,000.
Phase 3: External Relationships and Other IT and Non-IT Systems. This
phase includes the development of plans to address the
Company's embedded technology, such as micro- controllers,
secondary infrastructure issues, the assessment of Year 2000
readiness of material third party relationships, and other
operational and contingency plans. The Company has completed
its inventory of all systems and relationships that fall under
this category, and currently is in the process of assessing
its Year 2000 exposure. This phase of the project is expected
to be complete by June 1999 for secondary infrastructure
issues, and carry through the first quarter of 2000 for other
items. The anticipated costs of this phase for 1999 is
$350,000. Included in this amount is $300,000 budgeted to
implement, if necessary, contingency plans to prevent business
interruptions should critical third parties fail to complete
their Year 2000 efforts. This amount does not include the
costs of reallocating internal resources.
YEAR 2000 ISSUES RELATING TO THIRD PARTIES
The Company does rely on several third party systems whose
non-compliance could materially impact the results of operations. Certain
insurance companies process override commissions for the benefit of the
Company's subsidiaries, CSMR and CSI. Another significant business partner is
involved in the administrative, billing, collection and reporting of financial
transactions relating to the Company's payroll deduction universal life
products. Non-compliance by these third parties could negatively affect the
Company's revenue stream. The Company has surveyed and/or visited these
companies to determine the status of their Year 2000 compliance, and has
developed contingency plans in the event of Year 2000 failures with these
material relationships. The Company will continue to monitor the status of these
relationships as well as other significant relationships, and although the
Company has not received any indication at this time that these third parties
will not be Year 2000 compliant, the Company has not received nor expects to
assume that the third parties will guarantee that their remediation efforts will
result in Year 2000 compliance.
The Company has system contingency services contracted through a major
third party provider and is presently refining support related to potential Year
2000 issues. In addition, the Company has plans to
14
<PAGE> 15
develop a Year 2000 operational support plan for the millennium weekend,
including on-site staff and on-call support. Exposure and risk management will
continue through the first quarter of 2000.
RISKS OF YEAR 2000 ISSUES
In light of its compliance efforts, the Company does not believe that
the Year 2000 issue will materially adversely affect operations or results of
operations, and does not expect implementation to have a material impact on the
Company's financial statements. However, there can be no assurance that the
Company's systems will be Year 2000 compliant prior to December 31, 1999, or
that the failure of any such system will not have a material adverse effect on
the Company's business, results of operations and financial condition. In
addition, to the extent the Year 2000 problem has a material adverse effect on
business, operations and financial condition of third parties with whom the
Company has material relationships, such as customers, distributors, vendors,
suppliers and financial institutions, the Year 2000 problem could have a
material adverse effect on the Company's business, results of operations and
financial condition.
The above Year 2000 discussion contains forward-looking statements
reflecting management's current assessment and estimates with respect to the
Company's Year 2000 readiness efforts and the impact of Year 2000 issues on the
Company's business, financial condition and results of operations. Various
factors, many of which are beyond the control of the Company, could cause actual
plans and results to differ materially from those contemplated by such
assessments, estimates and forward-looking statements. Some of these factors
include, but are not limited to, the accuracy of the Year 2000 assurances,
disclosures or representations by the Company's customers, distributors,
vendors, suppliers, financial institutions and other third parties with whom it
has material relationships, availability of qualified personnel and other
information technology resources and any actions of third parties with respect
to Year 2000 problems.
FORWARD-LOOKING STATEMENTS
The Company has made certain forward-looking statements in this Annual
Report for the year ended December 31, 1998, and has and will make such
statements in other contexts. Forward-looking statements are statements not
based on historical information and which relate to future operations,
strategies, financial results, or other developments. Statements using verbs
such as "expect," "anticipate," "believe" or words of similar import generally
involve forward-looking statements. Without limiting the foregoing, forward-
looking statements include statements which represent the Company's beliefs
concerning future levels of sales and redemptions of the Company's products,
investment spreads and yields, or the earnings and profitability of the
Company's activities.
Forward-looking statements are necessarily based on estimates and
assumptions that are inherently subject to significant business, economic and
competitive uncertainties and contingencies, many of which are beyond the
Company's control and many of which are subject to change. These uncertainties
and contingencies could cause actual results to differ materially from those
expressed in any forward-looking statements made by, or on behalf of, the
Company. Whether or not actual results differ materially from forward-looking
statements may depend on numerous foreseeable and unforeseeable developments.
Some may be national in scope, such as general economic conditions, changes in
tax law and changes in interest rates. Some may be related to the insurance
industry generally, such as pricing competition, regulatory developments and
industry consolidation. Others may relate to the Company specifically, such as
credit, volatility and other risks associated with the Company's investment
portfolio. Investors are also directed to consider other risks and uncertainties
discussed in documents filed by the Company with the Securities and Exchange
Commission. If the Company's assumptions and estimates are incorrect or do not
come to fruition, or if the Company does not achieve all of these key factors,
then the Company's actual performance could vary materially from the
forward-looking statements made herein. The Company disclaims any obligation to
update forward-looking information.
15
<PAGE> 16
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
CREDIT RISK
Credit Risk is the risk that issuers of securities owned by the Company
will default, or other parties, including reinsurers which owe the Company
money, will not pay. The Company minimizes this risk by adhering to a
conservative investment strategy and by contracting with reinsuring companies
that meet certain rating criteria and other qualifications.
INTEREST RATE RISK
The Company's fixed maturity investments are subject to interest rate
risk. Increases and decreases in interest rates typically result in decreases
and increases in the fair values of these securities. The changes in fair market
values of the available for sale portfolio are presented as a component of
stockholders equity in accumulated other comprehensive income, net of taxes. The
Company invests in government, governmental agency and high quality corporate
bonds. The fixed maturity portfolio had an effective duration of 4.1 years and
an average rating of AA3 at December 31, 1998. Company policy is to have an
effective duration of less than ten years and to not purchase bonds with less
than an A rating. Through cash flow models, the Company works to lessen the
impact of interest rate fluctuations on its available for sale portfolio.
The Company's liabilities for interest sensitive products are carried
at full account value. The Company has changed the credited interest rate in the
past to reflect changes in market interest rates.
16
<PAGE> 17
The table below summarizes the Company's interest rate risk and shows
the effect of a hypothetical 100 and 200 basis point increase/decrease in
interest rates on the market values of the fixed investment portfolio. The
selection of 100 and 200 basis point increases/decreases in interest rates
should not be construed as a prediction by the Company's management of future
market events, but rather, to illustrate the potential impact of such events.
These calculations may not fully capture the impact of the changes in the ratio
of long-term rates to short-term rates.
<TABLE>
<CAPTION>
HYPOTHETICAL
ESTIMATED FAIR PERCENTAGE
ESTIMATED VALUE AFTER INCREASE(DECREASE)
ESTIMATED CHANGE IN HYPOTHETICAL IN SHAREHOLDER
VALUE INTEREST RATES CHANGE IN EQUITY BEFORE
DECEMBER 31, 1998 (BP-BASIS POINTS) INTEREST RATES TAXES
----------------- ----------------- -------------- -----------------
<S> <C> <C> <C> <C>
Held for investment:
U.S. Treasury securities
and obligations of U.S.
government corporations
and agencies $ 1,555 200 bp decrease 1,646 N/A
100 bp decrease 1,612 N/A
100 bp increase 1,547 N/A
200 bp increase 1,516 N/A
Debt securities issued by
foreign governments $ 2,138 200 bp decrease 2,301 N/A
100 bp decrease 2,242 N/A
100 bp increase 2,130 N/A
200 bp increase 2,077 N/A
Corporate securities $13,742 200 bp decrease 14,808 N/A
100 bp decrease 14,297 N/A
100 bp increase 13,344 N/A
200 bp increase 12,901 N/A
Available for sale:
U.S. Treasury
and obligations of U.S.
government corporations
and agencies $ 4,287 200 bp decrease 4,532 .45
100 bp decrease 4,455 .31
100 bp increase 4,275 (.28)
200 bp increase 4,132 (.60)
Corporate securities $71,534 200 bp decrease 80,609 16.65
100 bp decrease 76,652 9.39
100 bp increase 69,001 (4.65)
200 bp increase 65,294 (11.45)
Mortgage-backed securities $25,033 200 bp decrease 26,309 2.34
100 bp decrease 25,753 1.32
100 bp increase 24,520 (.94)
200 bp increase 23,499 (2.28)
--------
Total fixed maturities $118,289 200 bp decrease 130,205
======= 100 bp decrease 125,011
100 bp increase 114,817
200 bp increase 109,419
</TABLE>
(dollars in thousands)
17
<PAGE> 18
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
COTTON STATES LIFE INSURANCE COMPANY AND SUBSIDIARIES
Consolidated Balance Sheets
<TABLE>
<CAPTION>
December 31,
------------
Assets 1998 1997
------ ---- ----
<S> <C> <C>
Investments:
Fixed maturities, held for investment, at amortized
cost $ 16,590,028 18,104,440
Fixed maturities, available for sale, at fair value 100,853,776 91,891,271
First mortgage loans on real estate 3,531,728 4,215,962
Policy loans 8,155,752 7,976,103
Short-term investments 7,196,901 3,755,294
Other Invested assets 1,000,000 --
------------- -------------
Total investments 137,328,185 125,943,070
Cash 938,728 1,303,739
Accrued investment income 1,913,456 1,928,498
Amounts receivable, principally premiums 2,547,510 3,242,432
Amount due from reinsurers 2,492,493 2,376,473
Deferred policy acquisition costs 34,950,104 29,842,783
Refundable Federal income taxes -- 166,460
Other assets 602,813 533,854
------------- -------------
$ 180,773,289 165,337,309
============= =============
Liabilities and Shareholders' Equity
------------------------------------
Policy liabilities and accruals:
Future policy benefits $ 112,423,878 104,269,283
Policy claims and benefits payable 1,053,061 1,356,308
------------- -------------
Total policy liabilities and accruals 113,476,939 105,625,591
Federal income taxes:
Current 80,869 --
Deferred 5,621,684 3,920,376
Other liabilities 7,102,945 6,395,329
------------- -------------
Total liabilities 126,282,437 115,941,296
------------- -------------
Shareholders' equity:
Common stock of $1 par value. Authorized 20,000,000
shares; issued 6,754,504 shares 6,754,504 6,754,504
Additional paid-in capital 1,478,639 1,283,745
Accumulated other comprehensive income, net 1,779,920 1,285,556
Retained earnings 47,420,827 41,204,889
Less:
Unearned compensation - restricted stock (317,860) --
Treasury stock, at cost (392,716 shares in 1998 and
353,629 shares in 1997) (2,625,178) (1,132,681)
------------- -------------
Total shareholders' equity 54,490,852 49,396,013
------------- -------------
$ 180,773,289 165,337,309
============= =============
</TABLE>
See accompanying notes to consolidated financial statements
18
<PAGE> 19
COTTON STATES LIFE INSURANCE COMPANY AND SUBSIDIARIES
Consolidated Statements of Earnings
<TABLE>
<CAPTION>
Years ended December 31,
------------------------
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Revenues:
Premium income:
Life $10,038,981 8,014,887 6,537,594
Accident and health 134,017 174,483 165,328
----------- ----------- -----------
Total premium income 10,172,998 8,189,370 6,702,922
Mortality and expense charges 9,762,356 9,430,814 8,697,621
Net investment income 8,787,048 8,056,400 7,565,768
Realized investment gains 364,735 110,699 106,945
Brokerage income 3,214,216 3,141,695 1,785,761
----------- ----------- -----------
Total revenues 32,301,353 28,928,978 24,859,017
----------- ----------- -----------
Benefits and expenses:
Life benefits and claims 13,409,685 11,713,161 10,820,516
Accident and health benefits and claims 302,087 227,428 203,224
Amortization of deferred policy acquisition costs 1,809,619 2,271,407 2,421,587
Other operating expenses 6,394,619 6,239,888 5,290,536
----------- ----------- -----------
Total benefits and expenses 21,916,010 20,451,884 18,735,863
----------- ----------- -----------
Earnings before Federal income taxes 10,385,343 8,477,094 6,123,154
----------- ----------- -----------
Federal income taxes:
Current 1,546,986 1,515,393 1,101,651
Deferred 1,597,772 657,143 188,926
----------- ----------- -----------
Total Federal income taxes 3,144,758 2,172,536 1,290,577
----------- ----------- -----------
Net earnings $ 7,240,585 6,304,558 4,832,577
=========== =========== ===========
Basic net earnings per share of
common stock $ 1.13 .99 .76
=========== =========== ===========
Diluted net earnings per share of
common stock $ 1.10 .96 .74
=========== =========== ===========
Weighted average number of shares used in
computing basic earnings per share (note 1) 6,410,345 6,400,145 6,389,277
=========== =========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
19
<PAGE> 20
COTTON STATES LIFE INSURANCE COMPANY AND SUBSIDIARIES
Consolidated Statements of Shareholders' Equity
<TABLE>
<CAPTION>
Years ended December 31,
------------------------
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Common stock - balance at beginning and
end of year $ 6,754,504 6,754,504 6,754,504
----------- ----------- -----------
Additional paid-in capital:
Balance at beginning of year 1,283,745 1,283,969 1,292,207
Treasury shares issued 9,894 (224) (8,238)
Tax benefit arising from issuance of
restricted stock 185,000 -- --
----------- ----------- -----------
Balance at end of year 1,478,639 1,283,745 1,283,969
----------- ----------- -----------
Accumulated other comprehensive income:
Balance at beginning of year 1,285,556 297,609 1,354,897
----------- ----------- -----------
Change in unrealized gains (losses):
Unrealized gains (losses) during year 848,053 1,802,499 (1,998,408)
Deferred (taxes) benefit (288,338) (612,850) 679,459
Deferred acquisition cost adjustment (65,351) (201,702) 261,661
----------- ----------- -----------
Other comprehensive income (loss) 494,364 987,947 (1,057,288)
----------- ----------- -----------
Balance at end of year 1,779,920 1,285,556 297,609
----------- ----------- -----------
Retained earnings:
Balance at beginning of year 41,204,889 35,713,441 31,528,739
Net earnings 7,240,585 6,304,558 4,832,577
Dividends of $.16 per share in 1998,
$.126 in 1997, and $.102 in 1996 (1,024,647) (813,110) (647,875)
----------- ----------- -----------
Balance at end of year 47,420,827 41,204,889 35,713,441
----------- ----------- -----------
Unearned compensation - restricted stock:
Balance at beginning of year -- -- --
Shares awarded (317,860) -- --
----------- ----------- -----------
Balance at end of year (317,860) -- --
----------- ----------- -----------
Treasury stock:
Balance at beginning of year (1,132,681) (1,135,671) (1,243,310)
Cost of shares purchased (89,354 shares in 1998) (1,581,678) -- --
Cost of shares issued (50,267 shares in 1998,
934 shares in 1997, and 33,578 shares
in 1996) 89,181 2,990 107,639
----------- ----------- -----------
Balance at end of year (2,625,178) (1,132,681) (1,135,671)
----------- ----------- -----------
Total shareholders' equity (note 9) $54,490,852 49,396,013 42,913,852
=========== =========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
20
<PAGE> 21
COTTON STATES LIFE INSURANCE COMPANY AND SUBSIDIARIES
Consolidated Statements of Comprehensive Income
<TABLE>
<CAPTION>
Years ended December 31,
------------------------
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Net earnings $7,240,585 6,304,558 4,832,577
---------- ---------- ----------
Other comprehensive income (loss) before tax:
Unrealized gains (losses) on securities
available for sale 1,147,437 1,711,496 (1,629,802)
Reclassification adjustment for realized gains
included in net earnings (364,735) (110,699) (106,945)
---------- ---------- ----------
Total other comprehensive income
(loss) before tax 782,702 1,600,797 (1,736,747)
Income tax expense (benefit) related to
items of other comprehensive income 288,338 612,850 (679,459)
---------- ---------- ----------
Other comprehensive income (loss),
net of tax 494,364 987,947 (1,057,288)
---------- ---------- ----------
Total comprehensive income $7,734,949 7,292,505 3,775,289
========== ========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
21
<PAGE> 22
COTTON STATES LIFE INSURANCE COMPANY AND SUBSIDIARIES
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
Years ended December 31,
------------------------
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Cash flows from operating activities:
Net earnings $ 7,240,585 6,304,558 4,832,577
Adjustments to reconcile net earnings to net
cash provided from operating activities:
Increase in policy liabilities and accruals 7,851,348 7,370,515 6,947,867
Increase in deferred policy acquisition costs (5,172,476) (3,254,178) (2,357,831)
Change in Federal income taxes 1,845,101 591,122 (62,877)
Decrease (increase) in amounts receivable
and amounts due from reinsurers 578,902 (1,220,114) (436,785)
Other, net 613,080 1,567,988 (543,860)
------------ ------------ ------------
Net cash provided from operating
activities 12,956,540 11,359,891 8,379,091
------------ ------------ ------------
Cash flows from investing activities:
Purchase of fixed maturities held for investment -- -- (1,495,780)
Purchase of fixed maturities available for sale (31,232,770) (18,827,126) (22,109,575)
Purchase of other invested assets (1,000,000) -- --
Sale of fixed maturities available for sale 14,950,214 5,508,045 3,483,374
Proceeds from maturities of fixed maturities
held for investment 1,500,000 2,118,719 1,856,816
Proceeds from maturity and redemption of
fixed maturities available for sale 8,090,844 3,765,544 7,027,662
First mortgage loans originated -- (312,000) (102,000)
Principal collected on first mortgage loans 684,234 866,315 756,195
Net increase in policy loans (179,649) (938,358) (361,791)
Other, net (185,567) (201,946) 147,875
------------ ------------ ------------
Net cash used in investing activities (7,372,694) (8,020,807) (10,797,224)
------------ ------------ ------------
Cash flows from financing activities:
Cash dividends paid (1,024,647) (813,110) (647,875)
Purchase of treasury stock (1,581,678) -- --
Sale of treasury stock 99,075 2,766 99,401
------------ ------------ ------------
Net cash used in financing activities (2,507,250) (810,344) (548,474)
------------ ------------ ------------
Net increase (decrease) in cash and
cash equivalents 3,076,596 2,528,740 (2,966,607)
Cash and cash equivalents:
Beginning of year 5,059,033 2,530,293 5,496,900
------------ ------------ ------------
End of year $ 8,135,629 5,059,033 2,530,293
============ ============ ============
Supplemental disclosures of cash paid during
the year - income taxes $ 1,299,657 1,292,128 1,353,651
============ ============ ============
</TABLE>
See accompanying notes to consolidated financial statements
22
<PAGE> 23
COTTON STATES LIFE INSURANCE COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1998, 1997, and 1996
(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 differ from
estimates.
Following is a description of the most significant risks facing
insurers and how the Company mitigates those risks:
CREDIT RISK is the risk that issuers of securities owned by
the Company will default, or other parties, including
reinsurers which owe the Company money, will not pay. The
Company minimizes this risk by adhering to a conservative
investment strategy and by contracting with reinsuring
companies that meet certain rating criteria and other
qualifications.
INTEREST RATE RISK is the risk that interest rates will change
and cause a decrease in the value of an insurer's investments.
The Company mitigates this risk by attempting to match the
maturity schedule of its assets with the expected payout of
its liabilities. To the extent that liabilities come due more
quickly than assets mature, an insurer would have to sell
assets prior to maturity and recognize a gain or loss.
The significant accounting policies are as follows:
CONSOLIDATION POLICY
The consolidated financial statements include the accounts of
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.
23
<PAGE> 24
COTTON STATES LIFE INSURANCE COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1998, 1997, and 1996
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.
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 marketing, 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 $6,982,000 in
1998, $5,526,000 in 1997, and $4,780,000 in 1996.
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
The Company accounts for investments under the provisions of
Statement of Financial Accounting Standards No. 115 (SFAS No.
115), Accounting for Certain Investments in Debt and Equity
Securities.
Fixed maturities held for investment are stated at amortized
cost. Fixed maturities available for sale are stated at fair
value. The cost of securities sold is determined by the
identified certificate method. First mortgage loans are stated
at their aggregate unpaid balance. Policy loans are stated at
their aggregate unpaid balance and short-term investments are
stated at cost.
Investments deemed to have a loss in value, which is other
than temporary, are written down to their estimated net
realizable value. Unrealized gains and losses on fixed
maturities available for sale are excluded from earnings and
are reported within stockholders' equity as a component of
accumulated other comprehensive income, net of deferred taxes
and amounts attributable to the Company's universal life and
annuity products.
24
<PAGE> 25
COTTON STATES LIFE INSURANCE COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1998, 1997, and 1996
INCOME TAXES
The Company and CSI and CSMR file a consolidated Federal
income tax return.
Deferred taxes are recognized for the tax consequences of
"temporary differences" by applying enacted statutory rates
applicable to future years to differences between the
financial statement carrying amounts and the tax bases of
existing assets and liabilities. The effect on deferred taxes
of a change in tax rates is recognized in income in the period
that includes the enactment date.
EARNINGS PER SHARE
Basic earnings per share are based on the weighted average
number of common shares outstanding adjusted for the following
stock splits effected in the form of a stock dividend.
January 20, 1998 Three-for-two
April 30, 1997 Five-for-four
The following table summarizes information relating to the
calculation of basic and diluted earnings per share of common
stock:
<TABLE>
<CAPTION>
Years ended December 31,
------------------------
1998 1997 1996
---- ---- ----
Income Shares Income Shares Income Shares
(Numerator) (Denominator) (Numerator) (Denominator) (Numerator) (Denominator)
----------- ------------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Basic EPS $7,240,585 6,410,345 6,304,558 6,400,145 4,832,577 6,389,277
Effect of dilutive securities:
Options -- 70,768 -- 82,023 -- 59,037
Restricted stock -- 81,257 -- 94,068 -- 69,609
---------- ---------- ---------- ---------- ---------- ----------
Diluted EPS $7,240,585 6,562,370 6,304,558 6,576,236 4,832,577 6,517,923
========== ========== ========== ========== ========== ==========
</TABLE>
STOCK-BASED COMPENSATION
The Company accounts for its various stock-based compensation
in accordance with the provisions set forth in Statement of
Financial Accounting Standards No. 123 ("SFAS No. 123"),
Accounting for Stock- Based Compensation. SFAS No. 123 permits
entities to recognize as expense over the vesting period the
fair value of all stock-based awards on the date of the grant
or alternatively, continue to apply the provisions of
Accounting Principles Board (APB) Opinion No. 25, Accounting
for Stock Issued to Employees, and related interpretations and
provide pro forma net income and pro forma earnings per share
disclosures for employee stock-based grants as if the fair
value-based method had been applied as defined in SFAS No.
123. In accordance with APB Opinion No. 25, compensation
expense is recorded on the grant date only to the extent that
the current market price of the underlying stock exceeds the
exercise price on the grant date. The Company has elected to
continue to apply the provisions set forth in APB Opinion No.
25 and follow the disclosure provisions of SFAS No. 123. See
note 8 for further information.
25
<PAGE> 26
COTTON STATES LIFE INSURANCE COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1998, 1997, and 1996
COMPREHENSIVE INCOME
Effective January 1, 1998, the Company adopted the provisions
of SFAS No. 130, Reporting Comprehensive Income. This
statement establishes standards for reporting and displaying
comprehensive income and its components in a full set of
general purpose financial statements. SFAS No. 130 requires al
items that are required to be recognized under accounting
standards as components of comprehensive income to be reported
in a financial statement that is displayed in equal prominence
with the other financial statements. The term "comprehensive
income" is used in the statement to describe the total of all
components of comprehensive income including net income.
"Other comprehensive income" refers to revenues, expenses,
gains, and losses that are included in comprehensive income
but excluded from earnings under current accounting standards,
and consists of items recorded directly in equity under SFAS
No. 115, Accounting for Certain Investments in Debt and Equity
Securities.
SEGMENT DISCLOSURE
Also effective January 1, 1998, the Company adopted the
provisions of SFAS No. 131, Disclosures about Segments of an
Enterprise and Related Information. SFAS No. 131 establishes
new standards for the disclosures made by public business
enterprises to report information about operating segments in
annual financial statements and requires those enterprises to
report selected information about operating segments in
interim financial reports issued to shareholders. It also
establishes standards for related disclosures about products
and services, geographic areas, and major customers. The
operating results for the Company's operating segments are
contained on page 4 of the Form 10-K.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board (FASB)
issued SFAS No. 133, Accounting for Derivative Instruments and
Hedging Activities (SFAS No. 133). SFAS No. 133 is effective
for financial statements for all fiscal quarters of all fiscal
years beginning after June 15, 1999. The Company does not
believe the provisions of SFAS No. 133 will have a significant
impact on the financial statements upon adoption.
In October 1998, the FASB issued SFAS No. 134, Accounting for
Mortgage-Backed Securities Retained After the Securitization
of Mortgage Loans Held for Sale by a Mortgage-Banking
Enterprise, an amendment of FASB Statement No. 65 (SFAS No.
134). SFAS No. 134 is effective for the first quarter
beginning after December 15, 1998. The Company does not
believe the provisions of SFAS no. 134 will have a significant
impact on the financial statements upon adoption.
26
<PAGE> 27
COTTON STATES LIFE INSURANCE COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1998, 1997, and 1996
(2) INVESTMENTS
The amortized cost and estimated market values of investments in debt
securities as of December 31, 1998 and 1997 are as follows:
<TABLE>
<CAPTION>
1998
----
Gross Gross Estimated
Amortized unrealized unrealized 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 $ 1,497,876 56,964 -- 1,554,840
Debt securities issued by
foreign governments 1,992,730 145,480 -- 2,138,210
Corporate securities 13,099,422 642,583 -- 13,742,005
----------- ----------- ------- -----------
Total $16,590,028 845,027 -- 17,435,055
=========== =========== ======= ===========
Available for sale:
U.S. Treasury securities
and obligations of U.S.
government corporations
and agencies $ 4,247,714 72,156 32,957 4,286,913
Corporate securities 69,029,504 2,578,746 74,686 71,533,564
Mortgage-backed securities 24,375,455 657,844 -- 25,033,299
----------- ----------- ------- -----------
Total $97,652,673 3,308,746 107,643 100,853,776
=========== =========== ======= ===========
</TABLE>
<TABLE>
<CAPTION>
1997
----
Gross Gross Estimated
Amortized unrealized unrealized 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 $ 1,497,025 32,975 -- 1,530,000
Debt securities issued by
foreign governments 1,990,736 129,264 -- 2,120,000
Corporate securities 14,616,679 353,595 11,630 14,958,644
----------- ----------- ------ -----------
Total $18,104,440 515,834 11,360 18,608,644
=========== =========== ====== ===========
Available for sale:
U.S. Treasury securities
and obligations of U.S.
government corporations
and agencies $ 4,387,336 71,489 -- 4,458,825
Corporate securities 59,748,584 1,623,073 84,602 61,287,055
Mortgage-backed securities 25,402,301 752,133 9,043 26,145,391
----------- ----------- ------ -----------
Total $89,538,221 2,446,695 93,645 91,891,271
=========== =========== ====== ===========
</TABLE>
27
<PAGE> 28
COTTON STATES LIFE INSURANCE COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1998, 1997, and 1996
The amortized cost and estimated fair value of debt securities at December 31,
1998, by contractual maturity, is 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>
Amortized Estimated
cost fair value
<S> <C> <C>
Held for investment:
Due in one year or less $ 500,097 502,225
Due after one year through five years 12,745,513 13,323,001
Due after five years through ten years 3,344,418 3,609,829
----------- -----------
Total $16,590,028 17,435,055
=========== ===========
<CAPTION>
Amortized Estimated
cost fair value
<S> <C> <C>
Available for sale:
Due in one year or less 3,504,693 3,536,315
Due after one year through five years 17,087,140 17,792,700
Due after five years through ten years 30,057,423 31,511,232
Due after ten years 22,627,962 22,980,230
Mortgage-backed securities 24,375,455 25,033,299
----------- -----------
Total $97,652,673 100,853,776
=========== ===========
</TABLE>
Bonds with amortized cost of approximately $1,800,000 at December 31, 1998 were
on deposit with state regulatory authorities in accordance with statutory
requirements.
28
<PAGE> 29
COTTON STATES LIFE INSURANCE COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1998, 1997, and 1996
Realized and unrealized gains and losses on investments for the years
ended December 31, were as follows:
<TABLE>
<CAPTION>
1998 1997 1996
---------- ---------- ----------
<S> <C> <C> <C>
Realized gains (losses) on sales and redemptions of investments:
Fixed maturities held for investment:
Gross gains $ -- -- 1,041
Gross losses -- (18,719) (581)
---------- ---------- ----------
Net realized gains (losses) -- (18,719) 460
---------- ---------- ----------
Fixed maturities available for sale:
Gross gains 388,844 129,418 133,069
Gross losses (24,109) -- (26,584)
---------- ---------- ----------
Net realized gains 364,735 129,418 106,485
---------- ---------- ----------
Total 364,735 110,699 106,945
---------- ---------- ----------
Changes in unrealized gains (losses):
Fixed maturities held for investment 340,823 352,948 (693,042)
Fixed maturities available for sale 848,053 1,802,499 (1,998,408)
---------- ---------- ----------
Net unrealized gains (losses) 1,188,876 2,155,447 (2,691,450)
---------- ---------- ----------
Total realized and unrealized
gains (losses) $1,553,611 2,266,146 (2,584,505)
========== ========== ==========
Details of net investment income are as follows:
<CAPTION>
1998 1997 1996
---------- ---------- ----------
<S> <C> <C> <C>
Investment income:
Fixed maturities held for investment $1,181,695 1,244,735 1,395,312
Fixed maturities available for sale 6,619,801 5,917,054 5,371,791
First mortgage loans 333,870 395,235 429,312
Policy loans 576,800 527,493 480,635
Short-term investments 355,820 285,267 257,926
---------- ---------- ----------
Total investment income 9,067,986 8,369,784 7,934,976
Less investment expenses 280,938 313,384 369,208
---------- ---------- ----------
Net investment income $8,787,048 8,056,400 7,565,768
========== ========== ==========
</TABLE>
29
<PAGE> 30
COTTON STATES LIFE INSURANCE COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1998, 1997, and 1996
(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.
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, 1998 and 19967 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>
1998 $3,531,728 3,660,532
1997 $4,215,962 4,325,740
========== =========
</TABLE>
30
<PAGE> 31
COTTON STATES LIFE INSURANCE COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1998, 1997, and 1996
(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
------------- Years -----------
Line of business 1998 1997 of issue Interest rates Mortality Withdrawals
---------------- ---- ---- -------- -------------- --------- -----------
($000 omitted)
<S> <C> <C> <C> <C> <C> <C>
Life:
Individual $ 4,076 4,273 l956-65 4% l955-60 Basic Table Company
Select and Ultimate experience
Individual 8,617 8,892 l966-79 6.5% - 5% (A) Same as above Same as above
Individual 5,553 5,490 l980-88 7.5% - 6% (A) l965-70 Basic Table Same as above
Select and Ultimate
Individual 10,977 7,761 1989-98 7.5% - 6% (A) 1975-80 Basic Table Same as above
Select and Ultimate
Individual 4,059 3,789 Various 3.5% - 2.5% Statutory --
Annuities and
universal life 79,097 74,012 Various 6.25% - 4.5% Accumulated --
account value
Group 5 5 Various -- Unearned premiums --
-------- -------
112,384 104,222
Accident and health -
individual 40 47 Various 3% -- --
-- --
Total future
policy
benefits $112,424 104,269
======== =======
</TABLE>
(A) Interest rates are graded to the ultimate rate in 25 years.
31
<PAGE> 32
COTTON STATES LIFE INSURANCE COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1998, 1997, and 1996
The Company participates in certain business assumed from federally
sponsored group pools. Further, it is the Company's general policy to
reinsure individual life insurance in excess of $100,000, group life
insurance in excess of $55,000, major medical payments in excess of
$75,000 annually per individual, accidental deaths, and certain
disability income coverage. Amounts ceded under reinsurance agreements
become liabilities of the Company should the reinsurers be unable to
meet their obligations under the reinsurance agreements. The effect of
reinsurance assumed and ceded on certain financial statement accounts
is as follows:
<TABLE>
<CAPTION>
1998 1997 1996
---------- ---------- ----------
<S> <C> <C> <C>
Premium income:
Direct premiums $10,931,789 8,816,115 7,102,032
Reinsurance assumed 672,153 666,034 712,170
Reinsurance ceded (1,430,944) (1,292,779) (1,111,280)
---------- ---------- ----------
Net premium income $10,172,998 8,189,370 6,702,922
---------- ========== ==========
Mortality and expense charges ceded $2,119,851 1,818,826 1,590,701
---------- ---------- ----------
Benefits and claims:
Reinsurance assumed $ 662,918 641,005 696,986
========== ========== ==========
Reinsurance ceded $2,966,909 4,149,310 2,756,838
========== ========== ==========
</TABLE>
32
<PAGE> 33
COTTON STATES LIFE INSURANCE COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1998, 1997, and 1996
(5) INCOME TAXES
Deferred income taxes reflect the net tax effects of temporary
differences between the carrying values of assets and liabilities for
financial reporting purposes and Federal income tax purposes. The net
deferred tax liability at December 31, 1998 and 1997 is composed of the
tax-effected temporary differences related to the following amounts:
<TABLE>
<CAPTION>
1998 1997
---------- ----------
<S> <C> <C>
Deferred tax assets:
Deferred policy acquisition costs - tax $1,477,786 1,330,770
Life insurance reserves 4,802,693 4,697,802
Unearned mortality and expense charges 832,676 709,504
Post-retirement health benefits liability 102,741 105,759
Deferred compensation 206,511 139,869
Capital loss carryforward -- 129,012
Other, net 111,386 93,255
---------- ----------
Total deferred tax assets 7,533,793 7,205,971
---------- ----------
Deferred tax liabilities:
Fixed maturities available for sale 1,088,375 808,803
Deferred policy acquisition costs - financial
statements 11,973,712 10,237,548
Due and unpaid premiums 67,221 58,112
Other, net 26,169 21,884
---------- ----------
Total deferred tax liabilities 13,155,477 11,126,347
---------- ----------
Net deferred tax liability $5,621,684 3,920,376
========== ==========
</TABLE>
Statement of Financial Accounting Standards No. 109, Accounting for
Income Taxes, (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, 1998
was $4,203,000. The balance in the "shareholders' surplus" account at
December 31, 1998 was $36,758,000. The Company does not anticipate any
of the "policyholders' surplus" account becoming taxable in the
foreseeable future.
In assessing the realizability of deferred tax assets, management
considers whether it is more likely than not that some portion or all
of the deferred tax assets will not be realized. Management considers
the scheduled reversal of deferred tax liabilities, projected future
taxable income, and tax planning strategies in making this assessment.
33
<PAGE> 34
COTTON STATES LIFE INSURANCE COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1998, 1997, and 1996
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>
1998 1997 1996
---------- --------- ---------
<S> <C> <C> <C>
Federal income tax expense at statutory rate $3,634,870 2,966,983 2,143,104
Special deductions available to small life
insurance companies (584,724) (565,318) (547,625)
Net gains of subsidiaries not currently
includable -- (70,068) (80,552)
Change in valuation allowance -- (81,000) (169,000)
surtax exemption (92,581) (66,617) (42,928)
Other, net 187,193 (11,444) (12,422)
---------- --------- ---------
Total Federal income taxes $3,144,758 2,172,536 1,290,577
========== ========= =========
</TABLE>
(6) POST-RETIREMENT BENEFITS OTHER THAN PENSIONS
The Company has a plan which provides for post-retirement health care
and life insurance benefits for certain employees. These benefits
include major medical insurance with deductible and coinsurance
provisions. The Company accrues benefits on a current basis and the
plan is not funded. The components of the net periodic post-retirement
benefit cost for the years ended December 31 are as follows:
<TABLE>
<CAPTION>
1998 1997 1996
------- ------ ------
<S> <C> <C> <C>
Service cost $ 439 351 350
Interest cost 13,808 13,631 10,883
Amortization of unrecognized gain (9,425) (6,741) (9,370)
------- ------ ------
Net periodic post-retirement benefit cost $ 4,822 7,241 1,863
======= ====== ======
</TABLE>
34
<PAGE> 35
COTTON STATES LIFE INSURANCE COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1998, 1997, and 1996
The following table sets forth the plan's funded status reconciled with
the amount shown in the Company's balance sheet at December 31, 1998 and 1997:
<TABLE>
<CAPTION>
1998 1997
-------- -------
<S> <C> <C>
Accumulated post-retirement benefit obligation:
Retirees $151,617 184,642
Other active participants 10,800 12,458
-------- -------
Accumulated post-retirement benefit
obligation in excess of plan assets 162,417 197,100
Unrecognized net gain 139,761 113,956
-------- -------
Accrued post-retirement benefit liability $302,178 311,056
======== =======
Accumulated post-retirement benefit liability
at beginning of year $311,056 317,103
Net periodic cost 4,822 7,241
Amounts paid by Company (13,700) (13,288)
-------- -------
Accumulated post-retirement benefit liability
at year end $302,178 311,056
======== =======
Accumulated post-retirement benefit obligation
at beginning of year $197,100 190,665
Service cost 439 351
Interest 13,808 13,631
Amounts paid by Company (13,700) (13,288)
Actuarial (gain) loss (35,230) 5,741
-------- -------
Accumulated post-retirement benefit obligation
at end of year $162,417 197,100
======== =======
</TABLE>
The post-retirement benefit obligation was determined by application of
the terms of the plan using relevant actuarial assumptions. Health care
costs are projected to increase at annual rates ranging from 0% in 1998
up to 5% in 2005 and thereafter. A 1% annual increase in these assumed
cost trend rates would increase the accumulated post-retirement benefit
obligation by December 31, 1998 by approximately $19,970 and the
service and interest cost components of the net periodic
post-retirement benefit cost for 1998 approximately $1,348. A 1% annual
decrease in these assumed cost trends would decrease the accumulated
post-retirement benefit obligation at December 31, 1998 by
approximately $17,295 and the service and interest components of the
net periodic post-retirement benefit cost by $1,167. The assumed
discount rate used in determining the accumulated post-retirement
obligation was 6.75% at December 31, 1998 and 7.25% at December 31,
1997.
(7) TRANSACTIONS WITH AFFILIATES
CSMI, through its wholly owned subsidiary, Shield Insurance Company,
controls approximately 33% 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
35
<PAGE> 36
COTTON STATES LIFE INSURANCE COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1998, 1997, and 1996
basis of each company's premium income. Expenditures allocated to the
Company amounted to $2,779,136 in 1998,$2,467,408 in 1997, $2,469,691
in 1996. At December 31, 1998 and 1997, the Company owed Cotton States
Mutual $823,293 and $1,064,682, respectively.
Included in other assets are deferred software costs relating to
various system development projects of the Company and Cotton States
Mutual that were amortized over five years, and were fully amortized as
of December 31, 1996. Rent for use of the software of approximately
$106,000 in 1998 and 1997, $448,000 in 1996 has been charged to Cotton
States Mutual and Shield. The Company recorded amortization expense of
approximately $342,000 in 1996.
(8) STOCK-BASED COMPENSATION
The Company has various stock option plans for the Company's officers
and key employees, as well as directors. Under the employee plan,
options may be granted to purchase up to 937,500 shares of the
Company's stock at a per share price of not less than 100% of fair
market value at date of grant. At December 31, 1998, there had been
538,156 options exercised, 63,415 options were exercisable leaving
335,929 available for grant under the Plan. Under the directors' plan,
options are granted based on the level of directors' fees at a per
share price of 50% of fair market value at date of grant. The employee
and directors' options have a term of ten years and are not subject to
any vesting requirements. The weighted-average remaining contractual
life on options outstanding at December 31, 1998 is four years. The
weighted-average grant date fair value of options granted during 1998,
1997 and 1996 was $15.81, $8.24 and $4.53, respectively. A summary of
options follows:
<TABLE>
<CAPTION>
1998 1997 1996
--------------------- --------------------- ------------------
Weighted- Weighted- Weighted-
average average average
exercise exercise exercise Option
Options price Options price Options price price
------- ----- ------- ----- ------- ----- -----
<S> <C> <C> <C> <C> <C> <C> <C>
Shares under option 107,673 $3.32 128,124 $2.93 115,067 $2.78 $1.92-7.63
Options exercisable 107,673 3.32 128,124 2.93 115,067 2.78 1.92-7.63
Options granted 8,949 7.63 13,991 3.80 21,318 2.40 1.92-7.63
Options exercised 29,400 2.96 934 2.96 33,578 2.96 2.96
------- ------- ------- ---------
</TABLE>
In addition to the stock options described above, the Company has
awarded nontransferable, restricted shares of Company common stock to
various key executives under key executive restricted stock bonus
plans. The market value of the common stock at the date of issuance is
recorded as compensation expense using the straight-line method over
the vesting period of the awards. The Company awarded 23,832, 24,459,
and 32,966 shares of restricted stock under such plans during 1998,
1997, and 1996, respectively. The weighted-average grant date fair
value of such shares was $15.53, $7.43, and $4.50, respectively.
Aggregate compensation expense with respect to the foregoing restricted
stock awards was approximately $252,000, $151,000, and $106,000 in
1998, 1997, and, 1996, respectively.
36
<PAGE> 37
COTTON STATES LIFE INSURANCE COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1998, 1997 and 1996
In accordance with APB Opinion No. 25, approximately $320,000,$204,000
and $147,300 in compensation expense has been recorded in 1998, 1997
and 1996, respectively, for the various stock option and restricted
stock awards granted in 1998, 1997 and 1996. Had the Company determined
compensation cost based on the fair value at the grant date for its
stock options and restricted stock awards under SFAS No. 123, the
Company's net earnings and basic net earnings per share would have been
reduced to the pro forma amounts indicated below:
<TABLE>
<CAPTION>
Years ended December 31,
------------------------
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Net income:
As reported $7,240,585 6,304,558 4,832,577
Pro forma 7,215,424 6,258,403 4,799,904
Basic net earnings per share:
As reported 1.13 .99 .76
Pro forma 1.13 .98 .75
Diluted net earnings per share:
As reported 1.10 .96 .74
Pro forma 1.10 .95 .74
</TABLE>
The per share weighted-average fair value of stock options and
restricted stock granted was estimated using an option pricing model
with the following weighted average assumptions: expected life of five
years for options and three years for restricted stock for all years,
expected dividend yield of 1% for 1998 grants and 2.1% for all other
years, risk-free interest rate of 5.5% for 1998 and 1997 grants and
6.0% for 1996 grants, and an expected volatility of 67% for 1998
grants, 52% for 1997 grants and 30% for 1996 grants.
(9) STATUTORY FINANCIAL STATEMENTS
Accounting practices used to prepare statutory financial statements for
regulatory filings of stock life insurance companies differ from GAAP.
Material differences resulting from these accounting practices include:
deferred policy acquisition costs, deferred Federal income taxes and
statutory non-admitted assets are recognized under GAAP accounting;
statutory investment valuation reserves are not recognized under GAAP
accounting; premiums for universal life and investment-type products
are recognized as revenues for statutory purposes and as deposits to
policyholders' accounts under GAAP; different assumptions are used in
calculating future policyholders' benefits; and different methods are
used for calculating valuation allowances for statutory and GAAP
purposes.
Net earnings and shareholders' equity, as reported to regulatory
authorities in conformity with statutory accounting practices for each
of the years in the three-year period ended December 31, 1998 are as
follows:
<TABLE>
<CAPTION>
1998 1997 1996
----------- ---------- ----------
<S> <C> <C> <C>
Statutory net earnings $ 3,071,087 2,488,573 2,539,179
=========== ========== ==========
Statutory shareholders' equity $27,736,410 27,393,213 23,977,514
=========== ========== ==========
</TABLE>
37
<PAGE> 38
COTTON STATES LIFE INSURANCE COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1998, 1997 and 1996
The Georgia Insurance Code limits dividends in any one year to the
greater of statutory earnings, excluding realized capital gains, or 10%
of statutory surplus, unless the expressed permission of the Georgia
Insurance Department is obtained. Dividend payments to shareholders are
further limited by the Georgia Insurance Code to unassigned statutory
surplus, which at December 31, 1998 was approximately $22,000,000. 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 $3,100,000 in 1999 without approval.
(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.
38
<PAGE> 39
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholders
Cotton States Life Insurance Company:
We have audited the accompanying consolidated balance sheets of Cotton
States Life Insurance Company and subsidiaries (the "Company") as of
December 31, 1998 and 1997, and the related consolidated statements of
earnings, shareholders' equity, comprehensive income, and cash flows
for each of the years in the three-year period ended December 31, 1998.
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,
1998 and 1997, and the results of their operations and their cash flows
for each of the years in the three-year period ended December 31, 1998,
in conformity with generally accepted accounting principles.
/s/KPMG LLP
KPMG LLP
Atlanta, Georgia
February 24, 1999
39
<PAGE> 40
MANAGEMENT'S REPORT TO SHAREHOLDERS OF COTTON STATES LIFE INSURANCE COMPANY AND
SUBSIDIARIES
The accompanying consolidated financial statements for Cotton States Life
Insurance Company and subsidiaries (the "Company") were prepared by management,
which is responsible for the objectivity and integrity of these statements. The
consolidated financial statements have been prepared in conformity with
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 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 on the previous page.
The Board of Directors, through its audit committee composed of outside
directors, monitors management's financial reporting. The independent auditors
have direct access to the audit committee and meet with the committee
periodically to discuss the scope of each audit, the results of the audit and
other matters which they believe should be brought to the committee's attention.
J. Ridley Howard Gary W. Meader, CPA
Chairman of the Board, Chief Financial Officer
President and Chief
Executive Officer
40
<PAGE> 41
Quarterly Results
The Following is a summary of the unaudited quarterly results of operations for
the three years ended December 31, 1998.
<TABLE>
<CAPTION>
1998 quarter ended March 31 June 30 September 30 December 31
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Premium income $2,167,228 2,349,560 2,495,269 3,160,941
Mortality and expense charges $2,464,809 2,522,743 2,670,654 2,104,150
Net investment income, realized
investment gains and brokerage income $2,909,654 2,969,254 3,213,171 3,273,920
---------- ---------- ---------- ----------
Total revenue $7,541,691 7,841,557 8,379,094 8,539,011
---------- ---------- ---------- ----------
Benefits and expenses $5,305,058 5,655,469 5,635,458 5,320,025
---------- ---------- ---------- ----------
Net earnings $1,556,251 1,572,097 2,023,381 2,088,856
========== ========== ========== ==========
- -----------------------------------------------------------------------------------------------------------
Basic earnings per share of common stock $ .25 .25 .31 .33
Diluted earnings per share of common stock $ .24 .24 .30 .32
- -----------------------------------------------------------------------------------------------------------
<CAPTION>
1997 quarter ended March 31 June 30 September 30 December 31
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Premium income $1,778,758 1,780,168 1,969,344 2,661,100
Mortality and expense charges $2,317,145 2,308,049 2,481,680 2,323,940
Net investment income, realized
investment gains and brokerage income $2,321,194 2,785,897 2,580,460 3,621,243
---------- ---------- ---------- ----------
Total revenue $6,417,097 6,874,114 7,031,484 8,606,283
---------- ---------- ---------- ----------
Benefits and expenses $4,606,463 4,774,836 5,008,764 6,061,821
---------- ---------- ---------- ----------
Net earnings $1,431,300 1,552,380 1,627,901 1,692,977
========== ========== ========== ==========
- -----------------------------------------------------------------------------------------------------------
Basic earnings per share of common stock $ .22 .24 .26 .27
Diluted earnings per share of common stock $ .22 .23 .25 .26
- -----------------------------------------------------------------------------------------------------------
<CAPTION>
1996 quarter ended March 31 June 30 September 30 December 31
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Premium income $1,373,288 1,375,889 1,585,757 2,367,988
Mortality and expense charges $2,144,976 2,096,955 2,265,965 2,189,725
Net investment income, realized
investment gains and brokerage income $2,244,454 2,233,997 2,307,744 2,672,279
---------- ---------- ---------- ----------
Total revenue $5,762,718 5,706,841 6,159,466 7,229,992
---------- ---------- ---------- ----------
Benefits and expenses $4,125,037 4,354,847 4,483,049 5,772,930
---------- ---------- ---------- ----------
Net earnings $1,275,972 1,105,422 1,229,658 1,221,525
========== ========== ========== ==========
Basic earnings per share of common stock $ .20 .18 .19 .19
Diluted earnings per share of common stock $ .20 .17 .19 .18
</TABLE>
Note - Failure of individual quarterly earnings per share to total annual
earnings per share results from the computation of weighted average number of
shares on an individual quarterly basis.
Earnings per share amounts have been adjusted for the April 1997 and January
1998 five-for four stock and three-for -two stock splits, respectively.
The fourth quarter results for the three years include participation in
federally sponsored group pools as follows:
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Premiums $672,153 666,034 712,170
Benefits $662,918 641,005 696,986
</TABLE>
See previous discussion on Results of Operations.
41
<PAGE> 42
ITEM 9. DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
NONE.
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
or her successor has been duly elected and has qualified or until he or she
attains the age of 72.
TERMS EXPIRING 1999 ANNUAL MEETING - NOMINATED FOR RE-ELECTION
- --------------------------------------------------------------------------------
GAYLORD O. COAN
Director Since 1995
Age 63
Since 1995, Mr. Coan has been Chief Executive Officer of Gold Kist Inc., where
he also serves as the Chairman of the Management Executive Committee. Mr. Coan
is Chairman of the Executive Committee and serves as a member of the Audit
Committee and the Compensation Committee of the Board of Directors of the
Company. Mr. Coan also is a member the Board of Directors of SunTrust Banks of
Georgia, Inc., SunTrust Bank, Atlanta, Archer-Daniels-Midland Company, Georgians
for Better Transportation and Alfred C. Toepfer International of Hamburg,
Germany.
- --------------------------------------------------------------------------------
E. JENNER WOOD, III
Director Since 1991
Age 47
Since 1993, Mr. Wood has been Executive Vice President, Trust and Investment
Services, of SunTrust Banks, Inc. Mr. Wood was the Executive Vice President,
Trust and Investment Management, of SunTrust Bank, Atlanta prior to October,
1993. Mr. Wood is Chairman of the Audit Committee and serves as a member of the
Executive Committee of the Board of Directors of the Company. Mr. Wood also is a
member of the Board of Directors of CSI, Oxford Industries and Crawford &
Company.
- --------------------------------------------------------------------------------
MATHEWS D. SWIFT
Director Since 1997
Age 51
Since 1997, Mr. Swift has been the President and Chief Operating Officer of W.
C. Bradley Co., Real Estate Division and President of Developers-Investors,
Inc., a subsidiary of W. C. Bradley Co. From 1986 to 1997, Mr. Swift was the
Vice President and General Manager of W. C. Bradley Co., Real Estate Division.
Mr. Swift serves as a member of the Audit Committee and the Investment Committee
of the Board of Directors. Mr. Swift also is a member of the Board of Directors
of CSMR, Swift-Illges Foundation, Northstar Industries, Inc., and serves as a
director of the Advisory Board of Columbus Bank & Trust Company, an affiliate of
Synovus Financial Corporation.
- --------------------------------------------------------------------------------
42
<PAGE> 43
TERMS EXPIRING 2000 ANNUAL MEETING
- --------------------------------------------------------------------------------
ROBERT C. McMAHAN
Director Since 1987
Age 58
Since 1994, Mr. McMahan has been President and Chief Executive Officer of Golden
Point Group, Inc. Mr. McMahan was President and CEO of Fernbank, Inc., d/b/a
Fernbank Museum of Natural History through November, 1994. Mr. McMahan was Vice
Chairman of First Union National Bank of Georgia through September 1993. Mr.
McMahan was Chairman, Chief Executive Officer and a director of DF Southeastern
Inc., prior to January 15, 1993 and of Decatur Federal Savings & Loan
Association prior to March 1, 1993, and was President of each entity prior to
April, 1989. Mr. McMahan is Chairman of the Compensation Committee and serves as
a member of the Executive Committee of the Board of Directors of the Company.
Mr. McMahan also is a member of the Board of Directors of CSMR, 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 50
Since 1987, Mr. Harris has been the President and Chief Executive Officer of
Merchant Capital Investments, Inc., a Montgomery, Alabama investment and
merchant banking firm. Mr. Harris is Chairman of the Investment Committee and a
member of the Executive Committee and the Audit Committee of the Board of
Directors of the Company. Mr. Harris also serves on the Board of Directors of
Corral Southeast, Eufaula Bancorp and is Chairman of Southern Bank of Commerce
in Montgomery, Alabama.
- --------------------------------------------------------------------------------
43
<PAGE> 44
TERMS EXPIRING 2001 ANNUAL MEETING
- --------------------------------------------------------------------------------
J. RIDLEY HOWARD
Director Since 1989
Age 51
Since 1998, Mr. Howard has been the Chairman of the Board of Directors of the
Company, Mutual, CSI, CSMR and Shield. He has served as President and Chief
Executive Officer since 1989. Mr. Howard held various other offices with the
Company and its affiliates prior to January 1, 1989. Mr. Howard is a member of
the Executive Committee of the Board of Directors of the Company.
- --------------------------------------------------------------------------------
F. ABIT MASSEY
Director Since 1965
Age 71
Since 1988, Mr. Massey has been Chairman of the Board of Directors of
Gainesville Bank and Trust. Since 1960, Mr. Massey has been 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 Audit Committee and the Investment Committee of the Board of Directors of
the Company. Mr. Massey will retire as a member of the Board of Directors of the
Company on December 1, 1999 when he reaches mandatory retirement age. Mr. Massey
is also Chairman of the Board of Directors of GB&T Bancshares, Inc.
- --------------------------------------------------------------------------------
CAROL D. CHERRY
Director Since 1996
Age 51
Since 1976, Ms. Cherry has been Chairman of the Board of Directors of Shop'n
Chek, Inc., an international marketing service company providing clients with
information relative to the verbal and physical presentation of their products
and/or services at the retail level. From 1976 to 1998, Ms. Cherry was also the
President of Shop'n Chek, Inc. Ms. Cherry also is a member of the Compensation
Committee and the Investment Committee of the Board of Directors of the Company.
Ms. Cherry also is a member of the Board of Directors of CSI.
- --------------------------------------------------------------------------------
There are no family relationships among the directors or between any director
and any executive officer of the Company. All directors have served continuously
since their first election or appointment.
44
<PAGE> 45
OTHER INFORMATION ABOUT THE BOARD AND ITS COMMITTEES
During 1998, the Board of Directors held four meetings. Each director
attended at least 75% of the aggregate meetings of the Board of Directors and
meetings of committees of which he or she was a member. The Board of Directors
has four standing committees. Certain information regarding the function of the
Board's committees, and the number of meetings held by each committee during
1998 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. During 1998, 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
1998, the Compensation Committee held three meetings.
INVESTMENT COMMITTEE
The Investment Committee reviews the Company's investments and advises
the Board of Directors with respect to such investments. During 1998, the
Investment Committee held four meetings.
EXECUTIVE COMMITTEE
The Executive Committee is authorized to act on behalf of the Board of
Directors on all matters that may arise between regular meetings of the Board of
Directors upon which the Board of Directors would be authorized to act,
including the nomination of directors. During 1998, the Executive Committee held
five meetings.
45
<PAGE> 46
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 51 1984 Chairman of the Board/President
and Chief Executive Officer
Robert L. Fincher 56 1979 Senior Vice President
Gary W. Meader 52 1976 Chief Financial Officer/Treasurer
</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.
ITEM 11. EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG TERM COMPENSATION
ANNUAL COMPENSATION(1) ----------------------
NAME AND ---------------------- RESTRICTED ALL OTHER
PRINCIPAL POSITION YEAR SALARY BONUS STOCK AWARDS(2) COMPENSATION(3)
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
J. Ridley Howard, CEO 1998 $ 32,400 $115,255 $205,152 $5,700
1997 $ 33,000 $ 75,150 $ 88,087 $5,700
1996 $ 31,250 -- $ 96.427 $1,848
Robert L. Fincher,
Senior Vice president 1998 $ 18,630 $ 57,405 $ 60,112 $5,700
1997 $ 18,700 $ 32,630 $ 33,527 $5,700
1996 $ 16,800 -- $ 16,660 $1,848
Gary W. Meader, CFO 1998 $ 17,640 $ 36,490 $ 55,616 $5,700
1997 $ 18,830 $ 32,630 $ 32,230 $5,700
1996 $ 18,600 -- $ 24,579 $1,848
</TABLE>
(1) The salaries of officers of the Company are prorated among the Company,
Mutual and Shield, based upon the premium income of each entity. Total
compensation of the Company's executive officers for 1998 from all affiliated
corporations was $1,653,187 of which the Company paid $615,800.
(2) The aggregate restricted stock holdings at the end of 1998 for Messrs.
Howard, Fincher and Meader were 43,141, 11,340 and 12,456 shares with values of
$641,938, $168,739 and $185,345, respectively, based upon the value of the
Company's common stock at December 31, 1998. Dividends on stock awards are paid
at the same rate as paid to all share owners.
(3) The amounts represent the Company's 401(k) match.
46
<PAGE> 47
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
AND
FISCAL YEAR END OPTION VALUES
The following table shows stock options exercised by the named
executive officer during 1998, 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, 1998. 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
Securities Value of
Underlying Unexercised
Unexercised In-the-Money
Number of Value Options at Options at
Shares Realized 12/31/98 12/31/98
Acquired on Upon Exercisable/ Exercisable/
Name Exercise Exercise Unexercisable Unexercisable
- -------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
J. Ridley Howard 23,000 $259,670 10,769/0 $128,366/0
Robert L. Fincher -- -- 22,887/0 $272,813/0
Gary W. Meader 6,400 $ 84,078 19,865/0 $236,791/0
</TABLE>
COMPENSATION PURSUANT TO PLANS
PENSION PLAN
The Company is a participating employer in the Cotton States Employee
Retirement Income Plan (the "Plan"), which is a qualified pension plan sponsored
jointly with Mutual. The Plan covers all of the Company's salaried employees.
The Plan provides a retirement income benefit at age 65 which is based
on the employee's number of years of service (maximum 35 years) and average
earnings during the five consecutive years (in the last ten years of employment)
in which the earnings are highest. Age 65 retirement benefit is derived as the
sum of (i) the product of the number of years of service times 85% of average
earnings and (ii) the product of the number of years of service times 55% of
"excess average earnings." Excess average earnings is the amount, if any, by
which the average earnings for a participant exceeds the 35 year average maximum
social security taxable wage base for all persons born in the same year as the
participant. The Plan also provides an early retirement benefit after age 55,
with no reduction in benefit entitlement due to age, when the sum of the
employee's age and years of credited service equals or exceeds 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.
47
<PAGE> 48
SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN
The Company adopted the Cotton States Supplement Executive Retirement
Plan ("SERP") effective January 1, 1992 in order to provide for a supplement
pension plan to replace pension benefits which were affected as a result of
amendments to the Internal Revenue Code of 1986, as amended ("IRC"). The SERP is
an agreement between the Company and employees meeting the qualification
provisions of the SERP in which the Company provides benefits in excess of the
limitations on benefits imposed by the IRC regarding highly compensated
employees. The SERP also replaces the pension accruals set forth under the Plan
as a result of the new benefit formulas mandated by the IRC which resulted in
amendments to the Plan. The SERP incorporates all of the terms and conditions of
the Plan and future amendments to the Plan.
The following table sets forth the estimated annual benefits payable
upon retirement at age 65 under the plans.
PENSION PLAN AND SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN INCOME
ANNUAL BENEFITS PAYABLE UPON RETIREMENT AT AGE 65
<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 35
-- -- -- -- --
<S> <C> <C> <C> <C> <C>
$125,000 27,218 36,291 45,363 54,436 55,258
$150,000 33,468 44,624 55,780 66,936 67,508
$175,000 39,718 52,957 66,197 79,436 79,758
$200,000 45,968 61,291 76,613 91,936 92,008
$225,000 52,218 69,624 87,030 104,436 104,436
$250,000 58,468 77,957 97,447 116,936 116,936
$300,000 70,968 94,624 118,280 141,936 141,936
$350,000 83,468 111,291 139,113 166,936 166,936
$400,000 95,968 127,957 159,947 191,936 191,936
$450,000 108,468 144,624 180,780 216,936 216,936
$500,000 120,968 161,291 201,613 241,936 241,936
</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 $631,743. This estimate assumes no change from 1998 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.
48
<PAGE> 49
INCENTIVE SAVINGS PLAN
The Company participates in the Cotton States Incentive Savings and
Investment 401(k) Plan (the "401(k) Plan"). The 401(k) Plan is a qualified
savings incentive plan sponsored by the same companies that sponsor the
Company's Plan. The 401(k) Plan is open to all employees who have completed one
year of service and have reached their twenty-first birthday. Eligible employees
may contribute from 2% to 10% of their compensation to the 401(k) Plan. The
Company's contribution will not be less than 20% nor more than 60% of the
employees contribution eligible for matching. Employees are fully vested in the
Company's contribution after five years of service. Employees are not permitted
to withdraw their account before age 59 1/2 except in the event of death,
disability, termination of employment or financial hardship.
INCENTIVE STOCK OPTIONS
The Company has a qualified incentive stock option plan for its
officers and key employees and those of its subsidiaries, CSI and CSMR (the "ISO
Plan"). During 1998, no options were granted under the ISO Plan.
During 1998, 29,400 options were exercised pursuant to the ISO Plan. At
December 31, 1998, options to purchase 63,415 shares at $2.96 per share were
outstanding.
As of December 31, 1998, the following executive officers held options
with regard to the stated number of shares:
<TABLE>
<CAPTION>
Number of
Name Options (Shares)
---- ----------------
<S> <C>
J. Ridley Howard 10,769
Robert L. Fincher 22,887
Gary W. Meader 19,865
</TABLE>
DIRECTORS' DISCOUNTED STOCK OPTION PLAN
The Company has a Directors' Discounted Stock Option Plan (the "DSOP").
The DSOP is designed to assist the Company in attracting, retaining and
compensating highly qualified individuals who are not employees of the Company
for service as members of the Board and to provide them with a proprietary
interest in the common stock of the Company. The Board believes the DSOP will be
beneficial to the Company and its shareholders by encouraging and enabling
non-employee directors to have a personal financial stake in the Company, in
addition to emphasizing their common interest with the shareholders in
increasing the value of the common stock of the Company in the long term.
The DSOP provides for automatic yearly grants of options to purchase
shares of common stock of the Company to each director who elects to participate
in the DSOP. Each director who is not an employee of the Company or any of its
subsidiaries or affiliates may participate by filing with the Company an
irrevocable election to receive the grant of a stock option in lieu of part or
all of the fees which the director would have been entitled to receive for the
immediately preceding year for his or her service on the Board. Options will be
granted automatically on the date of the annual meeting of the Board as to any
director who, prior to the date of such annual meeting, has filed with the
Company an irrevocable election to participate in the DSOP.
The number of shares of common stock of the Company subject to each
option granted to a director shall be determined by dividing (i) the director's
fee due to a director, by (ii) the fair market value of the common stock of the
company on the date of grant, minus the option exercise price. The fair market
value of the common stock of the Company under the DSOP shall be the closing
price as reported on the Nasdaq National Market and the option exercise price
for each option granted shall be 50% of the fair market value, to be paid in
cash by the director upon exercise. All options granted under the DSOP will
expire ten years after the date of grant, subject to DSOP provisions relating to
the retirement of the director because of death, disability, or age. That
portion of an option granted under the DSOP which is attributable to any portion
of the directors' fees which is not earned due to termination as a director,
shall automatically abate and be canceled. In the event of the death of the
holder of any unexercised option, all of the holder's outstanding options will
become immediately exercisable
49
<PAGE> 50
upon the date of death by his or her legal representative. No option may be
exercised under the DSOP before the 12 month anniversary of the date of grant.
A total of 281,250 shares of Company common stock is reserved for
issuance under the DSOP (subject to adjustment for subsequent stock splits,
stock dividends and certain other changes in the common stock of the Company).
The Company has granted 44,258 options under the DSOP, including 8,949 options
to be granted automatically at the 1999 Annual Meeting. Upon the exercise of an
option, the Company will issue authorized but previously unissued shares. If an
option issued under the DSOP is terminated or canceled without having been
exercised, the shares which were not purchased thereunder will again become
available for issuance under the DSOP.
Adjustments will be made in the number of shares subject to the DSOP
and in the purchase price of outstanding options in the event of any change in
the number of shares of common stock of the Company outstanding as a result of a
stock split or stock dividend, recapitalization, merger, consolidation, or other
similar corporate change.
PERFORMANCE SHARE AWARDS PLAN
The Company has adopted a Performance Share Awards Plan (the "PAR
Plan"). The PAR Plan is designed to reward employees of the Company, its
subsidiaries and affiliates for services performed on behalf of the Company, to
stimulate employees' efforts on behalf of the Company, to encourage such
employees to remain with the Company, and to provide them with an ownership
interest in the common stock of the Company. The Board believes the PAR Plan
will be beneficial to the Company and its shareholders by encouraging and
enabling employees to have a personal financial stake in the Company.
The PAR Plan authorizes the Compensation Committee of the Board of
Directors to grant awards of shares of common stock of the Company to employees
of the Company designated by the Compensation Committee. The Compensation
Committee may grant performance share awards in shares of the common stock if
the performance of the Company, or any subsidiary, division or affiliate of the
Company selected by the Compensation Committee meets certain goals established
by the Compensation Committee during an award period. The Compensation Committee
would determine the goals, the maximum payment value of an award, and the length
of an award. In order to receive payment, a recipient of a performance share
award must remain in the employ of the Company until the completion of the award
period, except that the Compensation Committee may provide for a partial payment
if it determines that an exception is appropriate.
An aggregate of 281,250 shares of common stock of the Company are
subject to the PAR Plan. Adjustments will be made in the number of shares
subject to an award in the event of any change in the number of shares of common
stock outstanding as a result of a stock split or stock dividend,
recapitalization, merger, consolidation, or other similar corporate change. The
Company has granted 117,900 shares under the PAR Plan of which 36,643 vested in
1998. In the event of a change of control of the Company, as defined in the PAR
Plan, all awards granted prior to the change of control shall immediately vest
and the shares subject to the award shall be issued to the recipient of the
award.
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. Three officers are reimbursed for
country club dues. The Company, Mutual and Shield are allocated these expenses
under the same formula on which salaries are prorated. The total cost of these
expenses does not exceed 10% of any executive officer's salary and bonus
compensation.
50
<PAGE> 51
COMPENSATION OF DIRECTORS
During 1998, no director of the Company received any remuneration from
the Company in his capacity as a director except for fees, or options to receive
common stock in lieu of fees pursuant to the DSOP, and reimbursement for
expenses incurred in connection with attending directors' and committee
meetings. No director received cash compensation in excess of $18,125 for his
services as a director during 1998. Each director, other than J. Ridley Howard
is paid an annual stipend of $6,600. Mr. Howard did not receive an annual
stipend in 1998. In addition, each director was paid $750 plus travel expenses
for each meeting of directors and $600 for each committee meeting of directors
attended. Each committee member receives an additional $1,200 as an annual
stipend and each committee chairman receives $1,925 as an annual stipend. The
aggregate directors' fees for 1998 totaled $109,369. There were no retirement
benefits accrued or set aside during the year for any director for his services
as director. Upon reaching the mandatory retirement age of 72, directors of the
Company become directors emeritus and receive stipends ranging from $600 to
$11,000 annually for periods ranging from 15 years to life after the date of
retirement.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The members of the Compensation Committee of the Board of Directors
during the fiscal year were Messrs. McMahan and Coan and Ms. Cherry. None of
these directors are or have been officers or employees of the Company or its
subsidiaries. No executive officer of the Company serves on the board of any
other company other than an affiliate of the Company.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
The table below sets forth certain information about persons or
entities known by the Company to own beneficially more than 5 percent of the
Company's common stock, as of December 31, 1998. Except as noted below, the
Company believes that each of the persons or entities listed has sole investment
and voting power with respect to the shares included in the table.
<TABLE>
<CAPTION>
Percent
Name and Address Number of Shares Owned(1) of Class
- ---------------- ------------------------- --------
<S> <C> <C>
Shield Insurance Company 2,134,385(2) 33.5
244 Perimeter Center Parkway
Atlanta, Georgia 30346
Marvin Schwartz 477,982 7.51
605 Third Avenue
New York, New York 10158
Fidelity Management & Research Company,
a wholly owned subsidiary of
FMR Corporation
82 Devonshire Street
Boston, Massachusetts 02109 411,700 6.50
</TABLE>
(1) Under the rules of the U. S. Securities and Exchange Commission, a
person is deemed to be beneficial owner of a security if he or she has
or shares the power to vote or to direct the voting of such security,
or the power to dispose or to direct the disposition of such security.
A person is also deemed to be a beneficial owner of any securities that
such a person has the right to acquire beneficial ownership of within
60 days as well as any securities owned by such person's spouse,
children or relatives living in the same household. Accordingly, more
than one person may be deemed to be a beneficial owner of the same
securities.
(2) Shield Insurance Company is a wholly owned subsidiary of Mutual. The
Board of Directors of Mutual is identical to the Board of Directors of
the Company.
51
<PAGE> 52
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, 1999. All
shares are owned outright without shared voting and investment power except as
set forth below.
<TABLE>
<CAPTION>
NAME OF BENEFICIAL OWNER AMOUNT AND NATURE OF
DIRECTORS BENEFICIAL OWNERSHIP PERCENT OF CLASS
- --------- -------------------- ----------------
<S> <C> <C>
Carol D. Cherry 375 (1) *
Gaylord O. Coan 500 (2) *
Thomas A. Harris 1,187 (3) *
J. Ridley Howard 54.610 (4) *
F. Abit Massey 12,757 (5) *
Robert C. McMahan 2,109 (6) *
Mathews D. Swift 875 (7) *
E. Jenner Wood, III 1,405 *
EXECUTIVE OFFICERS
Robert L. Fincher 13,568 (8) *
Gary W. Meader 29,964 (9) *
All Officers and Directors as a Group
(16 persons) 138,291 (10) 2.2
</TABLE>
(*) Less than 1% not applicable
(1) Does not include options to acquire 2,640 shares previously granted or
options to acquire 1,022 shares to be granted automatically at the 1999
Annual Meeting under the DSOP.
(2) Does not include options to acquire 8,590 shares previously granted or
options to acquire 2,272 shares to be granted automatically at the 1999
Annual Meeting under the DSOP.
(3) Does not include options to acquire 5,914 shares previously granted or
options to acquire1,186 shares to be granted automatically at the 1999
Annual Meeting under the DSOP.
(4) Does not include options to acquire 10,769 shares previously granted
under the ISO Plan or 43,141 shares plus accrued dividends awarded
under the PAR Plan that have not vested.
(5) Does not include options to acquire10,854 shares previously granted or
options to acquire 1,789 shares to be granted automatically at the 1998
Annual Meeting under the DSOP.
(6) Does not include options to acquire 5,815 shares previously granted or
options to acquire 1,146 shares to be granted automatically at the 1999
Annual Meeting under the DSOP.
(7) Does not include options to acquire 1,496 shares preciously granted or
options to acquire 1,534 shares to be granted automatically at the 1999
Annual Meeting under the DSOP.
(8) Does not include options to acquire 22,887 shares under ISO Plan or
11,340 shares plus accrued dividends awarded under the PAR Plan that
have not vested.
(9) Does not include either options to acquire 19,865 shares under ISO Plan
or 12,456 shares plus accrued dividends awarded under the PAR Plan that
have not vested.
(10) Does not include either options to acquire 63,415 shares under ISO
Plan, which would increase the percentage of outstanding shares for all
officers and directors as a group to 3.2%, or 81,257 shares plus
accrued dividends awarded under the Par Plan that have not vested which
would increase the percentage of outstanding shares for all officers
and directors as a group to 4.4%. Also does not include options to
acquire 35,309 shares previously granted or options to acquire 8,949
shares to be granted automatically at the 1998 Annual Meeting under the
DSOP.
52
<PAGE> 53
CHANGES IN CONTROL
None.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
TRANSACTIONS WITH MANAGEMENT AND OTHERS
Shield, which is wholly owned by Mutual, owns 2,134,385 shares or 33.5
% of the outstanding common stock of the Company. See Item 12.
Certain general expenses are allocated to the Company by Mutual. These
expenses such as salaries, advertising, rents, and related expenses, represent
the Company's share of expenses initially paid by Mutual and are allocated based
on specific identification or, if indeterminable, generally on the basis of each
company's premium income. Expenditures allocated to the Company amounted to
$2,779,136 in 1998. See Item 1.
Gaylord O. Coan, a director of the Company, is CEO of Gold Kist Inc.
("Gold Kist"), where he also serves as the Chairman of the Management Executive
Committee. Gold Kist owns no stock of the Company. The Company shares offices
with Mutual and Shield in a building owned by a partnership of Mutual and Gold
Kist. The Company is not a partner in the partnership which owns the building
and has no equity interest in the building.
Gaylord O. Coan, a director of the Company, serves as a director of
SunTrust Banks, Inc. E. Jenner Wood, III, a director of the Company, serves as
an executive officer of SunTrust Banks, Inc. SunTrust Banks, Inc. received fees
from the Company in 1998 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 1998 for investment and custodial services and leases
of computer hardware.
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, 1998 and 1997
Consolidated Statements of Earnings, Years ended
December 31, 1998, 1997 and 1996
Consolidated Statements of Shareholders' Equity, Years ended
December 31, 1998, 1997 and 1996
Consolidated Statements of Comprehensive Income, Years ended
December 31, 1998, 1997 and 1996
Consolidated Statements of Cash Flows, Years ended
December 31, 1998, 1997 and 1996
Notes to Consolidated Financial Statements
53
<PAGE> 54
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, 1998
Schedule IV - Reinsurance, Years ended December 31, 1998,
1997 and 1996
Schedule V - Supplementary Insurance
Information, Years ended December 31,
1998, 1997 and 1996
All other schedules are omitted as the required information is
inapplicable, or the information is presented in the consolidated financial
statements or related notes.
<TABLE>
<CAPTION>
EXHIBITS
<S> <C>
21. Subsidiaries of the registrant.
23. Consent of experts.
27. Financial Data Schedule (for SEC only)
All other exhibits are omitted as the required documents are
inapplicable.
</TABLE>
REPORT ON FORM 8-K
No report on Form 8-K was filed for the fourth quarter of 1998.
54
<PAGE> 55
The Board of Directors and Shareholders
Cotton States Life Insurance Company
Under date of February 24, 1999, we reported on the consolidated balance sheets
of Cotton States Life Insurance Company and subsidiaries (the "Company") as of
December 31, 1998 and 1997, and the related consolidated statements of earnings,
shareholders' equity, comprehensive income and cash flows for each of the years
in the three year period ended December 31, 1998, as contained in the 1998
annual report to shareholders. Those consolidated financial statements and our
report thereon are incorporated by reference in the annual report on Form 10-K
for the year 1998. In connection with our audits of the aforementioned
consolidated financial statements, we also have audited the related financial
statements and schedules as listed in item 14. The financial statement schedules
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statement schedules based on our audits.
In our opinion, such financial statement schedules, when considered in relation
to the basic consolidated financial statements taken as a whole, present fairly,
in all material respects, the information set forth therein.
/s/KPMG LLP
KPMG LLP
Atlanta, Georgia
February 24, 1999
55
<PAGE> 56
Schedule I
Cotton States Life Insurance Company and Subsidiaries
Consolidated Summary of Investments
December 31, 1998
<TABLE>
<CAPTION>
Amount at which
shown on 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 $ 1,497,876 1,554,840 1,497,876
Foreign governments 1,992,730 2,138,210 1,992,730
Public utilities 4,847,682 5,064,344 4,847,682
All other corporate bonds 8,251,740 8,677,661 8,251,740
------------ ------------ ------------
Total fixed maturities held for investment 16,590,028 17,435,055 16,590,028
Fixed maturities, available for sale:
Bonds:
United States government and government
agencies and authorities 28,253,804 28,943,837 28,943,834
Foreign governments 2,027,358 2,076,740 2,076,740
Public utilities 13,029,273 13,412,805 13,412,805
All other corporate bonds 54,342,238 56,420,394 56,420,394
------------ ------------ ------------
Total fixed maturities available for sale 97,652,673 100,853,776 100,853,776
First mortgage loans on real estate 3,531,728 3,660,532 3,531,728
Policy loans 8,155,752 8,155,752 8,155,752
Short-term investments 7,196,901 7,196,901 7,196,901
Other Investments 1,000,000 1,000,000 1,000,000
------------ ------------ ------------
Total investments $134,127,082 138,302,016 137,328,185
============ ============ ============
</TABLE>
See accompanying independent auditors' report.
56
<PAGE> 57
Schedule IV
Cotton States Life Insurance Company and Subsidiaries
Reinsurance
Years ended December 31, 1998, 1997 and 1996
<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, 1998
Life insurance in force $4,130,933,000 1,013,619,000 725,749,000 3,843,063,000 18.9
-------------- -------------- ----------- -------------- ----
Premiums:
Life insurance(2) $ 20,516,628 1,387,444 672,153 19,801,337
Accident/health insurance 177,517 43,500 -- 134,017
-------------- -------------- ----------- --------------
Total $ 20,694,145 1,430,944 672,153 19,935,354
============== ============== =========== ==============
Year ended December 31, 1997
Life insurance in force $3,845,361,000 936,616,000 700,173,000 3,608,918,000 19.4
-------------- -------------- ----------- -------------- ----
Premiums:
Life insurance(2) $ 18,027,701 1,248,034 666,034 17,445,701
Accident/health insurance 219,228 44,745 174,483
-------------- -------------- ----------- --------------
Total $ 18,246,929 1,292,779 666,034 17,620,184
============== ============== =========== ==============
Year ended December 31, 1996
Life insurance in force $3,533,033,000 884,504,000 705,066,000 3,353,595,000 21.0
-------------- -------------- ----------- --------------
Premiums:
Life insurance(2) $ 15,594,122 1,071,077 712,170 15,235,215
Accident/health insurance 205,531 40,203 -- 165,328
-------------- -------------- ----------- --------------
Total $ 15,799,653 1,111,280 712,170 15,400,543
============== ============== =========== ==============
</TABLE>
(1) All reinsurance assumed results from participation in federally
sponsored group pools.
(2) Includes mortality and expense charges earned on universal life
contracts.
See accompanying independent auditors' report.
57
<PAGE> 58
Schedule V
Cotton States Life Insurance Company and Subsidiaries
Supplementary Insurance Information
December 31, 1998 and 1997
<TABLE>
<CAPTION>
Deferred Policy
Policy Future Claims and
Acquisition Policy Benefits
Segment Costs Benefits Payable
- ------- ------------ ----------- -----------
<S> <C> <C> <C>
At December 31, 1998
Individual $34,950,104 112,380,211 860,126
Group -- 43,667 192,935
----------- ----------- ---------
Total $34,950,104 112,423,878 1,053,061
=========== =========== =========
At December 31, 1997
Individual $29,842,783 104,222,549 1,306,308
Group -- 46,734 50,000
----------- ----------- ---------
Total $29,842,783 104,269,283 1,356,308
=========== =========== =========
</TABLE>
See accompanying independent auditors' report.
58
<PAGE> 59
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
<TABLE>
<S> <C>
J. Ridley Howard 02/24/99 Gary Meader 02/24/99
- ------------------------------------- --------------------------------------
Chairman of the Board of Directors/ Chief Financial and Accounting Officer
President and Chief Executive Officer
</TABLE>
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> <C> <C>
Carol Cherry 02/24/99 Abit Massey 02/24/99
Director Director
Gaylord Coan 02/24/99 Robert McMahan 02/24/99
Director Director
Thomas Harris 02/24/99 Mathews Swift 02/24/99
Director Director
J. Ridley Howard 02/24/99 Jenner Wood, III 02/24/99
Director Director
</TABLE>
59
<PAGE> 1
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.
CSMR was organized in the State of Florida and is doing business in various
states under the name of CSMRI.
60
<PAGE> 1
EXHIBIT 23
The Board of Directors
Cotton States Life Insurance Company
We consent to the incorporation by reference in the registration statement (No.
33-30696) on Form S-8 of Cotton States Life Insurance Company of our report
dated February 24, 1999, relating to the consolidated balance sheets of Cotton
States Life Insurance Company and subsidiaries as of December 31, 1998 and 1997,
and the related consolidated statements of earnings, shareholders' equity,
comprehensive income and cash flows for each of the years in the three-year
period ended December 31, 1998, and all related schedules, which report appears
in the December 31, 1998, annual report on Form 10-K of Cotton States Life
Insurance Company.
/s/ KPMG LLP
KPMG LLP
Atlanta, Georgia
March 29, 1999
61
<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 YEAR
ENDED DECEMBER 31, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> DEC-31-1998
<DEBT-HELD-FOR-SALE> 100,853,776
<DEBT-CARRYING-VALUE> 16,590,028
<DEBT-MARKET-VALUE> 17,435,055
<EQUITIES> 0
<MORTGAGE> 3,531,728
<REAL-ESTATE> 0
<TOTAL-INVEST> 137,328,185
<CASH> 938,728
<RECOVER-REINSURE> 2,492,493
<DEFERRED-ACQUISITION> 34,950,104
<TOTAL-ASSETS> 180,773,289
<POLICY-LOSSES> 113,476,939
<UNEARNED-PREMIUMS> 0
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 0
0
0
<COMMON> 6,754,504
<OTHER-SE> 47,736,348
<TOTAL-LIABILITY-AND-EQUITY> 180,773,289
19,935,354
<INVESTMENT-INCOME> 8,787,048
<INVESTMENT-GAINS> 364,735
<OTHER-INCOME> 3,214,216
<BENEFITS> 13,711,772
<UNDERWRITING-AMORTIZATION> 1,809,619
<UNDERWRITING-OTHER> 6,394,619
<INCOME-PRETAX> 10,385,343
<INCOME-TAX> 3,144,758
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 0
<EPS-PRIMARY> 1.13
<EPS-DILUTED> 1.10
<RESERVE-OPEN> 0
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 0
<PAYMENTS-PRIOR> 0
<RESERVE-CLOSE> 0
<CUMULATIVE-DEFICIENCY> 0
</TABLE>
