1
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, 2001
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)
- --------------------------------------------------------------------------------
(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, 2001, Registrant had 24,417,118 shares of Class A common
stock, No Par Value, outstanding and 711,040 shares of Class B common stock, No
Par Value, outstanding.
2
CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
INDEX
<Table>
<Caption>
Page
Number
------
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Consolidated Statements of Financial Position, June 30,
2001 (Unaudited) and December 31, 2000 3
Consolidated Statements of Operations, Three Months
Ended June 30, 2001 and 2000 (Unaudited) 5
Consolidated Statements of Operations, Six Months
Ended June 30, 2001 and 2000 (Unaudited) 6
Consolidated Statements of Cash Flows, Six Months
Ended June 30, 2001 and 2000 (Unaudited) 7
Notes to Consolidated Financial Statements 9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITIONS AND RESULTS
OF OPERATIONS 12
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK 19
PART II. OTHER INFORMATION 20
</Table>
2
3
CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
JUNE 30, 2001 AND DECEMBER 31, 2000
<Table>
<Caption>
(UNAUDITED)
JUNE 30, DECEMBER 31,
2001 2000
------------ ------------
ASSETS
Investments:
Fixed maturities held-for-investment, at
amortized cost (market $5,731,000
in 2001 and $5,589,000 in 2000) $ 5,576,350 $ 5,582,802
Fixed maturities available-for-sale, at
fair value (cost $168,987,143 in
2001 and $165,996,272 in 2000) 168,792,565 164,945,698
Equity securities, at fair value (cost
$689,907 in 2001 and $713,235 in 2000) 668,272 675,726
Mortgage loans on real estate (net of reserve
of $50,000 in 2001 and 2000) 1,128,846 1,178,668
Policy loans 19,911,445 20,884,136
Other long-term investments 994,084 936,297
------------ ------------
Total investments 197,071,562 194,203,327
Cash 5,667,553 4,064,035
Accrued investment income 2,370,363 2,222,583
Reinsurance recoverable 3,223,258 2,662,724
Deferred policy acquisition costs 38,832,551 38,052,352
Other intangible assets 1,521,725 1,675,325
Federal income tax recoverable 70,695 174,978
Deferred federal income tax 4,099,197 4,628,750
Cost of insurance acquired 5,775,604 6,156,424
Excess of cost over net assets acquired 7,054,438 7,362,654
Property, plant and equipment 6,287,185 5,469,583
Other assets 1,301,930 1,169,629
------------ ------------
Total assets $273,276,061 $267,842,364
============ ============
</Table>
See accompanying notes to consolidated financial statements. (Continued)
3
4
CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL POSITION, CONTINUED
JUNE 30, 2001 AND DECEMBER 31, 2000
<Table>
<Caption>
(UNAUDITED)
JUNE 30, DECEMBER 31,
2001 2000
------------- -------------
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES:
Future policy benefit reserves $ 178,535,994 $ 175,269,307
Dividend accumulations 4,771,175 4,749,321
Premium deposits 3,299,437 3,033,514
Policy claims payable 3,023,227 2,866,110
Other policyholders' funds 2,440,637 2,245,947
------------- -------------
Total policy liabilities 192,070,470 188,164,199
Other liabilities 1,813,240 1,355,718
Commissions payable 400,697 1,009,416
------------- -------------
Total liabilities 194,284,407 190,529,333
STOCKHOLDERS' EQUITY:
Common stock:
Class A, no par value, 50,000,000 shares
authorized, 26,642,938 shares issued in
2001 and 2000, including shares in
treasury of 2,225,820 in 2001 and 2000 79,701,590 79,701,590
Class B, no par value, 1,000,000 shares
authorized, 711,040 shares issued and
outstanding in 2001 and 2000 910,482 910,482
Retained earnings 2,414,843 1,311,655
Accumulated other comprehensive loss:
Unrealized investment loss, net of tax (142,700) (718,135)
------------- -------------
82,884,215 81,205,592
Treasury stock, at cost (3,892,561) (3,892,561)
------------- -------------
Total stockholders' equity 78,991,654 77,313,031
------------- -------------
Total liabilities and stockholders' equity $ 273,276,061 $ 267,842,364
============= =============
</Table>
See accompanying notes to consolidated financial statements.
4
5
CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
THREE MONTHS ENDED JUNE 30, 2001 AND 2000
(UNAUDITED)
<Table>
<Caption>
THREE MONTHS ENDED JUNE 30,
-----------------------------
2001 2000
------------ ------------
REVENUES:
Premiums $ 12,878,266 $ 12,986,914
Annuity and universal life considerations 52,447 58,831
Net investment income 3,312,720 3,076,425
Realized gains 1,041 40,373
Other income 109,275 158,347
------------ ------------
Total revenues 16,353,749 16,320,890
BENEFITS AND EXPENSES:
Insurance benefits paid or provided:
Increase in future policy benefit reserves 2,124,062 1,351,673
Policyholders' dividends 798,039 742,687
Claims and surrenders 6,983,040 6,955,112
Annuity expenses 58,427 223,999
------------ ------------
Total insurance benefits paid or provided 9,963,568 9,273,471
Commissions 3,273,019 2,740,645
Other underwriting, acquisition and insurance expenses 2,814,477 2,783,711
Capitalization of deferred policy acquisition costs (2,717,361) (2,196,386)
Amortization of deferred policy acquisition costs 1,927,793 2,095,386
Amortization of cost of insurance acquired, excess of
cost over net assets acquired and other intangibles 356,241 454,437
------------ ------------
Total benefits and expenses 15,617,737 15,151,264
------------ ------------
Income before Federal income tax $ 736,012 $ 1,169,626
Federal income tax expense 155,000 220,512
------------ ------------
NET INCOME $ 581,012 $ 949,114
============ ============
PER SHARE AMOUNTS:
BASIC AND DILUTED EARNINGS PER SHARE OF
COMMON STOCK $ 0.02 $ 0.04
============ ============
WEIGHTED AVERAGE SHARES OUTSTANDING 25,128,158 25,128,158
============ ============
</Table>
See accompanying notes to consolidated financial statements
5
6
CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
SIX MONTHS ENDED JUNE 30, 2001 AND 2000
(UNAUDITED)
<Table>
<Caption>
SIX MONTHS ENDED JUNE 30,
-----------------------------
2001 2000
------------ ------------
REVENUES:
Premiums $ 24,927,381 $ 25,240,025
Annuity and universal life considerations 111,665 125,258
Net investment income 6,620,958 6,053,136
Realized gains (losses) (61,588) 51,536
Other income 237,114 305,885
------------ ------------
Total revenues 31,835,530 31,775,840
BENEFITS AND EXPENSES:
Insurance benefits paid or provided:
Increase in future policy benefit reserves 3,319,024 2,470,677
Policyholders' dividends 1,395,753 1,293,358
Claims and surrenders 14,161,037 15,069,980
Annuity expenses 114,085 314,122
------------ ------------
Total insurance benefits paid or provided 18,989,899 19,148,137
Commissions 5,969,986 5,604,479
Other underwriting, acquisition and insurance expenses 5,365,020 5,286,924
Capitalization of deferred policy acquisition costs (4,904,249) (4,302,371)
Amortization of deferred policy acquisition costs 4,124,050 4,397,792
Amortization of cost of insurance acquired, excess of cost over
net assets acquired and other intangibles 842,636 891,762
------------ ------------
Total benefits and expenses 30,387,342 31,026,723
------------ ------------
Income before Federal income tax 1,448,188 749,117
Federal income tax expense 345,000 100,675
------------ ------------
NET INCOME $ 1,103,188 $ 648,442
============ ============
PER SHARE AMOUNTS:
BASIC AND DILUTED EARNINGS PER SHARE OF
COMMON STOCK $ 0.04 $ 0.03
============ ============
WEIGHTED AVERAGE SHARES OUTSTANDING 25,128,158 25,128,158
============ ============
</Table>
See accompanying notes to consolidated financial statements.
6
7
CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED JUNE 30, 2001 AND 2000
(UNAUDITED)
<Table>
<Caption>
SIX MONTHS ENDED JUNE 30,
-----------------------------
2001 2000
------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 1,103,188 $ 648,442
Adjustments to reconcile net gain to net cash provided
by operating activities:
Realized (gains) losses 61,588 (51,536)
Net deferred policy acquisition costs (780,199) 95,421
Amortization of cost of insurance
acquired, excess cost over
net assets acquired and other intangibles 842,636 891,762
Depreciation 327,945 257,579
Change in:
Accrued investment income (147,780) (123,613)
Reinsurance recoverable (560,534) (710,584)
Future policy benefit reserves 3,266,687 2,470,677
Other policy liabilities 639,584 (1,272,742)
Deferred federal income tax 233,117 (831,990)
Federal income tax 104,283 (884,025)
Commissions payable and other liabilities (151,197) 1,171,897
Other, net (59,309) (536,646)
------------ ------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 4,880,009 1,124,642
CASH FLOWS FROM INVESTING ACTIVITIES:
Sale of fixed maturities, available-for-sale 3,997,250 2,644,749
Maturity of fixed maturities, available-for-sale 29,665,499 4,581,592
Purchase of fixed maturities, available-for-sale (36,770,769) (13,816,192)
Principal payments on mortgage loans 49,822 72,435
Sale of other long-term investments and property,
plant and equipment 21,750 18,751
</Table>
See accompanying notes to consolidated financial statements. (Continued)
7
8
CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS, CONTINUED
SIX MONTHS ENDED JUNE 30, 2001 AND 2000
(UNAUDITED)
<Table>
<Caption>
SIX MONTHS ENDED JUNE 30,
-----------------------------
2001 2000
------------ ------------
Decrease in policy loans, net $ 972,691 $ 200,060
Purchase of other long-term investments and property, plant and
equipment (1,212,734) (964,173)
------------ ------------
NET CASH USED IN INVESTING ACTIVITIES (3,276,491) (7,262,778)
------------ ------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
1,603,518 (6,138,136)
Cash and cash equivalents at beginning of period 4,064,035 11,149,084
------------ ------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 5,667,553 $ 5,010,948
============ ============
Supplemental:
Cash paid during the period for
Income taxes $ 7,600 $ 1,816,695
============ ============
</Table>
See accompanying notes to consolidated financial statements.
8
9
CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2001
(UNAUDITED)
(1) FINANCIAL STATEMENTS
The interim consolidated financial statements include the accounts and
operations of Citizens, Inc. (Citizens), incorporated in the state of
Colorado on November 8, 1977, and its wholly-owned subsidiaries,
Citizens Insurance Company of America (CICA), Computing Technology,
Inc. (CTI), Funeral Homes of America, Inc. (FHA), Insurance Investors,
Inc. (III), Central Investors Life Insurance Company of Illinois
(CILIC), First Investors Group, Inc. (Investors) and Excalibur
Insurance Corporation (Excalibur). Citizens and its consolidated
subsidiaries are collectively referred to as "the Company."
The statement of financial position for June 30, 2001, the statements
of operations for the three-month and six-month periods ended June 30,
2001 and 2000, 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 at June 30,
2001 and for comparative periods presented have been made.
Certain information and footnote disclosures normally included in
financial statements prepared in accordance with accounting principles
generally accepted in the United States of America (U.S. 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, 2000 annual 10-K report filed with the
Securities and Exchange Commission. The results of operations for the
period ended June 30, 2001 are not necessarily indicative of the
operating results for the full year.
(2) SEGMENT INFORMATION
The Company has two reportable segments identified by geographic area:
international business and domestic business. International business,
consisting of ordinary whole-life business, is sold throughout 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 in accordance with U.S. GAAP
and are the same as those described in the summary of significant
accounting policies. The Company evaluates performance based on U.S.
GAAP net income (loss) before federal income taxes for its two
reportable segments.
9
10
Geographic Areas -- The following summary represents financial data of
the Company's continuing operations based on their location for the
six-month period ended June 30, 2001 and 2000.
<Table>
<Caption>
2001 2000
----------- -----------
REVENUES
Domestic $ 6,245,912 $ 7,412,622
International 25,589,618 24,363,218
----------- -----------
Total Revenues $31,835,530 $31,775,840
=========== ===========
</Table>
The following summary, representing revenues, amortization expense and
pre-tax income from continuing operations and identifiable assets for
the Company's reportable segments as of and for the six months ended
June 30, 2001 and 2000, is as follows:
<Table>
<Caption>
SIX MONTHS ENDED JUNE 30
-----------------------------
2001 2000
------------ ------------
Revenue, excluding net investment income and realized
gain (losses):
Domestic $ 4,959,009 $ 5,988,533
International 20,317,151 19,682,635
------------ ------------
Total consolidated revenue, excluding net investment
income and realized gain (losses) $ 25,276,160 $ 25,671,168
============ ============
Net investment income:
Domestic $ 1,298,986 $ 1,412,067
International 5,321,972 4,641,069
------------ ------------
Total consolidated net investment income $ 6,620,958 $ 6,053,136
============ ============
Amortization expense:
Domestic $ 999,656 $ 1,259,586
International 3,967,030 4,029,968
------------ ------------
Total consolidated amortization expense $ 4,966,686 $ 5,289,554
============ ============
Realized gain (losses):
Domestic $ (12,083) $ 12,022
International (49,505) 39,514
------------ ------------
Total consolidated realized gain (losses) $ (61,588) $ 51,536
============ ============
Income (loss) before federal income tax:
Domestic $ 305,617 $ (171,421)
International 1,142,571 920,538
------------ ------------
Total consolidated income before
federal income tax $ 1,448,188 $ 749,117
============ ============
</Table>
10
11
<Table>
<Caption>
JUNE 30, 2001 DECEMBER 31, 2000
------------- -----------------
Assets:
Domestic $ 94,826,793 $ 93,476,985
International 178,449,268 174,365,379
------------ ------------
Total $273,276,061 $267,842,364
============ ============
</Table>
Major categories of premiums are summarized as follows:
<Table>
<Caption>
SIX MONTHS ENDED SIX MONTHS ENDED
JUNE 30, 2001 JUNE 30, 2000
---------------- ----------------
Premiums:
Ordinary life $22,186,927 $21,191,288
Annuity and universal life 111,665 125,258
Group life 47,543 242,373
Accident and health 2,692,911 3,806,364
----------- -----------
Total premiums $25,039,046 $25,365,283
=========== ===========
</Table>
(3) ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
For the three and six months ended June 30, 2001, the other
comprehensive income (loss) amounts included in total comprehensive
income (loss) consisted of unrealized gains (losses) on investments in
fixed maturities and equity securities available-for-sale of $(915,305)
and $575,435, respectively, net of tax, and for the same period in 2000
unrealized gains (losses) of $1,330,955 and $(524,028), respectively.
Total comprehensive income (loss) for the three and six months ended
June 30, 2001 was $(334,293) and $1,678,623, and for the same period in
2000 total comprehensive income of $2,280,069 and $124,414,
respectively.
(4) EARNINGS PER SHARE
Basic and diluted earnings per share have been computed using the
weighted average number of shares of common stock outstanding during
each period. The weighted average shares outstanding for both the three
and six months ended June 30, 2001 and 2000 were 25,128,158. The per
share amounts have been adjusted retroactively for all periods
presented to reflect the change in capital structure resulting from a
7% stock dividend paid on December 31, 2000. The stock dividend
resulted in the issuance of 1,877,265 Class A shares (including 145,613
shares in treasury) and 46,517 Class B shares.
11
12
ITEM 2
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITIONS AND
RESULTS OF OPERATIONS
Certain statements contained in this Form 10-Q 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 that 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.
12
13
SIX MONTHS ENDED JUNE 30, 2001 AND 2000
Net income for the six months ended June 30, 2001 was $1,103,188 or $0.04 per
share, compared to net income of $648,442, or $0.03 per share, for the same
period in 2000. Revenues increased to $31,835,530 in 2001 compared to the first
six months of 2000 when revenues were $31,775,840. The increase in revenues was
driven by a 9.4% increase in net investment income that offset a 29.3% decline
in accident and health premiums.
Premium income for the first six months of 2001 was $24,927,381 compared to
$25,240,025 for the same period in 2000. The 1.2% decline is attributable to a
$1,113,453 decrease in accident and health premiums which offset increased
production of new business for the first six months of 2001 over the same period
in 2000. Accident and Health premiums were $2,692,911 for the six months ended
June 30, 2001 compared to $3,806,364 for the same period in 2000. As a result of
a substantial increase in the volume of claims plus an increase in the accident
and health loss ratio, management cancelled a large portion of the existing
blocks of United Security Life Insurance Company's ("USLIC")'s group dental
business and National Security Life and Accident Insurance Company's ("NSLIC")'s
(two wholly owned subsidiaries) major medical business during the third quarter
of 1999 in order to curtail both claims and operating expenses. This action
contributed to a $3,650,632 decrease in accident and health premiums for the
year ended December 31, 2000. An additional decrease of approximately $1.5
million of annual accident and health premium income in 2001 is expected as
policies terminate; however, due to the claims experience as well as the
overhead necessary to administer such business, management believes this action
will enhance near-term and long-term profitability. Because of increases in loss
ratios, management has implemented significant rate increases on the remaining
supplemental non-cancelable accident and health products.
Production of new international life insurance premiums measured in paid,
annualized premiums increased 16.1% during the first six months of 2001 compared
to the same period in 2000. In addition, management initiated a domestic
ordinary life sales program in late 2000 targeting rural areas of the United
States that is expected to provide a new entre into the domestic life market for
the Company in future years. The Company intends to expand sales efforts beyond
Texas to other states in which CICA is licensed. Because sales efforts have only
recently begun, management is unable to predict the success of this new program.
Net investment income increased 9.4% in the first six months of 2001 compared to
the same period in 2000, amounting to $6,620,958 in 2001 compared to $6,053,136
for the first six months of 2000. This increase reflects continued expansion of
the Company's asset base and the actions taken in previous years to change the
mix and duration of the Company's invested assets to place less emphasis on
government guaranteed mortgage pass-through instruments and more emphasis on
investments in callable instruments issued by U.S. government agencies.
Management terminated the Company's outside investment advisor effective March
31, 2000. The Company feels that it can more effectively achieve its investment
objectives by overseeing the investment activities in-house.
Claims and surrenders expense decreased 6.0% from $15,069,980 for the six months
ended June 30, 2000 to $14,161,037 for the same period in 2001. Death claims
increased 18.9% from
13
14
$2,355,062 in the first six months of 2000 to $2,800,552 in the first six months
of 2001 due to increases in claim volume and average claim amount. After review
of the incurred claims, management does not believe the increase reflects a
negative trend in the mortality of the Company's life business but rather, an
aberration in the historical experience. Surrender expense decreased 4.1% from
$7,541,790 in the first six months of 2000 to $7,235,300 in the first six months
of 2001. Improving persistency on the Company's book of international whole life
insurance business was the primary reason for the decreased surrender activity.
Endowments increased 5.0% from $2,295,962 in the first six months of 2000 to
$2,409,634 in the first six months of 2001. Like policy dividends, endowments
are factored into the premiums and as such the increase should have no adverse
impact on profitability. Accident and health benefits were $1,529,850 for the
first six months of 2001 compared to $2,678,028 for the same period of 2000.
This 42.9% decrease in accident and health benefits is directly related to the
cancellation of the USLIC and NSLIC blocks of business discussed above.
The remaining components of claims and surrenders, comprised of supplemental
contract benefits, interest on policy funds and assorted other miscellaneous
policy benefits, amounted to $185,701 for the first six months of 2001, compared
to $199,138 for the first six months of 2000.
Underwriting, acquisition and insurance expenses increased 1.5% from $5,286,924
in the first six months of 2000 to $5,365,020 for the same period in 2001. The
increase is attributed to the start-up costs of the domestic marketing program
which offset reductions in the expenses associated with the administration of
the accident and health business and the merger of NSLIC and USLIC in late 2000.
Deferred policy acquisition costs capitalized in the first six months of 2001
were $4,904,249 compared to $4,302,371 for the same period of the previous year.
Amortization of these costs was $4,124,050 for the first six months of 2001
compared to $4,397,792 for the same period of 2000. Amortization of cost of
insurance acquired, excess of cost over net assets acquired ("goodwill") and
other intangible assets decreased to $842,636 during the first six months of
2001 from $891,762 for the same period in 2000. The decrease in amortization is
related to the increased persistency related to the closed books of business of
companies previously purchased. In the event that production or revenues from
the companies that comprise the goodwill fall below assumed levels, write-offs
of the asset could occur. Management believes its assumptions regarding the
various blocks of business to be realistic and, accordingly, does not expect
such an event to occur.
THREE MONTHS ENDED JUNE 30, 2001 AND 2000
Net income for the three months ended June 30, 2001 was $581,012 or $0.02 per
share, compared to net income of $949,114, or $0.04 per share, for the same
period in 2000. Revenues increased slightly in 2001 to $16,353,749 compared to
the second quarter of 2000 when revenues were $16,320,890. The increase in
revenues was driven by a 7.7% increase in net investment income that offset a
35.8% decline in accident and health premiums.
Premium income for the second quarter of 2001 was $12,878,266 compared to
$12,986,914 for the same period in 2000. The slight decrease is attributable to
a $693,757 decrease in accident and health premiums which were $1,245,709 for
the three months ended June 30, 2001 compared to $1,939,466 for the same period
in 2000 that offset increased production of new life insurance
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during the second quarter of 2001. As a result of a substantial increase in the
volume of claims plus an increase in the accident and health loss ratio,
management cancelled a large portion of the existing blocks of USLIC's group
dental business and NSLIC's major medical business during the third quarter of
1999 in order to curtail both claims and operating expenses. This action
contributed to a $3,650,632 decrease in accident and health premiums for the
year ended December 31, 2000. An additional decrease of approximately $1.5
million of annual accident and health premium income in 2001 is expected as
policies terminate; however, due to the claims experience as well as the
overhead necessary to administer such business, management believes this action
will enhance profitability. Because of increases in loss ratios, management has
implemented significant rate increases on the remaining supplemental accident
and health products.
Production of new international life insurance premiums measured in paid,
annualized premiums, increased 41.3% during the second quarter of 2001 compared
to the same period in 2000. New domestic life sales remained negligible during
the quarter as management continued to recruit and train a domestic agency
force.
Net investment income increased 7.7% during the second quarter of 2001 compared
to the same period in 2000. Net investment income for the three months ended
June 30, 2001 was $3,312,720 compared to $3,076,425 for the second quarter of
2000. This increase reflects continued expansion of the Company's asset base and
the actions taken in previous years to change the mix and duration of the
Company's invested assets to place less emphasis on government guaranteed
mortgage pass-through instruments and more emphasis on investments in callable
instruments issued by U.S. government agencies.
Claims and surrenders expense increased slightly from $6,955,112 for the three
months ended June 30, 2000 to $6,983,040 for the same period in 2001. Death
claims increased 50.7% from $890,920 in the second quarter of 2000 to $1,342,453
in the second quarter of 2001 due to increased claim volumes and average claim
amounts After review of the incurred claims, management does not believe the
increase reflects a negative trend in the mortality of the Company's life
business but rather, an aberration in the historical experience. Surrender
expense increased 2.0% from $3,489,350 in the second quarter of 2000 to
$3,560,185 in the second quarter of 2001. Endowments increased 7.6% from
$1,175,353 in the second quarter of 2000 to $1,264,857 in the second quarter of
2001. Like policy dividends, endowments are factored into the premiums and as
such the increase should have no adverse impact on profitability. Accident and
health benefits were $721,861 for the second quarter of 2001 compared to
$1,312,757 for the same period of 2000. This 45.0% decrease in accident and
health benefits is directly related to the cancellation of the USLIC and NSLIC
blocks of business discussed above.
The remaining components of claims and surrenders, comprised of supplemental
contract benefits, interest on policy funds and assorted other miscellaneous
policy benefits, amounted to $93,684 for the second quarter of 2001, compared to
$86,732 for the second quarter of 2000.
Underwriting, acquisition and insurance expenses increased 1.1% from $2,783,711
in the second quarter of 2000 to $2,814,477 for the same period in 2001. The
increase is attributed to the development costs of the domestic marketing
program which offset reductions in the expenses
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associated with the administration of accident and health business and the
merger of NSLIC and USLIC in late 2000.
Deferred policy acquisition costs capitalized in the second quarter of 2001 were
$2,717,361 compared to $2,196,386 for the same period of the previous year.
Amortization of these costs was $1,927,793 for the second quarter of 2001
compared to $2,095,386 for the same period of 2000. Amortization of cost of
insurance acquired, excess of cost over net assets acquired ("goodwill") and
other intangible assets decreased to $356,241 during the second quarter of 2001
from $454,437 for the same period in 2000. The decrease in amortization is
related to increased persistency related to closed books of business of
companies previously purchased. In the event that production or revenues from
the companies that comprise the goodwill fall below assumed levels, write-offs
of the asset could occur. Management believes its assumptions regarding the
various blocks of business to be realistic and, accordingly, does not expect
such an event to occur.
LIQUIDITY AND CAPITAL RESOURCES
Stockholders' equity increased to $78,991,654 at June 30, 2001 from $77,313,031
at December 31, 2000. The increase was attributable to the net income earned
during the first six months of 2001 and unrealized gains, net of tax, increasing
by $575,435 during the period. Increases in the market value of the Company's
available-for-sale bond portfolio caused by higher bond prices resulted in the
decrease in unrealized losses, net of tax.
Invested assets increased from $194,203,327 at December 31, 2000 to $197,071,562
at June 30, 2001. At June 30, 2001 and December 31, 2000, fixed maturities were
categorized into two classifications: fixed maturities held-to-maturity, which
were valued at amortized cost, and fixed maturities available-for-sale which
were valued at fair value. Fixed maturities available-for-sale and fixed
maturities held-to-maturity were 85.7% and 2.8%, respectively, of invested
assets at June 30, 2001. Fixed maturities held-to-maturity, amounting to
$5,576,350, consist primarily of U.S. Treasury securities. Management has the
intent and believes the Company has the ability to hold the securities to
maturity.
The Company's mortgage loan portfolio, which constituted 0.6% of invested assets
at December 31, 2000 and June 30, 2001, has historically been composed primarily
of seasoned small residential loans in Texas. Management established a reserve
of $50,000 at June 30, 2001 and December 31, 2000 (approximately 4% of the
mortgage portfolio's balance) to cover potential unforeseen losses in the
Company's mortgage portfolio. At June 30, 2001, no loans were past due more than
ninety days.
Policy loans comprised 10.1% of invested assets at June 30, 2001. 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, Chase Bank, Austin,
Texas, were significantly in excess of Federal Deposit Insurance Corporation
coverage at June 30, 2001 and December 31, 2000. Management monitors the
solvency of all financial institutions in which it
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has funds to minimize the exposure for loss. Management does not believe the
Company is at risk for such a loss.
CICA owned 2,085,244 shares of Citizens Class A common stock at June 30, 2001
and December 31, 2000. In the Citizens consolidated financial statements, the
shares of Citizens Class A common stock owned by CICA are combined with the
other treasury shares and the aggregate treasury shares are reported at cost in
conformity with accounting principles generally accepted in the United States of
America (U.S. GAAP). The Statutory Accounting Practices for these shares
prescribed by the National Association of Insurance Commissioners ("NAIC") and
the State of Colorado are not followed in the U.S. GAAP consolidated financial
statements of Citizens. Those Statutory Accounting Practices are only followed
with respect to filings made in accordance with the rules and regulations of the
various state insurance departments and the NAIC and require that CICA carry its
investment in Citizens shares at market value reduced by the percentage
ownership of Citizens by CICA, limited to 2% of admitted assets.
The 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, 2000 and June 30, 2001, all life insurance
subsidiaries were above required minimum levels.
Effective January 1, 2001, the NAIC implemented codified rules for statutory
accounting. These rules are subject to implementation and approval by each
state. Colorado notified CICA that it has adopted the codified accounting rules;
however, certain state laws that differ from these rules should be followed. The
primary difference between the Colorado statutes and the codified rules involve
the establishment of a liability for future policy dividends payable. Under
codification, such a reserve is mandated; however, Colorado has an exception if
the difference between the premiums charged and the mortality factor included in
the premium on participating policies exceeds the reserve that would be
established. Such is the case for CICA. As a result, CICA did not establish the
reserve of approximately $3 million in its statutory financial statements.
Overall, the implementation of codification had no material effect on the
Company's statutory capital and surplus.
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FINANCIAL ACCOUNTING STANDARDS
Statement of Financial Accounting Standard (SFAS) No. 133, "Accounting for
Derivative Instruments and Hedging Activities," as amended, became effective as
of January 1, 2001. Implementation of SFAS No. 133, as amended, did not have a
material affect on the financial position, results of operations or liquidity of
the Company.
SFAS No. 140, "Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities - A Replacement of Financial Accounting Standards
Board (FASB) Statement 125" revises the rules to be followed when determining
whether a special purpose entity (SPE) is a qualifying SPE (QSPE). SFAS No. 140
requires that a QSPE have at least 10% of its beneficial interests held by
parties unrelated to the transferor, limits the amount and type of derivative
instruments that a QSPE can hold and sets requirements for a transfer to a QSPE
to be accounted for as a sale. SFAS No. 140 is effective for transfers occurring
after March 31, 2001. However, expanded disclosures about securitizations and
collateral are effective for fiscal years ending after December 15, 2000.
Management does not believe that SFAS No. 140 will have a material effect on the
financial position, results of operations or liquidity of the Company.
In December 2000, the American Institute of Certified Public Accountants (AICPA)
issued Statement of Position (SOP) 00-3, "Accounting by Insurance Enterprises
for Demutualizations and Formations of Mutual Life Insurance Holding Companies
and for Certain Long-Duration Participating Contracts." SOP 00-3 provided
guidance on accounting by insurance enterprises for demutualizations and the
formation of mutual insurance holding companies. SOP 00-3 also applies to stock
insurance enterprises that apply SOP 95-1, "Accounting for Certain Insurance
Activities of Mutual Life Insurance Enterprises" to account for participating
policies. This SOP is effective for financial statements for fiscal years ending
after December 15, 2001. Management does not believe that SOP 00-3 will have any
impact since it is already a stock life insurance company and does not pay
dividends based on actual experience of the Company. The Company utilizes
contractual life insurance dividend scales as shown in published dividend
illustrations at the date the insurance contracts are issued in determining
policyholder dividends.
In July 2001, the FASB issued SFAS No. 141, "Business Combinations," and SFAS
No. 142, "Goodwill and Other Intangible Assets." SFAS No. 141 requires that the
purchase method of accounting be used for all business combinations initiated
after June 30, 2001 as well as all purchase method business combinations
completed after June 30, 2001. SFAS No. 141 also specifies criteria intangible
assets acquired in a purchase method business combination must meet to be
recognized and reported apart from goodwill, noting that any purchase price
allocable to an assembled workforce may not be accounted for separately. SFAS
No. 142 will require that goodwill and intangible assets with indefinite useful
lives no longer be amortized, but instead tested for impairment at least
annually in accordance with the provisions of SFAS No. 142. SFAS No. 142 will
also require that intangible assets with definite useful lives be amortized over
their respective estimated useful lives to their estimated residual values, and
reviewed for impairment in accordance with SFAS No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of."
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The Company is required to adopt the provisions of SFAS No. 141 immediately; and
SFAS No. 142 is effective January 1, 2002. Furthermore, any goodwill and any
intangible asset determined to have an indefinite useful life that are acquired
in a purchase business combination completed after June 30, 2001 will not be
amortized, but will continue to be evaluated for impairment in accordance with
the appropriate pre-SFAS No. 142 accounting literature. Goodwill and intangible
assets acquired in business combinations completed before July 1, 2001 will
continue to be amortized prior to the adoption of SFAS No. 142.
The Company is currently completing an evaluation and has not yet determined the
financial impact of SFAS No. 141 and 142 as well as the required changes to its
related disclosures.
ITEM 3
QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK
The unrealized gains (losses) that could be caused by decreases and increases in
the interest rates of 100, 200 and 300 basis points, respectively, on the
Company's available-for-sale fixed maturities is as follows at June 30, 2001:
<Table>
<Caption>
DECREASES IN INTEREST RATES INCREASES IN INTEREST RATES
- -------------------------------------------- ----------------------------------------------
300 BASIS 200 BASIS 100 BASIS 100 BASIS 200 BASIS 300 BASIS
POINTS POINTS POINTS POINTS POINTS POINTS
- ------------ ------------ ------------ ------------ ------------ ------------
$ 9,542,000 $ 6,154,000 $ 2,993,000 $ (6,343,000) $(11,761,000) $(16,681,000)
============ ============ ============ ============ ============ ============
</Table>
There are no fixed maturities or other investments that the Company classifies
as trading instruments. At June 30, 2001 and December 31, 2000, there were no
investments in derivative instruments.
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PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company may from time to time be a party to various legal
proceedings incidental to its business.
ITEM 2. CHANGES IN SECURITIES
None, other than disclosed in the Notes to the Financial Statements or
Management's Discussion and Analysis of Financial Condition and Results
of Operations.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company's annual stockholders' meeting was held on June 5, 2001. At
that meeting the following individuals were elected to serve on the
Board of Directors: Harold E. Riley, Mark A. Oliver, Joe R. Reneau,
Rick D. Riley, Dr. Richard C. Scott, Steven F. Shelton, Ralph M. Smith,
Th.D., Timothy T. Timmerman and Dr. E. Dean Gage. Each of the
individuals elected were returning Directors.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
None.
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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: August 13, 2001
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