UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X]Quarterly Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the period ended June 30, 1999
or
[ ]Transition Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the transition period from to
Commission File Number: 1-13004
CITIZENS, INC.
(Exact name of registrant as specified in its charter)
Colorado 84-0755371
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
400 East Anderson Lane, Austin, Texas 78752
(Address of principal executive offices) (Zip Code)
(512) 837-7100
(Registrant's telephone number, including area code)
7801 North Interstate 35, Austin, Texas 78753
(Former name, former address and former fiscal year, if changed
since last report.)
Indicate by check mark whether the registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the registrant was required to
file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
[X] Yes [ ] No
As of June 30, 1999, Registrant had 21,374,357 shares of
Class A common stock, No Par Value, outstanding and 621,049
shares of Class B common stock, No Par Value, outstanding.
CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
INDEX
Page
Number
Part I. Financial Information
Item 1. Financial Statements
Consolidated Statements of Financial
Position, June 30, 1999 (Unaudited)
and December 31, 1998 3
Consolidated Statements of Operations,
Three-Months Ended June 30, 1999 and
1998 (Unaudited) 5
Consolidated Statements of Operations,
Six-Months Ended June 30, 1999 and
1998 (Unaudited) 6
Consolidated Statements of Cash Flows,
Six-Months Ended June 30, 1999 and
1998 (Unaudited) 7
Notes to Consolidated Financial 9
Statements
Item 2. Management's Discussion and Analysis
of Financial Conditions and Results
of Operations 120
Part Other Information 20
II.
CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
June 30, 1999 and December 31, 1998
(Unaudited)
June 30, December
1999 31,1998
Assets
Investments:
Fixed maturities held for investment,
at amortized cost (fair value
$5,523,500 in 1999 and $6,169,000 in
1998) $5,600,460 $
5,606,374
Fixed maturities available for sale,
at fair value (amortized cost
$140,321,931 in 1999 and
$141,202,761 in 1998) 139,081,942 146,645,842
Equity securities, at fair value
(cost $716,294 in 1999 and $815,271
in 1998) 732,739 862,287
Mortgage loans on real estate (net of
reserve of $50,000 in 1999 and 1998)
1,437,678 1,560,757
Policy loans 21,697,103 20,996,919
Guaranteed student loans 11,096 4,673
Other long-term investments 629,773 595,271
Short-term investments 300,000
8,050,000
Total investments 177,240,791 176,572,123
Cash 7,593,978 9,868,728
Prepaid reinsurance 951,514 -
Reinsurance recoverable 1,930,330 1,755,561
Other receivables - 433,320
Accrued investment income 1,784,267 1,806,065
Deferred policy acquisition costs 35,745,025 37,259,386
Cost of insurance acquired 7,610,131 8,290,853
Excess of cost over net assets 8,442,889 8,375,799
acquired
Other intangible assets 2,136,125 2,289,725
Property, plant and equipment 5,228,337 5,155,088
Federal income tax recoverable 20,240 -
Deferred Federal income tax
2,997,739 699,848
Other assets
993,457 877,699
Total assets 252,974,823 253,384,195
See accompanying Notes to Consolidated Financial Statements
CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL POSITION, CONTINUED
June 30, 1999 and December 31, 1998
(Unaudited)
June 30, December
1999 31, 1998
Liabilities and Stockholders' Equity
Liabilities:
Future policy benefit reserves 163,128,693 160,176,329
Dividend accumulations 4,863,629 4,818,915
Premium deposits 2,558,390 2,013,274
Policy claims payable 4,005,262 4,801,548
Other policyholders' funds 2,015,885 1,632,662
Total policy liabilities 176,571,859 173,442,728
Other liabilities 1,667,055 2,067,392
Commissions payable 459,200 833,881
Notes payable - 333,333
Federal income tax payable - 1,534,269
Amounts held on deposit 210,264 268,913
Total liabilities 178,908,378 178,480,516
Stockholders' Equity:
Common stock:
Class A, no par value, 50,000,000
shares authorized, 23,318,179 shares
issued in 1999 and 22,708,910 in
1998, including shares in treasury
of 1,943,822 in 1999
and 1998
56,217,781 52,790,643
Class B, no par value, 1,000,000
shares Authorized, 621,049 shares
issued and outstanding in 1999 and
1998 283,262 283,262
Accumulated other comprehensive
income:
Unrealized investment gains (losses)
(807,539) 3,623,464
Retained earnings 20,302,095 20,135,464
75,995,599 76,832,833
Treasury stock, at cost (1,929,154) (1,929,154)
Total stockholders' equity 74,066,445 74,903,679
Total liabilities and stockholders' 252,974,823 253,384,195
equity
See accompanying Notes to Consolidated Financial Statements
CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Three-Months Ended June 30, 1999 and 1998
(Unaudited)
Three-months ended June
30,
1999 1998
Revenues:
Premiums 14,857,197 14,549,512
Annuity and Universal life 58,612 64,204
considerations
Net investment income 2,912,273 2,787,417
Other income 167,914 145,594
Realized gains on investments 247,136 624,085
Interest expense (13,965)
(8,431)
18,229,167 18,162,381
Benefits and expenses:
Insurance benefits paid or provided:
Increase in future policy benefit 1,926,161 2,323,379
reserves
Policyholders' dividends 736,727 751,255
Claims and surrenders 8,365,566 8,190,825
Annuity expenses 176,232
91,715
11,204,686 11,357,174
Commissions 2,827,955 3,071,337
Underwriting, acquisition and
insurance expenses 3,038,598 3,021,246
Capitalization of deferred policy
acquisition costs (1,708,445) (1,899,615)
Amortization of deferred policy
acquisition costs 2,323,924 1,837,627
Amortization of cost of insurance
acquired and excess of cost over net
assets acquired 769,053
502,240
18,455,771 17,890,009
Income (loss) before Federal income
tax $(226,604) $
272,372
Federal income tax:
Federal income tax expense (benefit) (115,484)
72,516
Net Income (loss) (111,120) $
199,856
Per Share Amounts:
Basic and diluted earnings per share
of common stock $(0.01) $0.01
Weighted average shares outstanding 21,995,406 21,386,137
See accompanying Notes to Consolidated Financial Statements
CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS, CONTINUED
Six-Months Ended June 30, 1999 and 1998
(Unaudited)
Six-months ended June 30,
1999 1998
Revenues:
Premiums 28,392,142 27,970,186
Annuity and Universal life
considerations 127,895 130,702
Net investment income 5,917,231 5,504,064
Other income 351,431 389,997
Realized gains on investments 278,336 654,736
Interest expense (19,798)
(27,023)
35,047,237 34,622,662
Benefits and expenses:
Insurance benefits paid or provided:
Increase in future policy benefit 3,099,810 3,835,053
reserves
Policyholders' dividends 1,238,361 1,441,535
Claims and surrenders 16,572,827 14,962,318
Annuity expenses 310,361
190,287
21,221,359 20,429,193
Commissions 5,694,633 5,957,553
Underwriting, acquisition and 5,386,318 5,880,597
insurance expenses
Capitalization of deferred policy (3,393,665) (3,414,322)
acquisition costs
Amortization of deferred policy 4,908,026 3,951,641
acquisition costs
Amortization of cost of insurance
acquired and excess of cost over net
assets acquired 1,120,935 1,396,122
34,937,606 34,200,784
Income before Federal income tax $109,631 $
421,878
Federal income tax:
Federal income tax expense (benefit) (57,000)
109,438
Net Income $166,631 $
312,440
Per Share Amounts:
Basic and diluted earnings per share
of common stock $0.01 $0.01
Weighted average shares outstanding 21,911,253 21,386,137
See accompanying Notes to Consolidated Financial Statements
CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Six-Months Ended June 30, 1999 and 1998
(Unaudited)
Six-months ended June 30,
1999 1998
Cash flows from operating
activities:
Net income 166,631 312,440
Adjustments to reconcile net income to
net cash provided by operating
activities:
Accrued investment income 56,123 117,285
Realized (gains) losses on sale of
investments and other assets
(278,336) (654,736)
Deferred policy acquisition costs
1,514,361 537,319
Amortization of cost of insurance
acquired and excess cost over net
assets acquired
1,120,935 1,396,122
Depreciation 257,465 86,087
Prepaid reinsurance (951,514) (949,910)
Reinsurance recoverable (174,412) (22,654)
Other receivables 433,762 447,601
Deferred Federal income tax (15,253) (118,748)
Future policy benefit reserves 2,884,650 3,399,583
Other policy liabilities 175,740 676,350
Commissions payable and other (794,546) (828,615)
liabilities
Amounts received (paid out) as trustee (58,649) (135,691)
Federal income tax payable (1,854,509) (1,275,248)
Other, net (41,703) 1,194,863
Net cash provided by operating
activities 2,440,745 4,182,048
Cash flows from investing
activities:
Maturity of fixed maturities available- 4,790,070 5,054,551
for-sale
Sale of fixed maturities available-for- 268,090 9,275,952
sale
Purchase of fixed maturities available- (2,350,906) (13,319,865
for-sale )
Mortgage loans funded - (665,000)
Sale of equity securities 92,500 151,464
Principal payments on mortgage loans 123,079 107,953
Net change in guaranteed student loans (6,423) 51,120
Sale of other long-term investments
and property plant and equipment 4,212 954,689
See accompanying Notes to Consolidated Financial Statements
CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS, CONTINUED
Six-Months Ended June 30, 1999 and 1998
(Unaudited)
Six-months ended June 30,
1999 1998
Cash from merger 1,512,255 -
Purchase of other long-term
investments and property plant and
equipment (364,855) (312,863)
Purchase of short-term investments (41,350,000) (2,850,000)
Sale of short-term investments 33,600,000 -
Increase in policy loans (net) (700,184) (251,591)
Net cash used by investing
activities (4,382,162) (1,803,590)
Cash flows from financing
activities:
Repayment of note payable (333,333) (604,097)
Net cash used by financing activities (333,333) (604,097)
Net increase (decrease) in cash and
cash equivalents (2,274,750) 1,774,361
Cash and cash equivalents at beginning
of period 9,868,728 6,454,956
Cash and cash equivalents at end of $7,593,978 $8,229,317
period
Supplemental Disclosure of Non-Cash Investing and Financing
Activities:
In 1999, the Company issued 609,269 Class A stock to purchase all
of the capital stock of First Investors Group, Inc. In
conjunction with the acquisition, liabilities were assumed as
follows:
Fair value of tangible $3,170,80
assets acquired 2
Fair value of intangible
assets acquired, gross 353,703
Net assets acquired 3,524,50
5
Capital stock issued (3,427,13
8)
Liabilities assumed $
97,367
See accompanying Notes to Consolidated Financial Statements
CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1999
(Unaudited)
(1) Financial Statements
The statement of financial position as of June 30, 1999,
the statements of operations for the three and six-month
periods ended June 30, 1999 and 1998, and the statements
of cash flows for the six-month periods then ended have
been prepared by the Company without audit. In the
opinion of management, all adjustments (which include only
normal recurring adjustments) necessary to present fairly
the financial position, results of operations and changes
in cash flows as of and for the period then ending June
30, 1999 and for comparative periods presented have been
made.
Certain information and footnote disclosures normally
included in financial statements prepared in accordance
with generally accepted accounting principles (GAAP) have
been omitted. It is suggested that these financial
statements be read in conjunction with the financial
statements and notes thereto included in the Company's
December 31, 1998 annual 10-K report filed with the
Securities and Exchange Commission. The results of
operations for the period ended June 30, 1999 are not
necessarily indicative of the operating results for the
full year.
(2) Acquisition
On September 15, 1998, Citizens announced that a
definitive agreement had been reached between Citizens and
First Investors Group, Inc. (Investors) of Springfield,
Illinois wherein Citizens would acquire 100% of the
outstanding shares of Investors for shares of Citizens
Class A Common stock. Investors is the parent of
Excalibur Insurance Corporation (Excalibur), also of
Springfield, Illinois. This transaction closed on January
26, 1999.
Pursuant to the terms of the Agreement, which was approved
by Investors' shareholders and regulatory authorities,
Citizens issued one share of Citizens Class A Common stock
for each 6.6836 shares of Investors common and preferred
stock issued and outstanding. Citizens issued 609,269
shares of its Class A Common stock to consummate the
transaction, which was accounted for as a purchase.
(3) Segment Information
The Company has two reportable segments identified by
geographic area: International Business and Domestic
Business. International Business consists of ordinary
whole-life business. International sales are throughout
Latin America with policies sold to residents of Central
and South America. The Company has no assets, offices or
employees outside of the United States of America (U.S.)
and requires that all transactions be in U.S. dollars paid
in the U.S. Domestic Business consisting of traditional
life and burial insurance, pre-need policies, accident and
health specified disease, hospital indemnity and
accidental death policies are sold throughout the Southern
U.S.
The accounting policies of the segments are the same as
those described in the summary of significant accounting
policies. The Company evaluates performance based on GAAP
net income (loss) before federal income taxes for its two
reportable segments.
Geographic Areas - The following summary represents
financial data of the Company's continuing operations
based on their location for the six-months ended June 30,
1999 and 1998.
1999 1998
Revenues
U.S. Domestic $10,739,628 $10,206,607
International 24,307,609 24,416,055
Total Revenues $35,047,237 $34,622,662
The following summary represents revenues and pretax
income from continuing operations and identifiable assets
for the Company's reportable segments as of and for the
six-month periods June 30, 1999 and 1998, is as follows:
Six-months ended June 30 1999 1998
Revenue, excluding net
investment income and
realized gain (loss) on
investments:
Domestic 8,841,102 8,391,020
International 20,010,568 20,072,842
Total consolidated
revenue 28,851,670 28,463,862
Net investment income:
Domestic 1,813,235 1,622,574
International 4,103,996 3,881,490
Total consolidated
net investment income 5,917,231 5,504,064
Amortization expense:
Domestic 1,847,472 1,576,497
International 4,181,489 3,771,266
Total consolidated
amortization expense
6,028,961 5,347,763
Realized gain (loss) on
investments:
Domestic 85,291 193,013
International 193,04 461,723
5
Total consolidated
realized gain (loss) on
investments
$ 278,33 654,736
6
Income (loss) before
federal income tax:
Domestic 33,595 124,368
International 76,036 297,510
Total consolidated
income (loss) before
federal income taxes
109,631 421,878
Six-months Year ended
ended June December 31,
30, 1999 1998
Assets:
Domestic 79,940,044 80,069,406
International 173,034,779 173,314,789
Total $252,974,823 $253,384,195
(4) Comprehensive (Loss)
For the three and six-months ended June 30, 1999, the
other comprehensive loss amounts included in total
comprehensive loss consisted of unrealized losses on
investments in debt and equity securities of $(2,206,160)
and $(4,431,003), and for the same periods in 1998,
$(676,599) and $(597,872), respectively. Total
comprehensive loss for the three and six-months ended June
30, 1999, was $(2,317,280) and $(4,264,372), and for 1998,
$(476,743) and $(285,432), respectively.
ITEM 2
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITIONS AND
RESULTS OF OPERATIONS
Certain statements contained in this Form 10Q are not statements
of historical fact and constitute forward-looking statements
within the meaning of the Private Securities Litigation Reform
Act (the "Act"), including, without limitation, the italicized
statements and the statements specifically identified as forward-
looking statements within this document. In addition, certain
statements in future filings by the Company with the Securities
and Exchange Commission, in press releases, and in oral and
written statements made by or with the approval of the Company
which are not statements of historical fact constitute forward-
looking statements within the meaning of the Act. Examples of
forward-looking statements, include, but are not limited to: (i)
projections of revenues, income or loss, earnings or loss per
share, the payment or non-payment of dividends, capital
structure, and other financial items, (ii) statements of plans
and objectives of the Company or its management or Board of
Directors including those relating to products or services, (iii)
statements of future economic performance and (iv) statements of
assumptions underlying such statements. Words such as
"believes", "anticipates", "expects", "intends", "targeted",
"may", "will" and similar expressions are intended to identify
forward-looking statements but are not the exclusive means of
identifying such statements.
Forward-looking statements involve risks and uncertainties which
may cause actual results to differ materially from those in such
statements. Factors that could cause actual results to differ
from those discussed in the forward-looking statements include,
but are not limited to: (i) the strength of foreign and U.S.
economies in general and the strength of the local economies in
which operations are conducted; (ii) the effects of and changes
in trade, monetary and fiscal policies and laws; (iii)
inflation, interest rates, market and monetary fluctuations and
volatility; (iv) the timely development and acceptance of new
products and services and perceived overall value of these
products and services by existing and potential customers; (v)
changes in consumer spending, borrowing and saving habits; (vi)
concentrations of business from persons residing in third world
countries; (vii) acquisitions; (viii) the persistency of
existing and future insurance policies sold by the Company and
its subsidiaries; (ix) the dependence of the Company on its
Chairman of the Board; (x) the ability to control expenses; (xi)
the effect of changes in laws and regulations (including laws and
regulations concerning insurance) with which the Company and its
subsidiaries must comply, (xii) the effect of changes in
accounting policies and practices, as may be adopted by the
regulatory agencies as well as the Financial Accounting Standards
Board, (xiii) changes in the Company's organization and
compensation plans; (xiv) the costs and effects of litigation
and of unexpected or adverse outcomes in such litigation; and
(xv) the success of the Company at managing the risks involved
in the foregoing.
Such forward-looking statements speak only as of the date on
which such statements are made, and the Company undertakes no
obligation to update any forward-looking statement to reflect
events or circumstances after the date on which such statement is
made to reflect the occurrence of unanticipated events.
Six-months ended June 30, 1999 and 1998
Net income for the six-months ended June 30, 1999 was $166,631
compared to $312,440 for the same period in 1998. Revenues
reached $35,047,2379,763,884, an increase of 1.2% over the first
six months of 1998 when revenues were $34,622,662. The increase
in revenues were driven by a 3.7% increase in investment income
and a 1.5% increase in premiums. Higher claims and surrenders
combined with an increase in the amortization of deferred policy
acquisition costs and cost of insurance acquired caused the
decrease in earnings.
Premium income for the first half of 1999 was $28,392,142
compared to $27,970,186 for the same period in 1998. Premium
income was higher during the first six months of 1999 than in the
previous year due a substantial increase in group accident and
health business sold by the agents of United Security Life
Insurance Company ("USLIC") from July 1998 through March 1999.
This business, primarily group dental coverage, offset a decrease
in the Company's core book of ordinary life business. This
decrease in ordinary life premium is the result of continued
turmoil in Latin America caused by economic downturns in several
countries, as well as increased competition from several U.S.
companies entering the market. Management introduced a new line
of ordinary life products in late 1998 and had anticipated growth
in new international sales; however, due to the above-described
conditions, such expected growth has not materialized. During
the first half of 1999, management has intensified its recruiting
and training efforts in Latin America, as well as other parts of
the world and management believes such efforts will prove
successful in the long-term in restoring sales to historical
levels. Additionally, management has been developing a domestic
ordinary life sales program during 1999 and expects to file such
with regulatory authorities for approval during the third
quarter. This program, targeting rural areas of the United
States, is expected to be a major market for the Company in
future years.
Net investment income increased 7.5% in the first six months of
1999 compared to the same period in 1998. Net investment income
for the six months ended June 30, 1999 was $5,917,231 compared to
$5,504,064 in 1998. This increase reflects the earnings on the
growth in the Company's asset base as well as the inclusion of
First Investors Group, Inc. and Excalibur Insurance Corporation
in the 1999 results. In the coming quarters, management expects
to further diversify the portfolio focusing on high quality
private placement instruments as well as possibly mortgage loans.
Through this diversification, management believes that additional
yield can be earned with a minimal increase in risk.
Claims and surrenders expense increased from $14,962,318 at June
30, 1998 to $16,572,827 for the same period in 1999, an increase
of 10.8%. Death claims increased from $2,287,873 in 1998 to
$2,488,342 in 1999. Surrender expense increased to $6,931,991 in
1999 from $6,662,466 in 1998. Management constantly monitors
this activity, which is offset by surrendered policies. Coupons
and endowments decreased to $2,333,517 in 1999 from $2,358,256 in
1998.
Accident and health benefits increased 37.9% in the first six
months of 1999 compared to the same period in 1998. Such
benefits for the first six months ended June 30, 1999 were
$4,334,515 compared to $3,143,944 in 1998. This increase is
directly related to the USLIC and National Security Life and
Accident Insurance Company ("NSLIC") blocks of business which
consist of large amounts of scheduled benefit daily indemnity
policies, major medical coverages, and group dental business.
During the second half of 1998, the Company experienced a
significant increase in the volume of claims, which resulted in a
processing backlog. The backlog was created by the high early
utilization by holders of the dental certificates, and although
processing delays resulted, all such pending items were
considered in the establishment of claim reserves. During the
fourth quarter of 1998, management increased the number of
individuals processing claims from approximately 13 to 30 and as
a result, the backlog has been significantly reduced during the
first six months of 1999. Since the purchase of USLIC and NSLIC
there has been a substantial increase in the volume of claims
plus an increase in the accident and health loss ratio.
Management has decided to cancel a large portion of these
existing blocks of group dental and major medical business on
their next anniversary date in order to curtail both benefit and
operation expenses. Most of the terminations will be effective
prior to January 1, 2000. This action will result in the loss of
approximately $5 million of annual premium income; however, due
to the claims experience as well as the overhead necessary to
administer, management believes such action will enhance near and
long-term profitability.
The remaining components of claims and surrenders, consisting of
supplemental contracts and payments of dividends and endowments
previously earned and held at interest, amounted to $484,462 in
1999, compared to $509,779 in 1998.
Commission expense for the first six months of 1999 was
$5,694,633 compared to $5,957,553 for the same period in 1998.
The decrease reflects the decline in the production of new
premiums by the agents of Citizens Insurance Company of America
(CICA) during the second quarter of 1999. The group accident and
health business produced by USLIC carries a relatively low
commission.
Deferred policy acquisition costs capitalized in 1998 were
$3,414,322 compared to $3,393,665 in the current year.
Amortization of these costs was $4,908,026 for the first half of
1999 compared to $3,951,641 for 1998. The increased amortization
results from the increase in surrender activity.
Underwriting, acquisition and insurance expenses decreased from
$5,880,597 in the first half of 1998 to $5,386,318 in 1999, a
reduction of 8.4%. The decrease can be attributed to the
economies of scale being achieved after the consolidation of the
administration of the business of USLIC and NSLIC.
Amortization of cost of insurance acquired and excess of cost
over net assets acquired decreased to $1,120,935 in 1999 from
$1,396,122 in 1998. The decrease in amortization is related to a
write-off of approximately $9.5 million of goodwill recorded on
the purchase of American Liberty in third quarter 1998.
Three-months ended June 30, 1999 and 1998
A net loss of $ (111,120) was incurred for the three-months ended
June 30, 1999 compared to a net gain of $199,856 for the same
period in 1998. Revenues slightly increased by $66,786 to
$18,229,167 over the three months ended of 1998 when revenues
were $18,162,381. The increase in revenues was related to a
$307,685 increase in premium income, a $51,471 increase in net
investment income, and a $95,705 increase in other income.
These increases were offset by a decrease of $376,949 in
realized gains due to the 1998 sale of a corporate aircraft.
Higher expenses in claims and surrenders, amortization of
deferred policy acquisition costs, and amortization of cost of
insurance acquired contributed to the net loss.
Premium income for the second three months of 1999 was
$14,857,197 compared to $14,549,512 for the same period in 1998.
Premium income in the second quarter remained flat due to the
decline in new business produced by the CICA agents; however, an
increase in the domestic sales for 1999 offset the international
decline, and resulted in the small premium income increase. A
majority of the domestic production was in the area of group
dental business, which management has decided to cancel (see
above).
Net investment income increased 4.5% in the second quarter of
1999 compared to the same period in 1998. Net investment income
for the three months ended June 30, 1999 was $2,912,273 compared
to $2,787,417 in 1998. The inclusion of First Investors Group,
Inc. and Excalibur Insurance Corporation were the primary reasons
for the growth.
Claims and surrenders expense increased to $8,365,566 at June 30,
1999 from $8,190,825 for the same period in 1998. Death claims
decreased from $1,373,492 in 1998 to $1,137,966 in 1999.
Surrenders increased by 13.0% in the second quarter of 1999
compared to the same period in 1998. Surrender expense for the
three months ended June 30, 1999 was $3,750,212 compared to
$3,318,783 in 1998. As described above, this increase is related
to the economic problems experienced throughout Latin America as
well as increased competition. Coupons and endowments decreased
to $1,167,861 in 1999 from $1,224,365 in 1998. The endowment
benefits, a significant component of the Company's international
life insurance products, are factored into the premium much like
dividends and therefor, the amount does not pose a threat to
future profitability.
Accident and Health benefits were $2,027,737 in 1999, compared to
$2,001,908 in 1998. These expenses can be attributed to the
USLIC and NSLIC blocks of business, which consist of large
amounts of major medical and group dental business. In order to
slow the growth of such benefits, management is terminating all
major medical and group accident and health insurance.
The remaining components of claims and surrenders, consisting of
matured endowments, supplemental contracts and payments of
dividends and endowments previously earned and held at interest,
amounted to $281,790 in 1999, compared to $272,277 in 1998.
Commission expense decreased to $2,827,955 from $3,071,337. The
decrease reflects a slowdown in CICA's sales during the second
quarter, which caused overall commissions for 1999 to drop
despite the increase in NSLIC and USLIC sales.
Underwriting, acquisition and insurance expenses increased
slightly to $3,038,599 in the second quarter of 1999 from
$3,021,327. These expenses have started to level since the
absorption of USLIC and NSLIC. Management still feels a
reduction in these expenses can be expected since the conversion
of these two companies did not take place until the later half of
1998.
Amortization of cost of insurance acquired and excess of cost
over net assets acquired increased to $769,053 in 1999 from
$502,240 in 1998. The increase is attributable to the
amortization of excess of cost over net assets acquired and cost
of insurance recorded on the acquisition of USLIC, NSLIC, FIG and
American Liberty Life Insurance Company.
Liquidity and Capital Resources
Stockholders' equity decreased to $74,066,445 at June 30, 1999
from $74,903,679 at December 31, 1998. The decrease was
attributable to unrealized gains of $3,623,464 at December 31,
1998 declining by $4,431,003 during the six-months ended June 30,
1999 resulting in an unrealized loss of $807,539, net of tax, at
June 30, 1999. Declines in the market value of the Company's
bond portfolio caused by higher market interest rates caused the
change in unrealized gains.
Invested assets increased to $177,240,791 in 1999 from
$176,572,123 at December 31, 1998. The increase of policy loans
by 3.3% caused the increase in invested assets. The decline in
fixed maturity investments was offset by an increase in short-
term investments. At June 30, 1999 and December 31, 1998, fixed
maturities have been categorized into two classifications: Fixed
maturities held to maturity, which are valued at amortized cost,
and fixed maturities available for sale which are valued at fair
value. The Company does not have a plan to make material
dispositions of fixed maturities during 1999; however, because of
continued uncertainty regarding long-term interest rates,
management cannot rule out sales during 1999. Fixed maturities
held to maturity, amounting to $5,600,460 consist primarily of
U.S. Treasury securities. Management has the intent and believes
the Company has the ability to hold the securities to maturity.
In order to monitor the market risk associated with the Company's
investment policy, management measures the sensitivity of the
portfolio to instantaneous interest rate changes. At December
31, 1998, decreases in interest rates of 100, 200 and 300 basis
points, respectively, would result in increases in market values
of approximately $12,402,000, $19,666,000 and $23,588,000,
respectively. Conversely, increases in rates of 100, 200 and 300
basis points would generate losses of $1,041,000, $7,484,000 and
$13,738,000, respectively. Under either interest rate scenario,
the portfolio carries positive convexity. At June 30, 1999,
decreases of 100, 200 and 300 basis points, respectively, would
result in increases in market values of $4,123,000, $10,839,000
and $17,820,000, respectively. Increases in rates of 100, 200
and 300 basis points would generate losses of $9,240,000,
$15,440,000 and $21,245,000 respectively.
The Company's mortgage loan portfolio, which constitutes 0.8% of
invested assets at December 31, 1998 and June 30, 1999, has
historically been composed of small residential loans in Texas.
Management has established a reserve of $50,000 at June 30, 1999
and December 31, 1998 (approximately 3% of the mortgage
portfolio's balance) to cover potential losses in the Company's
mortgage portfolio.
Policy loans comprise 12.2% of invested assets at June 30, 1999.
These loans, which are secured by the underlying policy values,
have yields ranging from 5% to 10% percent and maturities that
are related to the maturity or termination of the applicable
policies. Management believes that the Company maintains more
than adequate liquidity despite the uncertain maturities of these
loans.
Cash balances of the Company in its primary depository, Texas
Commerce Bank Austin, Texas, were significantly in excess of
Federal Deposit Insurance Corporation (FDIC) coverage at June 30,
1999 and December 31, 1998. Management monitors the solvency of
all financial institutions in which it has funds to minimize the
exposure for loss. At June 30, 1999, management does not believe
the Company is at risk for such a loss. During 1999, the Company
intends to utilize short-term Treasury Bills and highly rated
commercial paper as cash management tools to minimize excess cash
balances and enhance return.
In February 1992, the Company paid cash for an 80,000 square foot
office building in Austin, Texas to serve as its primary office.
This building will, in the opinion of management, provide
adequate space for the Company's operations for many years. The
Company relocated to the building in September 1993. The Company
occupies approximately 35,000 square feet of space in the
building, which is 100% leased.
CICA owned 1,822,332 shares of Citizens Class A common stock at
June 30, 1999 and December 31, 1998. Statutory accounting
practices prescribed by Colorado require that the Company carry
its investment at market value reduced by the percentage
ownership of Citizens by CICA, limited to 2% of admitted assets.
As of June 30, 1999 and December 31, 1998, the Company valued the
shares in accordance with prescribed statutory accounting
practices. In the Citizens' consolidated financial statements,
this stock is shown as treasury stock.
At June 30, 1999 and December 31, 1998 CICA had outstanding a
surplus debenture payable to Citizens for $266,667 and $333,333,
respectfully. For statutory accounting purposes, this debenture
is a component of surplus, while for GAAP it is eliminated in
consolidation. Citizens has historically recognized a liability
for its related obligation to a bank in a like amount; however,
in April 1999 Citizens paid off the corresponding note to Chase
Bank.
The NAICNational Association of Insurance Commissioners ("NAIC")
has established minimum capital requirements in the form of Risk-
Based Capital ("RBC"). Risk-based capital factors the type of
business written by a company, the quality of its assets, and
various other factors into account to develop a minimum level of
capital called "authorized control level risk-based capital" and
compares this level to an adjusted statutory capital that
includes capital and surplus as reported under Statutory
Accounting Principles, plus certain investment reserves. Should
the ratio of adjusted statutory capital to control level risk-
based capital fall below 200%, a series of actions by the Company
would begin. At December 31, 1998, CICA, and CILIC were well
above required minimum levels. NSLIC and USLIC fell below the
200% level as reported on their December 31, 1998 Annual
Statement to insurance regulatory authorities. Management
immediately made capital contributions to both companies to raise
them above the minimum levels. Further evaluation of the
estimate of claims reserves indicated provisions for pending
claims for NSLIC were overstated. Management has amended the
1998 statutory financial statements of NSLIC to increase surplus
by approximately $1,000,000, as a result of the overstatement,
bringing the Company well above the 200% level of RBC.
Information Systems and the Year 2000
Company personnel have been actively planning, identifying and
resolving year 2000 issues for more than a year. These
activities have continued throughout 1999 with parallel testing
and final remediation actions concluding in late July, 1999.
In the late 1980's, the Company began developing software to
routinely audit its data bases and its source code. These
internal audit tools run daily and provide perpetual balancing of
the Company's policy and agency master files to its general
ledger. The source code audit tool has been an instrumental key
to identifying system code that may need year 2000 remediation.
By using this automated "bloodhound" combined with visual review
of record and screen layouts/documentation, the Company's ESD
staff have identified and addressed the "worst case" scenario for
a year 2000 impact.
The overall expenditure for addressing year 2000 issues is
minimal because all planning, remediation and testing have been,
and will continue to be, performed with existing staff during
normal business hours.
The Company utilizes a Wang VS 7160 for providing core processing
and on-line support in conjunction with a local-area-network
(LAN) based upon CISCO 5500 and 2900 intelligent switching
components. The Company's Mitel telephone system was replaced
during 1998 with a Mitel 2000 Light, nodal, fiber-optic system
which is year 2000 compliant.
Wang has certified the 7.53.00 operating system to be year 2000
compliant and the Company successfully completed installation and
testing of this system in July, 1998. The Company uses
Microsoft's WFW 3.11 and NT Server 3.51 (SP5), for its LAN, both
of which are certified by Microsoft to be year 2000 compliant.
The Company uses Word 6.0, EXCEL 5.0, and Notes 3.3 as
applications on the LAN which are certified to be compliant
except for the Notes product which is not compliant, but is
reported to have no loss of data or functionality. However, only
the Wang system is mission-critical with the in-house developed
code for Host Daily Cycle systems being considered a part
thereof.
As for electronic data exchanges, the Company interacts with
Chase Bank, Rudd and Wisdom, Dataplex, PCS Health Systems and
certain reinsurance companies. The Chase Bank relationship is
the only third-party interface that could be considered mission-
critical and it can be circumvented (in less than one man-hour)
by using paper drafts instead of electronic transactions should
the Company find such to be desirable. Other vendor interfaces
can be circumvented with hard-copy reporting should an electronic
interface become untenable for some reason.
The Company believes it has addressed its Year 2000 concerns.
The Company has developed contingency and recovery plans aimed at
ensuring the continuity of critical business functions before, on
and after December 31, 1999. The contingency and recovery
planning is complete. The Year 2000 contingency plans will be
reviewed periodically throughout 1999 and revised as needed. The
Company believes its Year 2000 contingency plan, coupled with
existing "disaster recovery" and "business resumption" plans,
minimize the impact Year 2000 issues may have on the organization
Financial Accounting Standards
In December 1997, the AICPA issued Statement of Position (SOP) 97-
3. SOP 97-3 provides: 1) guidance for determining when an
entity should recognize a liability for guaranty fund and other
insurance-related assessments, 2) guidance on how to measure a
liability, 3) guidance on when an asset may be recognized for a
portion or all of the assessment liability or paid assessment
that can be recovered through premium tax offsets or policy
surcharges, and 4) requirements for disclosure of certain
information. This SOP is effective for financial statements for
fiscal years beginning after December 15, 1998. The Company does
not anticipate implementation of SOP 97-3 to have a material
impact on the Company's financial statements.
In March 1998, the AICPA issued SOP 98-1, "Accounting for the
Costs of Computer Software Developed or Obtained for Internal
Use." This SOP provides guidance for determining whether costs
of software developed or obtained for internal use should be
capitalized or expensed when incurred. In the past, the Company
has expensed such costs as they were incurred. This SOP is also
effective for fiscal years beginning after December 15, 1998.
The Company is currently completing an evaluation of the
financial impact as well as the changes to its related
disclosures.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
None.
Item 2 Changes in Securities
None, other than disclosed in the Notes to Consolidated
Financial Statements or Management's Discussion and
Analysis of Financial Conditions and Results of
Operations.
Item 3. Defaults upon Senior Securities
None.
Item 4. Submission of Matters to a Vote of Security Holders
The Annual Stockholders' Meeting was held at the
Company's offices on June 1, 1999. At such meeting, the
following individuals were elected to serve on the Board
of Directors until the next annual meeting to be held the
1st Tuesday in June, 2000 or until their successors are
duly elected and qualified:
Class A: James C. Mott, Steven F. Shelton, Ralph M.
Smith, and Timothy T. Timmerman.
Class B: Harold E. Riley, T. Roby Dollar, Mark A.
Oliver, Joe R. Reneau, M.D., and Rick D. Riley.
Item 5. Other Information
At the Annual Meeting of the Board of Directors held on
June 1, 1999, the following individuals were elected
officers of the Company:
Harold E. Riley, Chairman of the Board and Chief
Executive Officer; Mark A. Oliver, President and
Assistant Treasurer; Jeffrey J. Wood, Executive Vice
President, Secretary and Treasurer; and Russell C. King,
Assistant Vice President, Personnel.
Item 6. Exhibits and Reports on Form 8-K
None.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
CITIZENS, INC.
By:/s/ Mark A. Oliver_____
Mark A. Oliver, FLMI
President
By:/s/ Jeffrey J. Wood_____
Jeffrey J. Wood, CPA
Executive Vice President,
Secretary/Treasurer and CFO
Date: May 15, 1995August 12, 1999