UNITED STATES
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, 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 of incorporation) (IRS Employer Identification No.)
400 East Anderson Lane, Austin, Texas 78752
- ---------------------------------------- --------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (512) 837-7100
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
Class A Common Stock American Stock Exchange
- -------------------- -----------------------
Securities registered pursuant to Section 12(g) of the Act:
None
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
requirement for the past 90 days. Yes |X| No | |.
Indicate by check mark if 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. | |
As of March 15, 2002, aggregate market value of the Class A voting stock held by
non-affiliates of the Registrant was approximately $229,597,000.
DOCUMENTS INCORPORATED BY REFERENCE
Part III of this Report incorporates certain portions of the definitive proxy
material of the Registrant in respect of its 2002 Annual Meeting of
Shareholders.
Number of shares of common stock outstanding as of March 15, 2002
Class A: 24,417,118
Class B: 711,040
PART I
ITEM 1. BUSINESS
(a) GENERAL DEVELOPMENT OF BUSINESS
Citizens, Inc. (Citizens) operates primarily as an insurance holding
company. It was incorporated in Colorado in 1977. Citizens is the
parent company that directly or indirectly owns 100% of seven
operating subsidiaries: Citizens Insurance Company of America
(CICA), Computing Technology, Inc. (CTI), Insurance Investors, Inc.
(III), Funeral Homes of America (FHA), Central Investors Life
Insurance Company of Illinois (CILIC), First Investors Group, Inc.
(Investors) and Excalibur Insurance Corporation (Excalibur) .
Collectively, Citizens and its subsidiaries are referred to herein
as the "Company." Pertinent information relating to Citizens'
subsidiary companies is set forth below:
YEAR STATE OF BUSINESS
SUBSIDIARY INCORPORATED INCORPORATION ACTIVITY
---------- ------------ ------------- --------
CICA 1968 Colorado Life insurance
CILIC 1965 Illinois Life insurance
Investors 1996 Illinois Holding company
Excalibur 1996 Illinois Life insurance
CTI 1986 Colorado Data processing
III 1965 Texas Aircraft transportation
FHA 1989 Louisiana Funeral home
In June, 1997, CICA acquired American Investment Network, Inc.
(AIN), a life insurance holding company and United Security Life
Insurance Company (USLIC), its wholly-owned subsidiary,
headquartered in Jackson, Mississippi with $7.5 million in assets,
$3.4 million of stockholders' equity, annual revenues of $3.2
million and $67 million of life insurance in-force. Subsequently,
AIN was liquidated. USLIC was merged into CICA in October, 2000.
To streamline corporate structure, in June, 1997, American Liberty
Financial Corporation (ALFC), a wholly owned subsidiary, was merged
into Citizens. American Liberty Life Insurance Company (ALLIC), a
subsidiary of ALFC, was also merged into CICA.
In November, 1997, Citizens purchased 100% of the issued and
outstanding shares of National Security Life and Accident Insurance
Company (NSLIC). NSLIC was a Texas-domiciled life and accident and
health insurer with assets of approximately $5 million and revenues
of approximately $5 million. It was merged into CICA in June, 2000.
In January, 1999, Citizens acquired Investors, the parent of
Excalibur.
2
On November 20, 2001, Citizens announced that definitive agreements
had been reached between Citizens and Combined Underwriters Life
Insurance Company (Combined) and Citizens and Lifeline Underwriters
Life Insurance Company (Lifeline). Pursuant to the terms of the
agreements, which were approved by Combined's and Lifeline's
shareholders and regulatory authorities, Citizens issued
approximately 753,000 shares of its Class A Common Stock to acquire
Combined and approximately 305,000 shares of its Class A Common
Stock to acquire Lifeline. The aggregate market value of the
consideration was approximately $12.1 million. The transactions
closed on March 19, 2002 and were accounted for as purchases.
Certain statements contained in this Annual Report on Form 10-K 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. Many of these
statements contain risk factors as well. 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 of 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
3
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.
(b) FINANCIAL INFORMATION REGARDING THE INSURANCE BUSINESS
Citizens, through CICA, CILIC, and Excalibur, operates principally
in two business segments: selling selected lines of individual life
and accident and health (A&H) insurance policies in domestic markets
and individual ordinary life insurance in international markets.
Except for certain insignificant operations, Citizens has no present
intention to engage in any non-insurance related business. The
following tables set forth certain statistical information on the
basis of accounting principles generally accepted in the United
States of America (U.S. GAAP) concerning the operations of the
Company for each of the five years ended December 31, 2001.
TABLE I
The following table sets forth (i) life insurance in-force and (ii) mean life
insurance in-force.
IN-FORCE MEAN LIFE
BEGINNING IN-FORCE INSURANCE
OF YEAR END OF YEAR IN-FORCE
(a) (b) (a) (b) (a) (b)
---------- ----------- ----------
2001 $2,240,523 $2,416,610 $2,328,567
2000 2,197,844 2,240,523 2,219,184
1999 2,340,744 2,197,844 2,269,294
1998 2,250,197 2,340,744 2,295,471
1997 2,231,017 2,250,197 2,240,607
- ----------
(a) In thousands (000s)
(b) Before assuming and ceding reinsurance from/to reinsurers
The increases in insurance in-force prior to 1999 reflect the volumes of new
business written by the Company as well as the impact of acquisitions. Economic
and other market disruptions in the Company's international markets had a
negative impact on the Company's persistency in 1999, contributing to the
decline in insurance in-force. Improved persistency in 2001 combined with
increased sale of new policies in 2000 and 2001 contributed to the growth in
insurance in-force during 2000 and 2001.
4
TABLE II
The following table sets forth (i) the ratio of lapses and surrenders to mean
life insurance in-force and (ii) life reinsurance ceded.
RATIO OF REINSURANCE CEDED
LAPSES AND -------------------------------
SURRENDERS AMOUNT REINSURANCE
LAPSES AND TO MEAN OF PREMIUM
SURRENDERS (a) IN-FORCE REINSURANCE (a) CEDED (b)
-------------- ---------- --------------- -----------
2001 $113,482 4.9% $206,386 $ 2,312,232
2000 112,676 5.1 272,150 2,494,798
1999 115,018 5.1 278,689 2,539,155
1998 100,906 4.4 306,070 3,368,690
1997 95,684 4.3 318,630 2,257,556
- ----------
(a) In thousands (000s)
(b) Approximately 95 percent of the reinsurance is yearly renewable term
insurance, with the remainder being coinsurance. Premiums reflect
both life and accident and health business.
As described above, the disruption in certain international markets contributed
to the increased lapsation and surrender activity in 1999. The decline in ceded
premium in 1999 and 2000 was related to the termination of a substantial portion
of NSLIC's major medical business, much of which had been ceded. The decline in
ceded premium in 2001 related to an increase in the Company's retention from
$75,000 to $100,000. The increase in ceded premium in 1998 was due to the
cession of a substantial portion of the major medical accident and health
business of NSLIC.
TABLE III
The following table sets forth information with respect to total insurance
premiums.
ORDINARY ANNUITY & ACCIDENT
LIFE (a) UNIVERSAL LIFE GROUP LIFE & HEALTH (a) TOTAL
-------- -------------- ---------- ------------ -----
2001 $ 48,142,397 $ 216,905 $ 543,792 $ 5,059,843 $ 53,962,937
2000 45,892,621 228,479 95,068 7,235,685 53,451,853
1999 47,687,414 261,880 484,746 10,886,317 59,320,357
1998 48,801,081 263,994 231,410 9,857,844 59,154,329
1997 49,412,066 366,135 284,632 5,299,783 55,362,616
- ----------
(a) After deduction for reinsurance ceded.
New sales of life insurance decreased slightly from 1997 to 1999. In 2000, new
life sales increased, but overall life premium declined due to the lower level
of sales in previous years coupled with the surrender activity shown in Table II
above. In 2001, new life sales increased and the ratio of lapses and surrenders
to mean in-force declined as shown in Table II above. Much of the 1998 increase
in accident and health premiums related to the acquisition of USLIC and NSLIC.
Additionally, much of the 2000 and 2001 decline in accident and health premiums
related to management's decision to cancel a large portion of USLIC's group
dental business and
5
NSLIC's major medical business during the third quarter of 1999 in order to
curtail both claims and operating expenses.
TABLE IV
The following table sets forth information relating to the ratio of underwriting
and other expenses to insurance revenues.
COMMISSIONS, UNDERWRITING
AND OPERATING EXPENSES,
POLICY RESERVE INCREASES,
COMMISSIONS, UNDERWRITING POLICYHOLDER BENEFITS AND
AND OPERATING EXPENSES DIVIDENDS TO POLICYHOLDERS
------------------------- --------------------------
RATIO TO RATIO TO
INSURANCE INSURANCE INSURANCE
PREMIUMS (a) AMOUNT PREMIUMS AMOUNT PREMIUMS
------------ ------ -------- ------ --------
2001 $ 53,962,937 $ 24,079,909 44.6% $ 63,253,162 117.2%
2000 53,451,853 22,550,592 42.2 63,693,030 119.2
1999 59,320,357 22,563,049 38.0 68,043,243 114.7
1998 59,154,329 23,580,491 39.9 66,914,063 113.1
1997 55,362,616 18,910,594 34.2 58,865,744 106.3
- ----------
(a) After premiums ceded to reinsurers.
The 1997 acquisitions of NSLIC and USLIC and their related conversion expenses
as well as increases in accident and health benefits were the primary reasons
for the 1998 and 1999 increases in policyholder benefits and the 1998 increase
in commission, underwriting and operating expenses. During 2000, accident and
health premiums and claims decreased as discussed above due to the cancellation
of major portions of the group dental and major medical business; however, due
to the development of a domestic ordinary life sales program and the
administrative costs of managing the run-off of the cancelled accident and
health business, the ratio of expenses to premium increased. During 2001, the
decrease in lapses and surrenders combined with the decrease in accident and
health claims offset increased commissions and administration expenses,
resulting in a decrease in the ratio of expenses and benefits to premium.
TABLE V
The following table sets forth changes in new life insurance business produced
between participating and nonparticipating policies.
PARTICIPATING NONPARTICIPATING
TOTAL NEW -------------------- --------------------
BUSINESS (a) AMOUNT (a) PERCENT AMOUNT (a) PERCENT
------------ ---------- ------- ---------- -------
2001 $346,132 235,847 68.1% 110,285 31.9%
2000 327,753 217,303 66.3 110,450 33.7
1999 287,238 180,800 62.9 106,438 37.1
1998 311,331 222,496 71.5 88,835 28.5
1997 286,698 245,547 85.6 41,151 14.4
- ----------
(a) In thousands (000s)
6
The significant changes in 1998 and 1999 were due to the volume of credit life
business produced by NSLIC that is non-participating. During 2000 and 2001 the
percentage of participating new business grew due to increases in the issuance
of participating ordinary life policies internationally.
TABLE VI
The following table sets forth changes in new life insurance business issued
according to policy types.
WHOLE LIFE
AND ENDOWMENT TERM CREDIT
TOTAL NEW -------------------- -------------------- --------------------
BUSINESS (a) AMOUNT (a) PERCENT AMOUNT (a) PERCENT AMOUNT (a) PERCENT
- ----- ------------ ---------- ------- ---------- ------- ---------- -------
2001 $346,132 $238,765 69.0% $71,900 20.8% $35,467 10.2%
2000 327,753 220,691 67.3 56,747 17.3 50,315 15.4
1999 287,238 183,726 63.9 43,607 15.2 59,905 20.9
1998 311,331 224,918 72.2 51,531 16.6 34,882 11.2
1997 286,698 245,637 85.7 41,061 14.3 -- --
- ----------
(a) In thousands (000s)
Most of the 1998 and 1999 increases were due to the credit life business sold by
NSLIC. The decline in 1998 and 1999 whole life production related to the
disruption in the Company's international market. In 2000, new life sales
measured in paid annualized premiums increased 21.4%. In 2001, new life sales
measured in paid annualized premiums increased 14.9%.
TABLE VII
The following table sets forth deferred policy acquisition costs capitalized and
amortized compared to new business life insurance issued.
DEFERRED POLICY
TOTAL NEW ACQUISITION COSTS
BUSINESS ------------------------
ISSUED CAPITALIZED AMORTIZED
------ ----------- ---------
2001 $346,132,000 $11,112,096 $ 8,568,445
2000 327,753,000 10,056,287 8,521,972
1999 287,238,000 9,287,457 10,028,806
1998 311,331,000 7,941,829 7,789,513
1997 286,698,000 9,804,022 9,630,705
The decrease in costs capitalized for 1998 reflected the reduction in the amount
of new business produced and lower commission expenses incurred as a result
thereof. Amortization in 1999 was high due to increased surrender activity. The
increase in 2000 and 2001 capitalized costs related to the increase in new
business issued, while the decrease in amortized costs was due to improved
persistency.
7
TABLE VIII
The following table sets forth investment results.
RATIO OF NET
INVESTMENT INCOME
MEAN AMOUNT OF NET INVESTMENT TO MEAN AMOUNT
INVESTED ASSETS (a) INCOME (b) OF INVESTED ASSETS (a)
------------------- ---------- ----------------------
2001 $ 200,449,569 $13,296,481 6.6%
2000 184,270,944 12,550,754 6.8
1999 175,305,342 11,636,940 6.6
1998 169,461,908 11,279,125 6.7
1997 150,481,414 10,038,736 6.7
- ----------
(a) The year 1997 includes assets acquired from NSLIC and USLIC.
(b) Does not include realized and unrealized gains and losses on
investments.
During 2000, the Company terminated its outside investment manager and changed
the mix of new investments, resulting in improved performance for the year.
During 2001, the significant decrease in yields in the bond market caused the
return on invested assets to drop slightly.
(c) NARRATIVE DESCRIPTION OF BUSINESS
(i) BUSINESS OF CITIZENS
Citizens' principal business is ownership of CICA, Investors
and their affiliates. Additionally, it provides management
services to these companies under management services
agreements. At December 31, 2001, Citizens had approximately
90 full and part-time employees. All intercompany fees and
expenses have been eliminated in the consolidated financial
statements.
(ii) BUSINESS OF CICA
Historically, CICA's revenues have been derived from life
insurance premiums and revenues from investments. CICA is a
Colorado-domiciled life insurance company marketing primarily
ordinary whole-life products on an international basis through
marketing companies. Additionally, it offers specialty
individual accident and health policies to United States
residents, and following the merger of NSLIC in 2000, credit
life insurance policies to U.S. residents. All intercompany
fees and expenses have been eliminated in the consolidated
financial statements.
During the year ended December 31, 2001, 90.2% of CICA's
premium income was attributable to life, endowment and term
insurance, .4% to individual annuities and 9.4% to accident
and health insurance. During the year ended December 31, 2000,
86.0% of CICA's premium income was attributable to life,
endowment and term insurance, 0.4% to individual annuities,
and 13.6% to accident and health insurance. Of the life
policies in force at December 31, 2001
8
and 2000, 46.1% and 43.1%, were nonparticipating and 53.9% and
56.9%, respectively were participating.
From 1987 to 1997, CICA offered a series of participating
whole life policies designed for international markets.
Beginning January 1, 1998, CICA introduced a new series of
policies to replace the policies then offered. Ten plans make
up this series and, like those previously sold, are designed
for the international market. These plans maintain many of the
features of the previous series and incorporate several new
enhancements, such as terminal illness protection as well as
dismemberment provisions.
Additionally, following the merger with ALLIC, CICA began
offering specialty individual accident and health products as
well as ordinary whole life policies to residents of the
United States. The sale of these products is focused in
Oklahoma, Louisiana and Mississippi.
In 1999, management began developing a domestic ordinary life
sales program and received regulatory approval of the product
and related sales material in Texas during April of 2000.
Management began recruiting efforts for associates in the
State of Texas for the new product in mid-2000 and sales began
late during second quarter 2000. This program, targeting rural
areas of the United States, is expected to provide a new entre
into the domestic life market for the Company. Due to changes
in agency management, this program's initial results have not
been as successful as management had anticipated; however, the
Company believes the program will ultimately be successful.
The Company intends to expand sales efforts beyond Texas to
other states in which CICA is licensed.
The CICA underwriting policy requires a medical examination of
applicants for ordinary insurance in excess of certain
prescribed limits. These limits are graduated according to the
age of the applicant and the amount of insurance. Generally,
the maximum amount of ordinary life insurance issued
domestically without a medical examination is $200,000 for
ages 0 through 35; $100,000 for ages 36 through 45; $50,000
for ages 46 through 50; $15,000 for ages 51 through 55; and
$10,000 for ages 56 and over. Non-United States applicants
ages 0 through 39 can obtain up to $150,000 of insurance
without a medical examination. Medical examinations are
required of all non-United States applicants age 40 and over .
The supplemental accident and health policies sold in the U.S.
have only minimal, field underwriting.
On life policies, CICA's maximum coverage on any one life is
not limited by Company policy. However, CICA reinsures the
amount of coverage, which is in excess of its retention
policy. See "Business of CICA - Reinsurance." CICA does not
accept substandard risks above Table 6 (generally
policyholders who cannot qualify for standard ordinary
insurance because of past medical history).
CICA has $31 million of insurance in-force on individuals that
are classified as substandard risks, the majority of such
business having been acquired in the purchase of other
companies. Management believes the exposure to loss as a
9
result of insuring these individuals is minimal, since the
premiums are increased to cover the nature of the risk,
additional reserves are established, and the amount of this
insurance represents approximately 1.0% of the total insurance
in-force.
GEOGRAPHICAL DISTRIBUTION OF BUSINESS
CICA makes available ordinary whole-life insurance products to
residents of foreign countries worldwide. Premium income from
non-U.S. residents accounted for approximately 82.4%, 82.7%
and 85.5% of total CICA premiums for the years ended December
31, 2001, 2000 and 1999, respectively.
Premiums in excess of 10% of CICA's total premiums for the
years ended December 31, 2001, 2000 and 1999 were: Argentina -
23.3%, 27.7% and 32.3%; Columbia - 21.9%, 20.2% and 19.4%; and
Uruguay -10.2%, 11.8% and 14.3%, respectively.
The following table sets forth CICA's total yearly premium
income by geographic area for the years indicated.
AREA 2001 2000 1999
---- ---- ---- ----
Oklahoma 4.6% 5.2% 5.4%
Texas 4.2% 4.4% 2.3%
Mississippi 4.0% 2.8% 1.6%
Louisiana 1.1% 1.1% 1.2%
All Other States 3.7% 3.8% 4.0%
Foreign 82.4% 82.7% 85.5%
The participating whole life policies accepted by CICA on high
net worth residents of foreign countries have an average face
amount of approximately $66,000 and are issued primarily to
individuals in the top 5% of the population in terms of
household income. CICA has neither offices nor employees
overseas. It accepts applications for international insurance
policies submitted by several independent firms in these
markets with whom CICA has non-exclusive consulting contracts.
These firms specialize in marketing life insurance products to
citizens of foreign countries and have many years of
experience marketing life insurance products. They provide
recruitment, training and supervision of their managers and
associates in the placement of dollar-denominated life
insurance products; however, all consultants and associates
contract directly with CICA and receive their compensation
from CICA. Accordingly, should the consulting arrangement
between any firm and CICA be canceled for any reason, CICA
believes it could continue suitable marketing arrangements
with the individuals of the consulting firms without
appreciable loss of present and future sales, as it has done
in the past. There is, however, always a risk that sales could
decrease. The contract with the consultants provides that they
are the representative of the prospective insured, have the
responsibility for recruiting and training their sales
associates and are responsible for all of their overhead costs
including the expense
10
of contests and awards. These firms guarantee any debts of
marketers and their associates. In consideration for the
services rendered, the marketing consultants receive a fee on
all new policies placed by them or their associates. See
"Business of CICA - Commissions." Either party may terminate
the marketing contracts for various causes at any time by
mutual consent of the parties or upon 30 days' notice.
At present, CICA is dependent on the non-U.S. markets for a
large percentage of its new life insurance business. This
subjects CICA to potential risks with regard to the continued
ability to write such business should adverse events occur in
the countries from which CICA receives applications. These
potential risks include lapses of policies if funds that flow
out of such countries were to become restricted. Based on more
than 35 years experience in the marketplace in which CICA
competes, management believes such risks are not material. The
Company maintains no assets outside the U.S. and requires all
premiums to be paid in the U.S. with U.S. dollars via drafts
drawn on banks in the U.S.; therefore, it could lose no funds
from currency devaluation or foreign appropriation. Many of
the inherent risks in foreign countries, such as political
instability, hyper-inflation and economic disruptions, tend to
improve rather than hurt CICA's business because it encourages
individuals to convert assets out of local currencies to the
more stable U.S. dollar.
MARKETING OPERATIONS
CICA holds licenses to do business in 15 states and accepts
applications for consideration from any foreign country.
CICA's operations are conducted on the independent contractor
basis, with 1,838 individuals contracted at December 31, 2001
and 1,302 at December 31, 2000 and 1,415 individuals at
December 31, 1999.
COMMISSIONS
CICA's marketing managers are independent contractors,
responsible for their respective expenses, and are compensated
on a percentage of premium basis. Percentage amounts paid to
contractors on individual term, annuity and accident and
health insurance are substantially less than the levels paid
for individual ordinary life insurance. The marketing managers
receive overriding first year and renewal commissions on
business written by individuals under their supervision and
all marketing expenses related thereto are included in the
above percentages.
RESERVES
CICA establishes actuarial reserves as liabilities to meet
obligations on all outstanding policies. Reserves and deferred
acquisition costs are prepared in conformity with the American
Academy of Actuaries Committee on Financial Reporting
Principles and accounting principles generally accepted in the
United States of America. In determining such reserves CICA
used the 1955 to 1960,
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1965 to 1970, and 1975 to 1980 Select and Ultimate Mortality
Tables with interest rates at 4% or in a range graded from 9%
to 5% with recent issues reserved at 7% graded to 6 1/2%.
Withdrawal assumptions are based primarily on actual
historical experience. Statutory reserves are used for paid-up
life business. Claims reserves include an amount equal to the
expected benefit to be paid on reported claims in addition to
an estimate of claims that are incurred but not reported based
on actual historical experience. CICA receives an independent
actuarial certification of its reserves prepared in accordance
with both Generally Accepted Accounting Principles and
Statutory Accounting Practices. The certifications have noted
no deficiencies for the years presented herein.
REINSURANCE
CICA assumes and cedes insurance with other insurers,
reinsurers and members of various reinsurance pools.
Reinsurance arrangements are utilized to provide greater
diversification of risk and minimize exposure on larger risks.
(a) INSURANCE CEDED
CICA has historically retained $75,000 of risk on any one
person. Effective January 1, 2001, this amount was increased
to $100,000 based upon CICA's capital growth. The increase in
retention is based upon the relative size and financial
strength of CICA. As of December 31, 2001, the aggregate
amount of life insurance ceded amounted to $204,989,000 or
7.2% of total direct and assumed life insurance in-force, and
was $270,515,000 or 10.6% in 2000. CICA is contingently liable
with respect to ceded insurance should any reinsurer be unable
to meet the obligations reinsured.
As of December 31, 2001, CICA had in effect automatic
reinsurance agreements with reinsurers that provide for
cessions of ordinary insurance from CICA. Additionally, CICA
has reinsurance treaties in force with several reinsurers of
life and accident and health insurance. These treaties provide
for both automatic and facultative reinsurance of standard and
substandard risks ceded to them by CICA for life, accident and
health and supplemental benefits above CICA's retention limit
on a yearly renewable term, coinsurance or modified
coinsurance basis.
Treaties with Employers Reassurance (ERC) and Businessmen's
Assurance (BMA) historically have been the primary vehicles
utilized by CICA for its international business. The treaties
are structured in such a way as to allow CICA to "self
administer" the cessions on a reduced cost basis. During 1995,
a third carrier was added as a principal reinsurer, Riunione
Adriatica di Sicurta, of Italy (RAS). American United Life
Insurance Company (AUL) replaced RAS in 2000.
The ERC and BMA agreements provide that for risks reinsured in
specified countries, 70% of each risk in excess of CICA's
retention will be ceded to ERC and 30% to BMA. The RAS
agreement provided that on risks reinsured in specified
countries, 100% of the risk in excess of CICA's retention was
ceded to
12
RAS. AUL's treaty provides for the same share of business that
RAS previously reinsured. CICA pays premiums to ERC, BMA and
AUL on an annual basis and is responsible for the production
of the reporting monthly and annually to ERC and BMA to allow
proper accounting for the treaties. The RAS agreement
contained similar terms.
The cessions are on a yearly renewable term basis and are
automatic over the Company's retention up to $350,000 for ERC,
$150,000 for BMA and $500,000 for AUL, after which the
reinsurance is subject to a facultative review by the
reinsurers. At December 31, 2001, CICA had ceded $91,172,000
in face amount of insurance to ERC, $52,704,000 to RAS,
$28,895,000 to BMA and $28,285,000 to AUL under these
agreements.
RAS is an unauthorized reinsurer in the state of Colorado;
however, RAS has agreed to comply with Colorado statutes
regarding such companies. Under these statutes, RAS will
provide a letter of credit, issued by a U.S. bank meeting the
Colorado requirements, equal to any liabilities it incurs
under this agreement. RAS notified CICA in late 1999 that it
was withdrawing from the reinsurance market effective January
1, 2001 and AUL replaced it.
A reinsurance treaty with Swiss Re Life & Health America, Inc.
(Swiss Re) covers all of CICA's accidental death insurance
supplementing its life insurance policies. These cessions are
on a yearly renewable term basis and occur automatically if
total accidental death benefits known to CICA are less than
$250,000 or otherwise on a facultative review basis. At
December 31, 2001, CICA had ceded $1.3 billion in face amount
of business to Swiss Re under this treaty.
CICA monitors the solvency of its reinsurers to minimize the
risk of loss in the event of a failure by one of the parties.
The primary reinsurers of CICA are large, well capitalized
entities .
(b) INSURANCE ASSUMED
At December 31, 2001, CICA had in-force reinsurance assumed as
follows:
TYPE OF AMOUNT
BUSINESS IN-FORCE AT
NAME OF COMPANY LOCATION ASSUMED END OF YEAR
--------------- -------- ------- -----------
Prudential Insurance Newark, Ordinary
Company (Prudential) New Jersey Group Life $440,023,000
The reinsurance agreement with Prudential provides for CICA to
assume a portion of the insurance under a group insurance
policy issued by Prudential to the Administrator of Veterans'
Affairs. CICA's portion of the total insurance under the
policy is allocated to CICA in accordance with the criteria
established by the Administrator. The agreement continues in
full force and effect at December 31, 2001.
13
CICA has also entered into a Serviceman's Group Life Insurance
Conversion Pool Agreement with Prudential, under the above
described agreement, whereby CICA assumed a portion of the
risk of Prudential under the group policy due to excess
mortality under the conversion pool agreement resulting from
issuing conversion policies as prescribed for membership in
the conversion pool.
INVESTMENTS
State insurance statutes prescribe the quality and percentage
of the various types of investments which may be made by
insurance companies and generally permit investment in
qualified state, municipal, federal and foreign government
obligations, high quality corporate bonds, preferred and
common stock, real estate and mortgage loans within certain
specified percentages. CICA's invested assets at December 31,
2001 were distributed as follows: fixed maturities - 88.9%,
equity securities .3%, mortgage loans - .6%, policy loans -
10.1% and other long-term investments - .1%. CICA did not
foreclose on any mortgage loans in 2001. All mortgage loans
are supported by independently appraised real estate. The
investment policy of CICA is consistent with the provisions of
the Colorado Insurance Code.
At December 31, 2001, 90.8% of CICA's investments in fixed
maturities were comprised of U.S. Treasury securities and
obligations of U.S. government corporations and agencies,
including U.S. government guaranteed mortgage-backed
securities, compared to 86.4% at December 31, 2000. Of these
mortgage-backed securities, all were guaranteed by U.S.
government agencies or corporations that are backed by the
full faith and credit of the U.S. government or that bear the
implied full faith and credit of the U.S. government.
REGULATION
CICA is subject to regulation and supervision by the insurance
department of each state or other jurisdiction in which it is
licensed to do business. These departments have broad
administrative powers relating to the granting and revocation
of licenses to transact business, the licensing of marketing
persons, the approval of policy forms, the advertising and
solicitation of insurance, the form and content of mandatory
financial statements, the reserve requirements, and the type
of investments which may be made. CICA is required to file
detailed annual reports with each such insurance department,
and its books and records are subject to examination at any
time. In accordance with state laws and the rules and
practices of the National Association of Insurance
Commissioners, CICA is examined periodically by examiners of
its domiciliary state and by representatives (on an
"association" or "zone" basis) of the other states in which it
is licensed to do business. An examination was concluded in
1998 for the five years ended December 31, 1996, by a public
accounting firm under contract with and supervision by the
Colorado Division of Insurance. CICA is audited annually by an
independent public accounting firm.
14
Various states, including Colorado, have enacted "Insurance
Holding Company" legislation, which requires the registration
and periodic reporting by insurance companies which control,
or are controlled by, other corporations or persons. Under
most of such legislation, control is presumed to exist with
the ownership of ten percent or more of an insurance company's
voting securities. The Company is subject to such regulation
and has registered under such statutes as a member of an
"insurance holding company system." The legislation typically
requires periodic disclosure concerning the transactions
between the registered insurer, the ultimate controlling
party, and all affiliates and subsidiaries of the ultimate
controlling party, and in many instances requires prior
approval of intercorporate transfers of assets (including in
some instances payment of dividends by the insurance
subsidiary) within the holding company system.
Since CICA does not physically conduct business in countries
outside the U.S. but rather accepts applications for
consideration from overseas marketers, it is not subject to
regulation in countries where most of its insureds are
residents. The prospect of such regulation is viewed as remote
by management of CICA because obtaining insurance through
application by mail outside of one's country is a common
practice in many foreign countries, particularly those where
CICA's insureds reside.
COMPETITION
The life insurance business is highly competitive, and CICA
competes with a large number of stock and mutual life
companies both internationally and domestically. CICA competes
with 1,500 to 2,000 other life insurance companies in the
United States, some of which it also competes with
internationally. CICA believes that its premium rates and its
policies are generally competitive with those of other life
insurance companies selling similar types of ordinary
whole-life insurance, many of which are larger than CICA.
A large percentage of CICA's first year and renewal life
insurance premium income during the last five years came from
the international market. See "Business of CICA - Geographical
Distribution of Business." Management believes CICA to be a
significant competitor in the non-U.S. market and attributes
its market position to the expertise of management, the
uniqueness of CICA's life insurance products and the
competitiveness of its pricing methods.
Given the significance of CICA's international business, the
variety of markets in which CICA makes ordinary whole-life
insurance available and the impact that economic changes have
on these foreign markets, it is not possible to ascertain
CICA's competitive position.
CICA's international marketing plan stresses making available
dollar-denominated life insurance products available to high
net worth individuals residing in foreign countries and the
sale of individual, whole life and supplemental accident and
health products to United States residents.
15
CICA faces offshore competition from numerous American life
insurance companies that also sell U.S. dollar denominated
policies to non-U.S. citizens, with no one company being
dominant in the market. Some companies may be deemed to have a
competitive advantage due to histories of successful
operations and large agency forces. Management believes that
its experience, combined with the special features of its
unique policies, allows CICA to compete effectively in
pursuing new business.
Management believes that CICA competes indirectly with
non-U.S. companies, particularly with respect to Latin
American companies. CICA, as a U.S. domestic insurer paying
claims in U.S. dollars in the U.S., has a different clientele
and product than foreign-domiciled companies. CICA's product
is usually acquired by persons in the top 5% of income of
their respective countries. The policies sold by foreign
companies are sold broadly and are priced based on the
mortality of the entire populace of the respective geographic
region. Because of the predominance of lower incomes in most
of these countries, the mortality experience tends to be very
high on the average, causing mortality charges which are
considered unreasonable based on the life mortality experience
of the upper five percent of income of the population.
Additionally, the assets that back up the policies issued by
foreign companies are invested in the respective countries,
and thus, are exposed to the inflationary risks and economic
crises that historically have impacted many foreign countries.
Another reason that CICA experiences an advantage is that many
of its policyholders desire to transfer capital out of their
countries due to the perceived financial strength and security
of the United States.
Also, CICA competes indirectly with other U.S. and European
insurers in countries where CICA's insureds reside. CICA's
experience has been that its market niche is in attracting
insureds who want the safety and security of a U.S. domestic
insurer. Management of CICA considers it to be difficult and
speculative to estimate the potential of the foreign market
for U.S. insurers. However, based upon the volume of new
premium generated by CICA that originates from many countries
in Latin America, management believes that CICA receives a
substantial share of such business. However, CICA does not
have market share data to confirm management's belief.
CICA initiated a new domestic marketing program during 2000
focusing on the sale of individual ordinary life insurance
products to residents of rural communities. This program is
being initiated through one state at a time, and began in
Texas. Management believes this market is overlooked by the
majority of U.S. insurers. Competition from many U.S.
companies is significantly greater in the domestic market,
particularly as banking institutions enter the insurance
market due to the passage of the Graham Leach Bliley Act in
1999.
16
In CICA's block of accident and health insurance (9.4% of
total premium income), it is in competition with many
insurance companies as well as with voluntary and
government-sponsored plans for meeting hospitalization and
medical expenses such as Blue Cross/Blue Shield, "Medicare"
and "Medicaid." Future expansion of such programs or the
establishment of additional government health programs could
adversely affect the future of accident and health insurance
on CICA's books, most of which has been acquired in the
acquisition of other companies.
FEDERAL INCOME TAXATION
CICA is a "small company" as that term is defined in Section
806 of the Internal Revenue Code (the "Code"). As such, CICA
qualifies for a special small company deduction (presently
equal to 60% of "tentative life insurance company taxable
income") which serves to decrease significantly the amount of
tax, which might otherwise have to be paid.
The Revenue Reconciliation Act of 1990 revised the method by
which insurance companies claim deductions for policy
acquisition costs. Previously, insurance companies were
allowed to deduct actual policy acquisition costs as they were
incurred. Beginning in 1990, policy acquisition costs are
determined as a percentage of annual net premiums and are then
deductible on a straight-line basis over a ten-year period
rather than treated as an immediate deduction. This change in
treatment for acquisition costs has had a significant impact
on CICA's taxable income due to the relatively large amounts
of such deferrals caused by the increases in new business.
CICA files a consolidated Federal income tax return with
Citizens and its subsidiaries.
(iii) BUSINESS OF CILIC
CILIC is an Illinois domiciled life insurer admitted to do
business in four states. Dormant for several years, CILIC
services a closed block of life insurance policies. At
December 31, 2001, CILIC had assets of $3.0 million and annual
revenues of $197,000. All intercompany fees and expenses have
been eliminated in the consolidated financial statements.
(iv) BUSINESS OF INVESTORS
Investors is an Illinois holding company that owns Excalibur.
All intercompany fees and expenses have been eliminated in the
consolidated financial statements. Management expects to
consolidate Investors with Citizens during 2002.
(v) BUSINESS OF EXCALIBUR
Excalibur is an Illinois-domiciled life insurer. It services a
small block of ordinary life insurance. Excalibur is 100%
owned by Investors. At December 31,
17
2001, Excalibur had assets of $3.0 million and annual revenues
of $187,000. All intercompany fees and expenses have been
eliminated in the consolidated financial statements.
(vi) BUSINESS OF CTI
CTI is a wholly owned subsidiary of CICA and engages in the
business of providing data processing services and acquisition
and leasing of furniture and equipment for its parent as well
as data processing services and software to other companies.
Pursuant to an Information Systems Management and Services
Contract dated October 1, 1991, and subsequently amended, CTI
provides data processing services to the Company for a fixed
fee of $85,000 per month. As of and for the year ended
December 31, 2001, CTI's total assets were approximately
$514,000 and revenues were $1.1 million. All intercompany fees
and expenses have been eliminated in the consolidated
financial statements.
(vii) BUSINESS OF III
III is a wholly owned subsidiary of CICA and engages in the
business of providing aviation transportation for its parent
and subsidiaries. As of and for the year ended December 31,
2001, III's total assets were $1.5 million and revenues were
$130,000. All intercompany fees and expenses have been
eliminated in the consolidated financial statements.
(viii) BUSINESS OF FHA
FHA owns and operates a funeral home in Baker, Louisiana. At
December 31, 2001, FHA had total assets of $547,000 and total
annual revenues of $540,000. All intercompany fees and
expenses have been eliminated in the consolidated financial
statements.
ITEM 2. DESCRIPTION OF PROPERTIES
CICA owns its principal office in Austin, Texas, consisting of
an 80,000 square foot office building. Approximately 50,000
square feet is occupied or reserved for occupancy by CICA and
its affiliates with the remainder of the building being leased
to a single tenant under a multi-year lease.
The Company also owns a 6,324 square foot funeral home in
Baker, Louisiana with a total cost of $527,000. This facility,
acquired as a result of a 1995 acquisition, is owned and
operated by a subsidiary, FHA.
Because CICA owns its principal offices and FHA owns its
facilities, neither CICA nor FHA makes any lease payments on
these properties.
18
ITEM 3. LEGAL PROCEEDINGS
The Company from time to time may be a party to various legal
proceedings incidental to its business. Management does not
expect the ultimate resolution of these legal proceedings to
have a material adverse impact on the results of operations or
the financial condition of the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to shareholders of Citizens during
the fourth calendar quarter of 2001.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Citizens' Class A common stock is traded on the American Stock
Exchange (AMEX) under the symbol CIA. The high and low prices
per share as supplied by the Amex Monthly Statistical Report
are as follows. These prices have been adjusted to reflect 7%
stock dividends paid in 1999 and 2000.
2001 2000
-------------- --------------
QUARTER ENDED HIGH LOW HIGH LOW
-------------- ---- --- ---- ---
March 31 $7.00 $6.05 $6.72 $6.13
June 30 7.60 6.25 6.31 5.02
September 30 10.40 6.21 6.31 5.89
December 31 13.30 8.80 7.00 5.72
As of December 31, 2001, the approximate number of record
owners of Citizens' Class A common stock was 15,000.
Management estimates the number of beneficial owners to be
approximately 60,000.
On November 2, 1999, the Company's Board of Directors declared
a 7% stock dividend, payable on December 31, 1999 to holders
of record as of December 1, 1999. The dividend resulted in the
issuance of 1,763,805 Class A shares (including 136,091 shares
in treasury) and 43,474 Class B shares.
On October 31, 2000, the Board declared a 7% stock dividend
payable on December 31, 2000 to holders of record as of
December 1, 2000. The dividend resulted in the issuance of
1,887,265 Class A shares (including 145,613 shares in
treasury) and 46,517 Class B shares.
Citizens has not paid cash dividends in any of the past five
years and does not expect to pay such in the immediate future.
For restrictions on the present and future ability to pay
dividends, see Note 6 of the "Notes to Consolidated Financial
Statements."
19
ITEM 6. SELECTED FINANCIAL DATA
The table below sets forth, in summary form, selective data of
the Company. This data, which is not covered in the report of
the independent auditors, should be read in conjunction with
the consolidated financial statements and notes which are
included elsewhere herein (amounts in thousands except per
share amounts). The per share amounts have been adjusted
retroactively for all periods presented to reflect the change
in capital structure resulting from 7% common stock dividends
paid on December 31, 1999 and December 31, 2000, respectively.
YEAR ENDED DECEMBER 31,
(IN THOUSANDS EXCEPT PER SHARE DATA)
------------------------------------------------------
2001 2000 1999 1998 1997
-------- -------- -------- --------- --------
NET OPERATING REVENUES $ 67,647 $ 66,678 $ 71,877 $ 72,685 $ 65,027
NET INCOME (LOSS) $ 3,963 $ 2,053 $ 1,271 $ (6,721) $ 3,426
NET INCOME (LOSS) PER SHARE $ .16 $ .08 $ .05 $ (.27) $ .14
TOTAL ASSETS $282,086 $267,842 $255,485 $ 253,384 $249,519
NOTES PAYABLE $ -- $ -- $ -- $ 333 $ 937
TOTAL LIABILITIES $199,364 $190,529 $183,218 $ 178,480 $169,938
TOTAL STOCKHOLDERS' EQUITY $ 82,722 $ 77,313 $ 72,267 $ 74,904 $ 79,581
BOOK VALUE PER SHARE $ 3.29 $ 3.08 $ 2.88 $ 3.06 $ 3.33
See Part I (b) - Financial information regarding the insurance business
and Item 7 - Management's Discussion and Analysis.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
On November 20, 2001, Citizens announced agreements to acquire
all outstanding shares of Combined Underwriters Life Insurance
Company ("Combined") and Lifeline Underwriters Life Insurance
Company ("Lifeline") for shares of Citizens Class A Common
stock. Both Combined and Lifeline are members of the Walden P.
Little Group of Tyler, Texas.
The agreement was approved by shareholders of Combined and
Lifeline and insurance regulatory authorities in Texas in
March, 2002. The exchange was based upon a market value of
$8.64 per share for Combined and $5.00 per share for Lifeline.
The price for Citizens shares of $11.479 was based upon its
average closing price for the 20-days preceding closing, which
occurred on March 19, 2002. The total aggregate consideration
issued by Citizens amounted to approximately 1.1 million
shares of Class A common stock.
Combined had revenues of $15.7 million for the year ended
December 31, 2000, the last full year such data was available,
and assets and stockholders' equity as of December 31,
2000 were $24.9 million and $6.3 million, respectively.
20
Lifeline had revenues of $838,000 for the year ended December
31, 2000 and assets and stockholders' equity as of December
31, 2000 were $4.1 million and $3.4 million, respectively.
Combined and Lifeline will continue to operate from their
offices in Tyler, with a combined management team. Management
believes that the acquisitions should enhance premium income
and total revenue and provide the Company an established
domestic marketing program. It is expected that the marketing
operations of these companies will continue to write the
supplemental accident and health products that have
historically been the foundation of their new business, but
will also provide a new division to offer the domestic
ordinary life products developed by CICA.
RESULTS OF OPERATIONS
Net income of $3,963,113 or $.16 per share was earned during
2001, compared to net income of $2,052,741 or $.08 per share
for the year ended December 31, 2000 and net income of
$1,271,072 or $.05 per share in 1999. Increased production of
new business coupled with improved persistency contributed to
the increased earnings in 2001.
Total revenues for the year ended December 31, 2001 were
$67,646,824 compared to $66,678,116 in 2000, an increase of
1.5%. In 1999 revenues were $71,877,058. The 2001 increase in
revenues compared to 2000 was related to a 14.9% increase in
new life sales (measured in paid annualized premiums), a 3.4%
increase in renewal premiums and a 5.9% increase in net
investment income that offset a 30.1% decrease in accident and
health premiums (a decline from $7,235,685 in 2000 to
$5,059,843 in 2001). The decrease in 2000 revenues was related
to a 33.5% decrease in accident and health premiums (a decline
from $10,886,317 in 1999 to $7,235,685 in 2000) as a result of
the Company's termination of the book of individual major
medical and group dental business as well as decreased renewal
life premiums resulting from the lower persistency experienced
in 1999.
Premium income increased by 1.0% from $53,451,853 in 2000 to
$53,962,937 in 2001. Premium income decreased by 9.9% from
$59,320,357 in 1999 to $53,451,853 in 2000. The 2001 increase
is comprised of a $2,698,500 increase in life premiums offset
by a $2,175,842 decrease in accident and health premiums. The
2000 decrease was primarily attributable to a $3,650,632
decrease in accident and health premiums.
During the second half of 1998, the Company began to
experience a significant increase in the volume of accident
and health claims created by high early utilization by holders
of USLIC's group dental certificates. As a result of the
substantial increase in the volume of claims plus an increase
in the accident and health loss ratio, management moved to
cancel a large portion of the existing block of USLIC's group
dental business and NSLIC's individual major medical
21
business during the third quarter of 1999 in order to curtail
both claims and operating expenses. This action contributed to
the $3,650,632 decrease in accident and health premiums in
2000 and an additional $2,175,842 decrease in 2001. Because of
the increase in the loss ratio, management has implemented
significant rate increases on the remaining supplemental
non-cancelable accident and health products which has also
contributed to the decrease in accident and health premiums,
as some policyholders have elected to cancel their policies.
In January, 1998, CICA introduced a new line of international
products known as the Millennia 2000 series; however, in 1998
and 1999, CICA's international sales were hampered due to the
contraction of several Latin American economies, as well as
competition from new local companies, many of whom are
subsidiaries of large U.S. insurers. As a result, there was a
decrease in the Company's core book of ordinary life business.
Production of new life insurance premiums by the associates of
CICA measured in issued and paid annualized premiums increased
21.4% from 1999 to 2000 and 14.9% from 2000 to 2001. In
addition, management initiated a domestic ordinary life sales
program in late 2000. This program, targeting rural areas of
the United States, is expected to provide a new entree into
the domestic life market for the Company in future years. Due
to changes in agency management, this program's initial
results have not been as successful as management had
anticipated; however, the Company believes the program will
ultimately be successful. The Company intends to expand sales
efforts beyond Texas to other states in which CICA is
licensed.
Net investment income increased 5.9% during 2001 to
$13,296,481 from $12,550,754 during 2000. The 2000 results
were up 7.9% compared to the $11,636,940 earned in 1999. The
2001, 2000 and 1999 results reflect the continuing 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
it can more effectively achieve its investment objectives by
overseeing the investment activities in-house. During 2001,
significant decreases in interest rates occurred. As a result,
management expects returns on newly invested funds to decline
in the short-term. Management does not believe such declines
will have a materially adverse effect on future operating
results, and believes the yield earned on newly invested money
to be reasonable and in line with assumptions utilized in
new-product development.
During the fourth quarter of 2001, the Company realized losses
of approximately $390,000 before tax on the disposal of
approximately $9 million of U.S. Treasury notes which were
purchased in the early 1990s. The entire principal portion of
the notes could have been called in February of 2002, at par.
Management disposed
22
of the notes in order to reduce any potential loss in the
event the notes were called. This avoided an additional
$100,000 in losses when the notes were called in February
2002. The Company typically avoids investments in bonds and
notes at significant premiums in order to minimize the
potential for loss on early calls such as the situation
described above. Management does not believe any similar
condition exists within the Company's bond portfolio which
could result in any significant future losses. An analysis of
the Company's portfolio indicates that the total remaining
exposure from such calls in the future is approximately
$30,000.
Policyholder dividends increased to $3,294,899 in 2001, up
8.5% over 2000 dividends of $3,037,343. The 2000 amounts
represented an increase of 6.8% compared to $2,843,681 in
1999. Virtually all of CICA's policies that have been sold
since 1989 are participating. Participating policies represent
a large majority (53.9%) of the Company's business in-force,
although the percentage of participating business has declined
from approximately 91% in 1995 due to acquisitions in recent
years. Management expects continued growth in participating
policies because CICA will continue to focus on sales of
participating products internationally.
Claims and surrenders decreased 3.9% from $30,370,996 in 2000
to $29,189,132 in 2001. In 1999 claims and surrenders were
$34,747,480. Decline on claims in accident and health benefits
attributable to the respective blocks of business of NSLIC and
USLIC were responsible for the 2000 decrease. The decline in
claims on these blocks as a result of the above discussed
cancellation of a large block of business in 1999 and 2000
contributed to the 2001 improvement.
Death benefits increased 6.4% from $5,277,284 in 2000 to
$5,613,782 in 2001. Death benefits were $5,135,808 in 1999.
Management believes the increase in 2001 was reflective of the
increased business in force. The Company has historically
adhered to an underwriting policy which requires complete
medical examinations on all applicants who are foreign
residents, except children, regardless of age or face amount
of the policy applied for. Beginning in 1996, management
initiated a change to more selective medical examinations in
conjunction with dry spot blood tests and extensive medical
questions on the application in order to lower the cost of new
business without sacrificing necessary information for the
underwriter. Additionally, X-rays and electrocardiograms are
required depending on age and face amount of the policy. On
all policies of $150,000 or more, inspection reports are
required which detail the background resources and lifestyle
of the applicant. The Company has developed numerous contacts
throughout Latin America with which its underwriters can
validate information contained in the application, medical or
inspection report.
Accident and health benefits decreased 36.0% from $5,158,623
in 2000 to $3,301,341 in 2001. Such claims were $8,686,218 in
1999. As indicated above, as a result of the substantial
increase in the volume of USLIC's accident and health 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 and
23
NSLIC's individual major medical business during the third
quarter of 1999. This action contributed to the decrease of
$2,175,842 and $3,650,632 in accident and health premiums and
the $1,857,282 and $3,527,595 decrease in accident and health
claims in 2001 and 2000, respectively. Additionally,
significant rate increases have been imposed on the accident
and health business remaining in force.
Endowment benefits increased 10.1% from $4,895,492 in 2000 to
$5,389,082 in 2001. In 1999, such expenses were $5,048,973.
Beginning in late 1990, CICA introduced a new series of
international policies that carried an immediate endowment
benefit of an amount elected by the policyowner. This
endowment is factored into the premium of the policy and is
paid annually.
Policy surrenders increased 2.2% from $14,124,514 in 2000 to
$14,435,486 in 2001. Surrenders were $14,920,985 in 1999. The
relative stability in 2001, 2000 and 1999 is, in the opinion
of management, the result of a campaign begun in mid-1997 to
inform policyowners about the benefits of their policies.
Other claim expenses amounted to $449,441 in 2001, $915,083 in
2000 and, $955,496 in 1999. These expenses are comprised of
supplemental contract benefits, interest on policy funds and
assorted other miscellaneous policy benefits.
During 2001, commissions increased 8.3% to $13,444,270 from
$12,411,053 in 2000. In 1999, commission expense was
$12,234,053. The increases in 2001 and 2000 occurred because
of the increased production and related increased issuance of
new life policies.
Underwriting, acquisition and insurance expenses increased
4.9% to $10,635,639 in 2001 compared to $10,139,539 in 2000
and $10,328,996 in 1999. During 2000, overhead expenses were
incurred to develop the domestic ordinary life sales program
which offset reductions achieved following the termination of
the accident and health business described above and the
consolidation of NSLIC and USLIC. During 2001, the Company
incurred overhead expenses related to acquisition activities
combined with expenses incurred to continue to develop the
domestic ordinary life sales program.
In order to convert a majority of CICA's marketing overhead
from fixed to variable, management contracted in early 1997
with an independent international marketing company to serve
as managing agent for the Company's international marketing
activities. This firm receives an overriding commission on all
new business issued internationally in exchange for the
absorption of all marketing, management and promotion
activities. By taking such actions, management believes a
significant amount of fixed overhead has been converted to a
variable expense. Management has utilized firms such as this
in previous periods with success in obtaining increases in new
business production and expense reductions.
24
Capitalized deferred policy acquisition costs increased 10.5%
from $10,056,287 in 2000 to $11,112,096 in 2001. These costs
were $9,287,457 in 1999. The increase in 2001 reflects
increased sales throughout the year of traditional whole life
policies internationally. The 2000 increase reflects increased
fourth quarter sales activity. Amortization of these costs was
$8,568,445, $8,521,972 and $10,028,806, respectively in 2001,
2000 and 1999.
Amortization of cost of insurance acquired, excess of cost
over net assets acquired and other intangibles decreased from
$1,995,660 in 2000 to $1,908,683 in 2001. In 1999, such
amortization was $2,120,017.
A charge of $9.5 million was recorded in the third quarter of
1998 related to the non-recoverability of a portion of the
excess of cost over net assets acquired ("goodwill") on the
Company's books. The writedown was related to the goodwill
recorded in the 1995 acquisition of American Liberty Financial
Corporation (ALFC) and was caused by a decline in new
production from insurance agents formerly associated with
American Liberty. Subsequent to the acquisition, management
implemented a 50% reduction in the amount of commission paid
to these agents in order to preserve the profitability of the
accident and health business which was negatively impacted by
changes in state laws that severely limited profit margins, as
well as mandated change in interest rates used to compute
reserves on this business. In order to ascertain the
recoverability of the goodwill balance, the Company performed
an analysis of the relevant cash flows based upon estimated
production, net of policy acquisition costs, policyholder
benefits and other general expenses. As a result of this
analysis, it was determined that an impairment of goodwill
had occurred and a write-down to goodwill was necessary.
Management has continued to monitor production associated with
these products. Through 2001, management was successful in
reviving production from some of the largest producers of
American Liberty. Should production by the former agents of
American Liberty, now representing CICA, not meet expected
amounts due to the rate increases described above, additional
write-offs could result. At December 31, 2001, approximately
$2.6 million of goodwill related to American Liberty remained
on the balance sheet. New accounting rules regarding
amortization of goodwill were promulgated by the Financial
Accounting Standards Board (FASB) during 2001 as discussed
below and became effective January 1, 2002. Under the new FASB
pronouncement, annual amortization of such amounts would cease
since goodwill has an indefinite life, and a charge would
occur only if goodwill on the balance sheet was determined to
be impaired. The Company has approximately $6.8 million of
goodwill recorded at December 31, 2001. During 2001, $595,410
of goodwill was amortized.
LIQUIDITY AND CAPITAL RESOURCES
Stockholders' equity increased from $77,313,031 at December
31, 2000 to $82,721,798 at December 31, 2001. The increase was
attributable to net income
25
of $3,963,113 earned in 2001 and unrealized gains (losses),
net of tax, changing by $1,445,654 during 2001. Increases in
the market value of the Company's bond portfolio caused by
higher bond prices resulted in the change in unrealized
(losses).
The Company paid a 7% stock dividend on December 31, 2000 to
holders of record as of December 1, 2000. A similar 7%
dividend was paid on December 31, 1999 to holders of record as
of December 1, 1999. Both dividends were paid using Class A
and B shares that were previously authorized but unissued. The
dividends had the effect of transferring $11,497,886 and
$10,649,736 respectively in 2000 and 1999 from retained
earnings to Common Stock and Treasury Stock.
Invested assets increased to $206,695,811 in 2001 from
$194,203,327 in 2000, an increase of 6.4%. An 8.2% increase in
fixed maturities available-for-sale more than offset a 4.3%
decrease in policy loans. At December 31, 2001 and 2000, 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. Fixed maturities held to maturity,
amounting to $5,569,899 at December 31, 2001 consist of U.S.
Treasury securities. Management has the intent and believes
the Company has the ability to hold the securities to
maturity.
Policy loans comprise 9.7% of invested assets at December 31,
2001 compared to 10.8% at December 31, 2000. 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, were significantly in excess of Federal Deposit
Insurance Corporation (FDIC) coverage at December 31, 2001 and
2000. Management monitors the solvency of all financial
institutions in which it has funds to minimize the exposure
for loss. At December 31, 2001, management does not believe
the Company is at significant risk for such a loss. During
2002, the Company intends to continue to utilize callable
securities issued by Federal agencies as cash management tools
to minimize excess cash balances and enhance return.
In the wake of recent bankruptcy filings by large
corporations, concern has been raised regarding the use of
certain off-balance sheet special purpose entities such as
partnerships to hedge or conceal losses related to investment
activity. The Company does not utilize special purpose
entities as investment vehicles. Nor are there any such
entities which the Company has an investment in that engage in
speculative activities of any description, and the Company
does not use such investments to hedge the Company or CICA
positions. Furthermore, there are no commitments nor
guarantees that provide for the potential issuance of the
Company's stock.
26
CICA owned 2,085,244 shares of Citizens Class A common stock
at both December 31, 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 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 applicable to 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,
2001, CICA, CILIC and Excalibur were above required minimum
levels.
Effective January 1, 2001, the NAIC implemented codified rules
for statutory accounting. These rules were approved and
implemented by each state in which CICA's, CILIC's and
Excalibur's operations are domiciled. CICA is domiciled in
Colorado and CILIC and Excalibur are domiciled in Illinois.
CICA follows certain Colorado state laws that differ from
NAIC's codified rules. 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 reserve is mandated; however,
Colorado has an exception if the difference between the
premium 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 as of and for the year
ended December 31, 2001 or December 31, 2000. In Illinois,
codified rules must be followed unless the Commissioner of
Insurance of the State of Illinois permits specific practices
that differ from the codified rules. CILIC and Excalibur have
not requested explicit permission to deviate from the NAIC
codified rules. Overall, the implementation of codification
increased the Company's surplus on a statutory accounting
basis by 1.0% related to the statutory accounting practices
with respect to deferred income taxes.
27
SEPTEMBER 11, 2001 TERRORIST ATTACKS
The tragedies of September 11, 2001 significantly impacted the
life insurance industry's operating results. None of the
Company's life insurance subsidiaries have ever written
business in New York, Pennsylvania or Washington, D.C. The
Company is unaware of any claims related to such events, and
therefore, does not expect any adverse effects as a result.
The Company may, however, be inadvertently subject to claims
from such attacks should they be assessed by various state
Guaranty Funds as a result of any insurance company
insolvencies triggered by those attacks.
CRITICAL ACCOUNTING POLICIES
The Company's critical accounting policies are as follows:
POLICY LIABILITIES
Future policy benefit reserves have been computed by the net
level premium method with assumptions as to investment yields,
dividends on participating business, mortality and withdrawals
based upon the Company's and industry experience. The
preparation of financial statements requires management to
make estimates and assumptions that affect the reported amount
of policy liabilities and the increase in future policy
benefit reserves. Management's judgments and estimates for
future policy benefit reserves provide for possible
unfavorable deviation.
The Company continues to use the original assumptions
(including a provision for the risk of adverse deviation) in
subsequent periods to determine the changes in the liability
for future policy benefits (the "lock-in concept") unless a
premium deficiency exists. Management closely monitors these
assumptions and has determined that a premium deficiency does
not exist. Management believes that the Company's policy
liabilities and increase in future policy benefit reserves as
of and for the years ended December 31, 2001, 2000 and 1999
are based upon assumptions, including a provision for the risk
of adverse deviation, that do not warrant revision. The
relative stability of these assumptions is discussed below.
In Table II presented earlier, the ratio of lapses and
surrenders to mean life insurance in-force has varied between
4.3% to 5.1% for the past five years. Table IV illustrates
that during the past five years the ratio of commissions,
underwriting and operating expenses to insurance premiums has
ranged from 34.2% to 44.6% and the ratio of commissions,
underwriting and operating expenses, policy reserves
increases, policyholder benefits and dividends to
policyholders to insurance premiums has ranged from 106.3% to
119.2%. Table VIII also shows that the ratio of net investment
income to mean amount of invested assets has varied from 6.6%
to 6.8% during the past five years. As presented above in
Management's Discussion and Analysis of Financial Condition
and Results of Operations, death benefits for the years ended
December 31, 2001, 2000 and 1999 have been $5,613,782,
$5,277,284 and $5,135,808, respectively.
28
DEFERRED POLICY ACQUISITION COSTS
Acquisition costs, consisting of commissions and policy
issuance, underwriting and agency expenses that relate to and
vary with the production of new business, are deferred. These
deferred policy acquisition costs are amortized primarily over
the estimated premium paying period of the related policies in
proportion to the ratio of the annual premium recognized to
the total premium revenue anticipated using the same
assumptions as were used in computing liabilities for future
policy benefits.
The Company utilizes the factor method to determine the amount
of costs to be capitalized and the ending asset balance. The
factor method is based on the ratio of premium revenue
recognized for the policies in force at the end of each
reporting period compared to the premium revenue recognized
for policies in force at the beginning of the reporting
period. The factor method ensures that policies that lapsed or
surrendered during the reporting period are no longer included
in the deferred policy acquisition costs calculation. The
factor method limits the amount of deferred costs to its
estimated realizable value, provided actual experience is
comparable to that contemplated in the factors.
Inherent in the capitalization and amortization of deferred
policy acquisition costs are certain management judgments
about what acquisition costs are deferred, the ending asset
balance and the annual amortization. Use of the factor method,
as discussed above, limits the amount of unamortized deferred
policy acquisition costs to its estimated realizable value
provided actual experience is comparable to that contemplated
in the factors and results in amortization amounts such that
policies that lapse or surrender during the period are no
longer included in the ending deferred policy acquisition cost
balance. A recoverability test which considers among other
things, actual experience and projected future experience, is
performed at least annually. Management believes that the
Company's deferred policy acquisition costs and related
amortization as of and for the years ended December 31, 2001,
2000 and 1999 limits the amount of deferred costs to its
estimated realizable value.
ACCOUNTING PRONOUNCEMENTS
Statement of Financial Accounting Standard (SFAS) No. 133,
"Accounting for Derivative Instruments and Hedging
Activities," as amended, was effective January 1, 2001. The
Company adopted SFAS No. 133, as amended during 2001.
Implementation did not have an impact on the Company's
financial statements since it has no derivative instruments
and does not participate in any hedging activities. Based on
current operations, the Company does not anticipate that SFAS
No. 133 will have a material effect on the financial position,
results of operation or liquidity of the Company.
SFAS No. 140, "Accounting for Transfers and Servicing of
Financial Assets and Extinguishments of Liabilities - A
Replacement of FASB Statement 125" was
29
effective after March 31, 2001. The Company adopted SFAS No.
140 during 2001. Implementation did not have an impact on the
Company's financial statements since it was not involved in
any such transfers, servicing or extinguishments. Based on
current operations, the Company does not anticipate that SFAS
No. 140 will have a material effect on the financial position,
results of operation 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 on the Company 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 June 2001, the FASB issued SFAS No. 141, "Business
Combinations," (SFAS No. 141) and SFAS No. 142, "Goodwill and
Other Intangible Assets" (SFAS No. 142). 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 that
intangible assets acquired in a business combination must meet
to be recognized and reported separately from goodwill. 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 also requires that
intangible assets with estimable 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 and subsequently, SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets," after its
adoption.
The Company adopted the provisions of SFAS No. 141 as of July
1, 2001, and SFAS No. 142 is effective January 1, 2002.
Goodwill and intangible assets acquired in business
combinations completed before July 1, 2001 continued to be
amortized and tested for impairment in accordance with the
appropriate pre-SFAS No. 142 accounting literature prior to
the full adoption of SFAS No. 142.
30
Upon adoption of SFAS No. 142, the Company is required to
evaluate its existing intangible assets and goodwill that were
acquired in purchase business combinations, and to make any
necessary reclassifications in order to conform with the new
classification criteria in SFAS No. 141 for recognition
separate from goodwill. The Company will be required to
reassess the useful lives and residual values of all
intangible assets acquired, and make any necessary
amortization period adjustments by the end of the first
interim period after adoption. If an intangible asset is
identified as having an indefinite useful life, the Company
will be required to test the intangible asset for impairment
in accordance with the provisions of SFAS No. 142 within the
first interim period. Impairment is measured as the excess of
carrying value over the fair value of an intangible asset with
an indefinite life. Any impairment loss will be measured as of
the date of adoption and recognized as the cumulative effect
of a change in accounting principle in the first interim
period.
In connection with the transitional goodwill impairment
evaluation of SFAS No. 142, the Statement requires the Company
to perform an assessment of whether there is an indication
that goodwill is impaired as of the date of adoption. To
accomplish this, the Company must identify its reporting units
and determine the carrying value of each reporting unit by
assigning the assets and liabilities, including the existing
goodwill and intangible assets, to those reporting units as of
January 1, 2002. The Company will then have up to six months
from January 1, 2002 to determine the fair value of each
reporting unit and compare it to the carrying amount of the
reporting unit. To the extent the carrying amount of a
reporting unit exceeds the fair value of the reporting unit,
an indication exists that the reporting unit goodwill may be
impaired and the Company must perform the second step of the
transitional impairment test. The second step is required to
be completed as soon as possible, but no later than the end of
the year of adoption. In the second step, the Company must
compare the implied fair value of the reporting unit goodwill
with the carrying amount of the reporting unit goodwill, both
of which would be measured as of the date of adoption. The
implied fair value of goodwill is determined by allocating the
fair value of the reporting unit to all of the assets
(recognized and unrecognized) and liabilities of the reporting
unit in a manner similar to a purchase price allocation, in
accordance with SFAS No. 141. The residual fair value after
this allocation is the implied fair value of the reporting
unit goodwill. Any transitional impairment loss will be
recognized as the cumulative effect of a change in accounting
principle in the Company's statement of operations.
As of the date of adoption of SFAS No. 142, the Company
expects to have unamortized goodwill in the amount of
$6,767,244 and unamortized identifiable intangible assets in
the amount of $1,368,125, all of which will be subject to the
transition provisions of SFAS No. 141 and 142. Amortization
expense related to goodwill was $595,410, $658,390 and
$658,458 for the years ended December 31, 2001, 2000 and 1999,
respectively. In addition, the amortization expense related to
intangible assets was $307,200 for each of the years ended
December 31, 2001, 2000 and 1999. Because of the extensive
effort needed to comply with adopting
31
SFAS No. 141 and No. 142, it is not practicable to reasonably
estimate the impact of adopting the Statements on the
Company's financial statements at the date of this report,
including whether it will be required to recognize any
transitional impairment losses as the cumulative effect of a
change in accounting principle.
In August 2001, the FASB issued SFAS No. 143, "Accounting for
Asset Retirement Obligations." SFAS No. 143 addresses
financial accounting and reporting for obligations associated
with the retirement of tangible long-lived assets that result
from the acquisition, construction, development or normal
operations of a long-lived asset. SFAS No. 143 is effective
for fiscal years beginning after June 15, 2002. Management
does not believe SFAS No. 143 will have a significant effect
on the financial position, results of operations or liquidity
of the Company.
In October 2001, the FASB issued SFAS No. 144, "Accounting for
the Impairment or Disposal of Long-Lived Assets." SFAS No. 144
supersedes and amends SFAS No. 121 and relevant portions of
SFAS No. 30. SFAS No. 144 is required to be adopted on January
1, 2002. Because of the extensive effort needed to comply with
adopting SFAS No. 144, and its close relationship to SFAS No.
141 and 142, it is not practicable to reasonably estimate the
impact of adopting the Statement on the Company's financial
statements at the date of this report.
ITEM 7A. 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 December
31, 2001 and 2000:
DECREASES IN INTEREST RATES
--------------------------------------------
100 BASIS 200 BASIS 300 BASIS
POINTS POINTS POINTS
------ ------ ------
December 31, 2001 $ 8,042,000 $ 17,013,000 $ 27,015,000
============ ============ ============
December 31, 2000 $ 2,505,000 $ 5,865,000 $ 9,515,000
============ ============ ============
INCREASES IN INTEREST RATES
--------------------------------------------
100 BASIS 200 BASIS 300 BASIS
POINTS POINTS POINTS
------ ------ ------
December 31, 2001 $(16,938,000) $(28,041,000) $(38,030,000)
============ ============ ============
December 31, 2000 $ (6,502,000) $(12,330,000) $(18,141,000)
============ ============ ============
There are no fixed maturities or other investments that the
Company classifies as trading instruments. At December 31,
2001 and 2000, there were no investments in derivative
instruments. Approximately 90.8% of the fixed maturities owned
by the Company at December 31, 2001 are instruments of the
United States government or are backed by U.S. government
agencies or private corporations
32
carrying the implied full faith and credit backing of the U.S.
government. The Company has minimal investment in equity
securities. See also Item 7. Management's Discussion and
Analysis of Financial Condition and Results of Operations.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND
FINANCIAL STATEMENT SCHEDULES
PAGE
REFERENCE
---------
Independent auditors' report 38
Consolidated statements of financial position at
December 31, 2001 and 2000 39-40
Consolidated statements of operations
- years ended December 31, 2001, 2000 and 1999 41-42
Consolidated statements of stockholders' equity and comprehensive
Income (loss)- years ended December 31, 2001, 2000 and 1999 43
Consolidated statements of cash flows
- years ended December 31, 2001, 2000 and 1999 44-45
Notes to consolidated financial statements 46-67
Schedules at December 31, 2001 and 2000:
Schedule II - Condensed Financial
Information of Registrant 68-70
Schedules for each of the years in the three-year
period ended December 31, 2001:
Schedule III - Supplementary Insurance Information 71-72
Schedules for each of the years in the three-year period ended
December 31, 2001
Schedule IV - Reinsurance 73
All other schedules have been omitted as the required information is
inapplicable or the information required is presented in the financial
statements or the notes thereto filed elsewhere herein.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
During the 24 months preceding the date of the audited financial
statements of the Company included herein, there has been no change of
accountants made by the Company, nor has it reported on Form 8-K any
disagreements between the Company and its independent accountants.
33
PART III
Items 10, 11, 12, and 13 of this Report incorporate by reference the information
in the Company's definitive proxy material under the headings "Stock and
Principal Stockholders," "Control of the Company," "Election of Directors,"
"Executive Officers," "Executive Officer and Director Compensation" and "Certain
Reports" to be filed with the Securities and Exchange Commission within 120 days
after December 31, 2001.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) 1 AND 2
FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES
The financial statements and schedules listed on the following index
to financial statements and financial statement schedules are filed
as part of this Form 10-K.
(a) 3 EXHIBITS
The following exhibits are incorporated by reference herein or filed
herewith as indicated.
EXHIBIT
EXHIBIT NO. DESCRIPTION PAGE NO.
- ----------- ----------- --------
(1) Underwriting Agreement N/A
(2) Plan of acquisition, reorganization, arrangement,
liquidation or succession N/A
(3) 3.1 Articles of Incorporation; as amended (e)
3.2 Bylaws (d)
(4) Instruments defining the rights of security holders,
including indentures N/A
(5) Opinion re: Legality N/A
(6) (Removed and Reserved) N/A
(7) (Removed and Reserved) N/A
(8) Opinion re: Tax Matters N/A
(9) Voting Trust Agreement N/A
(10) Material Contracts
34
10.1 Automatic Yearly Renewable term Life Reinsurance
Agreement between Citizens Insurance Company of
America and The Centennial Life Insurance Company
dated March 1, 1982 (a)
10.2 Stock Purchase Agreement between Citizens
Insurance Company of America and Citizens, Inc. (a)
10.3 Plan and Agreement of Merger and Exchange by and
among Insurance Investors & Holding Co., Central
Investors Life Insurance Company of Illinois,
Citizens, Inc. and Citizens Acquisition, Inc. (g)
10.4 Self-Administered Automatic Reinsurance Agreement
- Citizens Insurance Company of America and
Riunione Adriatica di Sicurta, S.p.A. (h)
10.5 Plan and Agreement of Exchange dated October 28,
1996 between Citizens, Inc. and American
Investment Network, Inc. (h)
10.6 Agreement and Plan of Merger dated October 31,
1996 between Citizens Insurance Company of
America, CICA Acquisition, Inc., and First
American Investment Corporation (h)
10.7 Plan and Agreement of Merger dated November 22,
1996 between Citizens, Inc. and American Liberty
Financial Corporation, as amended (i)
10.8 Plan and Agreement of Merger dated November 22,
1996 between Citizens Insurance Company of
America and American Liberty Life Insurance
Company, as amended (i)
10.9 Bulk Accidental Death Benefit Reinsurance
Agreement between Connecticut General Life
Insurance Company and Citizens Insurance Company
of America, as amended Plan and Agreement of
Exchange dated October 28, 1996 (i)
10.10 between American Investment Network, Inc., United
Security Life Insurance Co., Inc. and Citizens
Insurance Company of America Plan and Agreement
of Merger dated September 10, 1998 between First
Investors Group, Inc., Citizens, Inc., and (j)
10.11 Excalibur Acquisition, Inc. Plan and Agreement of
Exchange between Citizens, Inc. and Combined
Underwriters Life Insurance Company (k)
10.12 Plan and Agreement of Exchange between Citizens,
Inc. and Lifeline Underwriters Life Insurance
Company (l)
10.13 Plan and Agreement of Exchange between Citizens,
Inc. and Lifeline Underwriters Life Insurance
Company (l)
(11) Statement re: Computation of per share earnings N/A
(12) Statement re: Computation of ratios N/A
35
(13) Annual report to security holders, Form 10-Q or N/A
quarterly report to security holders
(14) (Removed and Reserved) N/A
(15) Letter re: Unaudited interim financial statements N/A
(16) Letter re: Change in certifying accountant N/A
(17) Letter re: Director resignation N/A
(18) Letter re: Change in accounting principles N/A
(19) Report furnished to security holders N/A
(20) Other documents or statements to security holders N/A
(21) Subsidiaries of the registrant Filed
Herewith
(22) Published report regarding matters submitted to a vote
of security holders N/A
(23) Consents of expert and counsel Filed
Herewith
(24) Power of Attorney See
signature
page
(25) Statement of eligibility of trustee N/A
(26) Invitations for competitive bids N/A
(27) (Removed and Reserved) N/A
(99) Additional Exhibits N/A
- ----------
(a) Filed as a part of the Amendment No. 1 to Registration Statement on Form
S-4, SEC File No. 33--4753, filed on or about June 19, 1992 and
incorporated herein by reference.
(b) Filed with or referenced in the Registrant's Annual Report on Form 10-K
for the year ended December 31, 1991 and incorporated herein by reference.
(c) Filed with or referenced in the Registrant's Annual Report on Form 10-K
for the year ended December 31, 1992 and incorporated herein by reference.
(d) Filed with or referenced in the Registrant's Annual Report on Form 10-K
for the year ended December 31, 1993 and incorporated herein by reference.
(e) Filed with or referenced in the Registrant's Current Report on Form 8-K
dated December 9, 1994 and incorporated herein by reference.
(f) Filed as a part of the Registration Statement on Form S-4, SEC File No.
33--59039, filed on or about May 2, 1995.
(g) Filed as a part of the Registration Statement on Form S-4, SEC File No.
33--63275, filed on or about October 6, 1995 and incorporated herein by
reference.
(h) Filed as a part of the Registration Statement on Form S-4, SEC File No.
333--16163, filed on or about November 14, 1996 and incorporated herein by
reference.
(i) Filed with or referenced in the Registrant's Annual Report on Form 10-K
for the year ended December 31, 1996 and incorporated herein by reference.
(j) Filed with or referenced in the Registrant's Annual Report on Form 10-K
for the year ended December 31, 1997 and incorporated herein by reference.
(k) Filed as a part of the Registration Statement on Form S-4, SEC File No.
333--67091, on or about November 10, 1998 and incorporated herein by
reference.
(l) Filed as a part of the Registration Statement on Form S-4, SEC File No.
333-76926, on or about January 18, 2002 and incorporated herein by
reference.
36
(b) REPORTS ON FORM 8-K
Current Report on Form 8-K dated November 26, 2001 filed under "Item 5. Other
Events," regarding the execution of the Plans and Agreements of Exchange with
Combined Underwriters Life Insurance Company and Lifeline Underwriters Life
Insurance Company.
CITIZENS, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND
FINANCIAL STATEMENT SCHEDULES
PAGE
REFERENCE
---------
Independent auditors' report 38
Consolidated statements of financial position at
December 31, 2001 and 2000 39-40
Consolidated statements of operations
- years ended December 31, 2001, 2000 and 1999 41-42
Consolidated statements of stockholders' equity and comprehensive
income (loss)- years ended December 31, 2001, 2000 and 1999 43
Consolidated statements of cash flows
- years ended December 31, 2001, 2000 and 1999 44-45
Notes to consolidated financial statements 46-67
Schedules at December 31, 2001 and 2000:
Schedule II - Condensed Financial
Information of Registrant 68-70
Schedules for each of the years in the three-year
period ended December 31, 2001:
Schedule III - Supplementary Insurance Information 71-72
Schedules for each of the years in the three-year period ended
December 31, 2001:
Schedule IV - Reinsurance 73
All other schedules have been omitted as the required information is
inapplicable or the information required is presented in the financial
statements or the notes thereto filed elsewhere herein.
37
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
Citizens, Inc.:
We have audited the consolidated financial statements of Citizens, Inc. and
consolidated subsidiaries as listed in the accompanying index. In connection
with our audits of the consolidated financial statements, we also have audited
the financial statement schedules as listed in the accompanying index. These
consolidated financial statements and financial statement schedules are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements and financial statement
schedules based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. 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 Citizens, Inc. and
subsidiaries as of December 31, 2001 and 2000, and the results of their
operations and their cash flows for each of the years in the three-year period
ended December 31, 2001, in conformity with accounting principles generally
accepted in the United States of America. Also in our opinion, the related
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.
KPMG LLP
/s/ KPMG LLP
Dallas, Texas
March 19, 2002
38
CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
DECEMBER 31, 2001 AND 2000
ASSETS 2001 2000
------ ---- ----
Investments:
Fixed maturities held-to-maturity, at amortized cost $ 5,569,899 $ 5,582,802
Fixed maturities available-for-sale, at fair value 178,447,347 164,945,698
Equity securities available-for-sale, at fair value 568,398 675,726
Mortgage loans on real estate 1,109,547 1,178,668
Policy loans 19,984,477 20,884,136
Other long-term investments 1,016,143 936,297
------------ ------------
Total investments 206,695,811 194,203,327
Cash and cash equivalents 6,793,852 4,064,035
Accrued investment income 2,021,469 2,222,583
Reinsurance recoverable 2,450,015 2,662,724
Deferred policy acquisition costs 40,596,003 38,052,352
Other intangible assets 1,368,125 1,675,325
Federal income tax recoverable -- 174,978
Deferred federal income tax 3,465,138 4,628,750
Cost of insurance acquired 5,150,351 6,156,424
Excess of cost over net assets acquired 6,767,244 7,362,654
Property, plant and equipment 5,946,806 5,469,583
Other assets 831,449 1,169,629
------------ ------------
Total assets $282,086,263 $267,842,364
============ ============
(Continued)
39
CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL POSITION, CONTINUED
DECEMBER 31, 2001 AND 2000
LIABILITIES AND STOCKHOLDERS' EQUITY 2001 2000
------------------------------------ ---- ----
Liabilities:
Future policy benefit reserves:
Life insurance $ 170,381,823 $ 161,869,267
Annuities 3,839,023 4,170,884
Accident and health 7,580,448 9,229,156
Dividend accumulations 4,779,329 4,749,321
Premium deposits 4,316,149 3,033,514
Policy claims payable 2,982,469 2,866,110
Other policyholders' funds 2,485,461 2,245,947
------------- -------------
Total policy liabilities 196,364,702 188,164,199
Commissions payable 1,506,700 1,009,416
Federal income tax payable 484,430 --
Other liabilities 1,008,633 1,355,718
------------- -------------
Total liabilities 199,364,465 190,529,333
------------- -------------
Stockholders' equity:
Common stock:
Class A, no par value, 50,000,000 shares
authorized, 26,642,938 shares issued
in 2001 and in 2000, including shares in
treasury of 2,225,820 in 2001 and in 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 in 2000 910,482 910,482
Retained earnings 5,274,768 1,311,655
Accumulated other comprehensive income (loss):
Unrealized investment income (loss), net of tax 727,519 (718,135)
------------- -------------
86,614,359 81,205,592
Treasury stock, at cost (3,892,561) (3,892,561)
------------- -------------
Total stockholders' equity 82,721,798 77,313,031
------------- -------------
$ 282,086,263 $ 267,842,364
============= =============
See accompanying notes to consolidated financial statements.
40
CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
2001 2000 1999
---- ---- ----
Revenues:
Premiums:
Life insurance $ 48,686,189 $ 45,987,689 $ 48,172,160
Accident and health 5,059,843 7,235,685 10,886,317
Annuity and universal life
considerations 216,905 228,479 261,880
Net investment income 13,296,481 12,550,754 11,636,940
Realized gains (losses) (148,415) 86,569 310,890
Other income 535,821 588,940 667,320
Interest expense -- -- (58,449)
------------ ------------ ------------
Total revenues 67,646,824 66,678,116 71,877,058
------------ ------------ ------------
Benefits and expenses:
Insurance benefits paid or provided:
Increase in future
policy benefit reserves 6,483,706 7,265,347 7,371,214
Policyholders' dividends 3,294,899 3,037,343 2,843,681
Claims and surrenders 29,189,132 30,370,996 34,747,480
Annuity expenses 205,516 468,752 517,819
------------ ------------ ------------
Total insurance benefits 39,173,253 41,142,438 45,480,194
paid or provided
Commissions 13,444,270 12,411,053 12,234,053
Other underwriting, acquisition
and insurance expenses 10,635,639 10,139,539 10,328,996
Capitalization of deferred policy
acquisition costs (11,112,096) (10,056,287) (9,287,457)
Amortization of deferred policy
acquisition costs 8,568,445 8,521,972 10,028,806
Amortization of cost of insurance
acquired, excess of cost
over net assets acquired
and other intangibles 1,908,683 1,995,660 2,120,017
------------ ------------ ------------
Total benefits and expenses 62,618,194 64,154,375 70,904,609
------------ ------------ ------------
(Continued)
41
CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS, CONTINUED
YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
2001 2000 1999
---- ---- ----
Income before Federal income
tax $5,028,630 $2,523,741 $ 972,449
Federal income tax expense (benefit) 1,065,517 471,000 (298,623)
---------- ---------- -----------
Net income $3,963,113 $2,052,741 $ 1,271,072
========== ========== ===========
Basic and diluted earnings per
share of common stock $ .16 $ .08 $ .05
========== ========== ===========
See accompanying notes to consolidated financial statements.
42
CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY AND COMPREHENSIVE INCOME (LOSS)
YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
ACCUMULATED
COMMON STOCK OTHER TOTAL
---------------------- RETAINED COMPREHENSIVE TREASURY STOCKHOLDERS'
CLASS A CLASS B EARNINGS INCOME (LOSS) STOCK EQUITY
------- ------- -------- ------------- ----- ------
BALANCE AT DECEMBER 31, 1998 $52,790,643 $283,262 $ 20,135,464 $ 3,623,464 $(1,929,154) $ 74,903,679
----------- -------- ------------ ----------- ----------- ------------
Comprehensive loss:
Net income -- -- 1,271,072 -- -- 1,271,072
Unrealized investment losses, net -- -- -- (7,334,920) -- (7,334,920)
----------- -------- ------------ ----------- ----------- ------------
Comprehensive loss -- -- 1,271,072 (7,334,920) -- (6,063,848)
----------- -------- ------------ ----------- ----------- ------------
Acquisition of Investors 3,427,138 -- -- -- -- 3,427,138
Stock dividend 11,292,245 301,601 (10,649,736) -- (944,110) --
----------- -------- ------------ ----------- ----------- ------------
BALANCE AT DECEMBER 31, 1999 $67,510,026 $584,863 $ 10,756,800 $(3,711,456) $(2,873,264) $ 72,266,969
----------- -------- ------------ ----------- ----------- ------------
Comprehensive income:
Net income -- -- 2,052,741 -- -- 2,052,741
Unrealized investment gains, net -- -- -- 2,993,321 -- 2,993,321
----------- -------- ------------ ----------- ----------- ------------
Comprehensive income -- -- 2,052,741 2,993,321 -- 5,046,062
Stock dividend 12,191,564 325,619 (11,497,886) -- (1,019,297) --
----------- -------- ------------ ----------- ----------- ------------
BALANCE AT DECEMBER 31, 2000 $79,701,590 $910,482 $ 1,311,655 $ (718,135) $(3,892,561) $ 77,313,031
----------- -------- ------------ ----------- ----------- ------------
Comprehensive income:
Net income -- -- 3,963,113 -- -- 3,963,113
Unrealized investment gains, net -- -- -- 1,445,654 -- 1,445,654
----------- -------- ------------ ----------- ----------- ------------
Comprehensive income -- -- 3,963,113 1,445,654 -- 5,408,767
----------- -------- ------------ ----------- ----------- ------------
BALANCE AT DECEMBER 31, 2001 $79,701,590 $910,482 $ 5,274,768 $ 727,519 $(3,892,561) $ 82,721,798
=========== ======== ============ =========== =========== ============
See accompanying notes to consolidated financial statements.
43
CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
2001 2000 1999
---- ---- ----
Cash flows from operating activities:
Net income $ 3,963,113 $ 2,052,741 $ 1,271,072
Adjustments to reconcile net income to
net cash provided by operating activities,
net of assets acquired:
Realized (gains) losses 148,415 (86,569) (310,890)
Net deferred policy acquisition costs (2,543,651) (1,534,315) 741,349
Amortization of cost of insurance
acquired, excess cost over
net assets acquired and other
intangibles 1,908,683 1,995,660 2,120,017
Depreciation 738,451 608,533 510,755
Deferred federal income tax 418,881 12,000 (1,704,321)
Change in:
Reinsurance recoverable 212,709 (478,995) (427,811)
Future policy benefit reserves 6,531,987 7,856,111 7,169,153
Other policy liabilities 1,668,516 (347,198) (25,336)
Accrued investment income 201,114 (461,512) 79,319
Federal income tax 659,408 (1,304,945) (404,302)
Commissions payable and other liabilities 150,199 932,570 (1,763,567)
Other, net 466,384 157,828 376,787
------------- ------------ ------------
Net cash provided by operating activities 14,524,209 9,401,909 7,632,225
------------- ------------ ------------
Cash flows from investing activities:
Sale of fixed maturities, available-for-sale 11,626,961 10,325,965 1,630,775
Maturity of fixed maturities, available-for-sale 77,169,119 30,559,981 10,260,075
Purchase of fixed maturities, available-for-sale (100,516,704) (57,178,261) (18,742,695)
Sale of equity securities, available-for-sale 97,500 88 92,500
Principal payments on mortgage loans 240,891 195,536 186,553
Mortgage loans funded (171,770) -- --
Guaranteed student loans funded -- -- (6,287)
Guaranteed student loans sold -- -- 10,960
Sale of other long-term investments and
property, plant and equipment 352,490 10,949 13,799
44
CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS, CONTINUED
YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
2001 2000 1999
---- ---- ----
Cash and cash equivalents provided by
mergers and acquisitions $ -- $ -- $ 1,512,255
(Increase) decrease in policy loans, net 899,659 672,208 (559,425)
Purchase of other long-term investments
and property, plant and equipment (1,492,538) (1,073,424) (717,046)
------------ ------------ ------------
Net cash used in investing activities (11,794,392) (16,486,958) (6,318,536)
------------ ------------ ------------
Cash flows used by financing activities:
Payments on notes payable -- -- (333,333)
------------ ------------ ------------
Net increase (decrease) in cash and cash equivalents 2,729,817 (7,085,049) 980,356
------------ ------------ ------------
Cash and cash equivalents at beginning of year 4,064,035 11,149,084 10,168,728
------------ ------------ ------------
Cash and cash equivalents at end of year $ 6,793,852 $ 4,064,035 $ 11,149,084
============ ============ ============
Supplemental:
2001 2000 1999
---- ---- ----
Cash paid (recovered) during the year for:
Interest $ -- $ -- $ 43,810
============ ============ ============
Income taxes $ (12,772) $ 1,763,945 $ 1,810,000
============ ============ ============
Supplemental disclosures of non-cash investing and financing activities:
The Company issued Class A common stock and cash to purchase all of the capital
stock of Investors in 1999. In conjunction with the acquisition, cash and cash
equivalents were provided as follows:
1999
----
Fair value of capital stock issued $ 3,427,138
Fair value of tangible assets acquired
excluding cash and cash equivalents (1,658,547)
Fair value of intangible assets acquired (353,703)
Liabilities assumed 97,367
-----------
Cash and cash equivalents provided by
mergers and acquisitions $ 1,512,255
===========
Issuance of 609,269 Class A shares $ 3,427,138
===========
See accompanying notes to consolidated financial statements.
45
CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2001, 2000 AND 1999
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) NATURE OF BUSINESS
The 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), Excalibur
Insurance Corporation (Excalibur) and Industrial Benefits, Inc
(IBI). Citizens and its consolidated subsidiaries are collectively
referred to as "the Company."
American Liberty Financial Corporation (ALFC) and its subsidiaries,
American Liberty Life Insurance Company (ALLIC), First American
Investment Corp. (FAIC) and American Liberty Exploration Company
(ALEC) were acquired by Citizens in September 1995. Effective
January 1, 1997, ALFC was merged into Citizens and ALLIC was merged
into CICA. American Investment Network (AIN), which was acquired in
June 1997, owned United Security Life Insurance Company (USLIC).
During 1998, AIN was liquidated into CICA. Insurance Investors and
Holding Company (IIH), which was acquired in March 1996, owned
CILIC. During 1998, IIH was liquidated and merged into CICA.
National Security Life and Accident Insurance Company (NSLIC) was
merged into CICA effective January 1, 2000 and USLIC was merged into
CICA effective October 1, 2000.
Citizens provides life and health insurance policies through three
of its subsidiaries - CICA, CILIC and Excalibur. CICA sells ordinary
whole-life policies internationally, and burial insurance, pre-need
policies, accident and health specified disease, hospital indemnity
and accidental death policies, throughout the southern United
States. Excalibur sells life insurance business throughout the State
of Illinois. CILIC does not actively market insurance policies, but
administers an in-force block of life insurance.
III provides aviation transportation to the Company. CTI provides
data processing systems and services to the Company. FHA is a
funeral home operator. IBI is inactive and has minimal assets and
liabilities.
46
(b) BASIS OF PRESENTATION
The accompanying consolidated financial statements of the Company
and its wholly owned subsidiaries have been prepared in conformity
with accounting principles generally accepted in the United States
of America (U.S. GAAP). All significant intercompany accounts and
transactions have been eliminated.
(c) INVESTMENTS, OTHER THAN AFFILIATES
Fixed maturities consist primarily of bonds. Fixed maturities, which
the Company has the ability and intent to hold to maturity, are
carried at amortized cost. Fixed maturities, which may be sold prior
to maturity to support the Company's investment strategies, are
considered held as available-for-sale and carried at fair value as
of the balance sheet date. Equity securities (including
non-redeemable preferred stock) are considered available-for-sale
and are reported at fair value.
Unrealized appreciation (depreciation) of equity securities and
fixed maturities held as available-for-sale is shown as a separate
component of stockholders' equity, net of tax, and is a separate
component of comprehensive income.
Mortgage loans on real estate, policy loans, and guaranteed student
loans are reported at unpaid principal balances less an allowance
for uncollectible amounts. Mortgage loans have an allowance for
uncollectible amounts of $50,000 at December 31, 2001 and 2000 which
was estimated by the Company based upon historical amounts that
proved uncollectible.
Other long-term investments consist primarily of real estate that is
recorded at the lower of fair value, minus estimated costs to sell,
or cost. If the fair value of the real estate minus estimated costs
to sell is less than cost, a valuation allowance is provided for the
deficiency. Increases in the valuation allowance are charged to
income.
A decline in the fair value of any available-for-sale or
held-to-maturity security below cost that is deemed other than
temporary is charged to earnings resulting in the establishment of a
new cost basis for the security.
Premiums and discounts are amortized or accreted over the life of
the related security as an adjustment to yield using the effective
interest method. Dividend and interest income is recognized when
earned. Realized gains and losses for securities classified as
available-for-sale and held-to-maturity are included in earnings and
are derived using the specific identification method for determining
the cost of securities sold.
Policy loans and other investments are primarily reported at cost.
The Company has assets with a fair value of $9,538,429 at December
31, 2001 and $9,420,063 at December 31, 2000 on deposit with various
state regulatory authorities to fulfill statutory requirements.
47
(d) PREMIUM REVENUE AND RELATED EXPENSES
Premiums on life and accident and health policies are reported as
earned when due or, for short duration contracts, over the contract
periods. Benefits and expenses are associated with earned premiums
so as to result in recognition of profits over the estimated life of
the contracts. This matching is accomplished by means of provisions
for future benefits and the capitalization and amortization of
deferred policy acquisition costs.
Annuities are accounted for in a manner consistent with accounting
for interest bearing financial instruments. Premium receipts are not
reported as revenues but rather as deposit liabilities to annuity
contracts.
(e) DEFERRED POLICY ACQUISITION COSTS AND COST OF INSURANCE ACQUIRED
Acquisition costs, consisting of commissions and policy issuance,
underwriting and agency expenses that relate to and vary with the
production of new business, are deferred. These deferred policy
acquisition costs are amortized primarily over the estimated premium
paying period of the related policies in proportion to the ratio of
the annual premium recognized to the total premium revenue
anticipated using the same assumptions as were used in computing
liabilities for future policy benefits.
The Company utilizes the factor method to determine the amount of
costs to be capitalized and the ending asset balance. The factor
method ensures that policies that lapsed or surrendered during the
reporting period are no longer included in the deferred policy
acquisition costs or the cost of insurance acquired calculation. The
factor method limits the amount of deferred costs to its estimated
realizable value, provided actual experience is comparable to that
contemplated in the factors. A recoverability test which considers
among other things, actual experience and projected future
experience, is performed at least annually.
The value of insurance acquired in the Company's various
acquisitions, which is included in cost of insurance acquired in the
accompanying consolidated financial statements, was determined based
on the present value of future profits discounted at a risk rate of
return. The cost of insurance acquired is being amortized over the
anticipated premium paying period of the related policies.
Deferred policy acquisition costs on universal life contracts are
capitalized and amortized over the life of the contract at a
constant rate based on the present value of the estimated gross
profit amounts expected to be earned over the life of the universal
life contracts.
48
(f) POLICY LIABILITIES AND ACCRUALS
Future policy benefit reserves have been computed by the net level
premium method with assumptions as to investment yields, dividends
on participating business, mortality and withdrawals based upon the
Company's and industry experience, which provide for possible
unfavorable deviation.
Annuity benefits are carried at accumulated contract values based on
premiums paid by participants, annuity rates of return ranging from
3.0% to 7.0% (primarily at 4.0% to 5.5%) and annuity withdrawals.
Premium deposits accrue interest at rates ranging from 3.5% to 8.25%
per annum. Cost of insurance is included in premium when collected
and interest is credited annually to the deposit account.
Policy and contract claims are based on case-basis estimates for
reported claims, and on estimates, based on experience, for incurred
but unreported claims and loss expenses.
Premiums collected on universal life contracts are not reported as
revenues in the statement of operations but are included in the
liability for policy benefits for universal life contracts based on
policyholders' account balances. Revenues from universal life
contracts are amounts assessed the policyholder for mortality and
expenses and are reported when assessed based upon one-year service
periods. Amounts assessed for services to be provided in future
periods are reported as unearned revenue and are recognized in
income over the benefit period.
The liability for policy benefits for universal life contracts is
based on the balance that accrues to the benefit of policyholders.
It includes any amounts assessed to compensate the Company for
services to be performed over future periods, any amounts previously
assessed by the Company against the policyholders that are
refundable at termination of the contract and any premium
deficiency.
(g) EXCESS OF COST OVER NET ASSETS ACQUIRED AND OTHER INTANGIBLE ASSETS
The excess of cost over the fair value of net assets acquired in
mergers and acquisitions is amortized on a straight-line basis
ranging from 5 to 20 years. Other intangible assets, primarily the
value of state licenses, are amortized on a straight-line basis
ranging from 10 to 20 years.
The Company continually monitors long-lived assets and certain
intangible assets, such as excess of cost over net assets acquired
and cost of insurance acquired, for impairment. An impairment loss
is recorded in the period in which the carrying value of the assets
exceeds the fair value or expected future cash flows. Any amounts
deemed to be impaired are charged, in the period in which such
impairment was determined, as an expense against earnings.
49
(h) PARTICIPATING POLICIES
At December 31, 2001 and 2000, participating business approximated
54% and 57%, respectively, of life insurance in-force and premium
income.
Policyholder dividends are determined based on the discretion of the
Company's Board of Directors. The Company utilizes contractual life
insurance dividend scales as shown in published dividend
illustrations at the date the insurance contracts are issued
(unrelated to the Company's net income) in determining policyholder
dividends. Policyholder dividends are accrued over the premium
paying periods of the insurance contracts.
(i) 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 the years
ended December 31, 2001, 2000 and 1999 were 25,128,158, 25,128,158
and 25,057,913, respectively. 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
in 2000 and a 7% stock dividend paid in 1999. The 2000 stock
dividend resulted in the issuance of 1,887,265 Class A shares
(including 145,613 shares in treasury) and 46,517 Class B shares and
the 1999 stock dividend resulted in the issuance of 1,763,805 Class
A shares (including 136,091 shares in treasury) and 43,474 Class B
shares.
(j) INCOME TAXES
For the year ended December 31, 2001, the Company plans to file
three separate tax returns as follows: 1) Citizens, Inc., CICA and
all direct non-life subsidiaries, 2) Excalibur and 3) CILIC.
For the year ended December 31, 2000, the Company filed three
separate tax returns as follows: 1) Citizens, Inc., CICA and all
direct non-life subsidiaries, 2) Excalibur and 3) CILIC.
For the year ended December 31, 1999, the Company filed five
separate tax returns as follows: 1) Citizens, Inc., CICA and all
direct non-life subsidiaries, 2) Excalibur, 3) USLIC, 4) NSLIC and
5) CILIC.
Deferred tax asset and liabilities are recognized for the estimated
future tax consequences attributable to differences between the
financial statement carrying amounts of existing assets and
liabilities and their respective tax bases. Deferred tax assets and
liabilities are measured using enacted tax rates in effect for the
year in which those temporary differences are expected to be
recovered or settled. The effect on deferred tax assets and
liabilities of a change in tax rates is recognized in income in the
period that includes the enactment date.
50
(k) ACCOUNTING PRONOUNCEMENTS
Statement of Financial Accounting Standard (SFAS) No. 133,
"Accounting for Derivative Instruments and Hedging Activities," as
amended, was effective January 1, 2001. The Company adopted SFAS No.
133, as amended during 2001. Implementation did not have an impact
on the Company's financial statements since it has no derivative
instruments and does not participate in any hedging activities.
Based on current operations, the Company does not anticipate that
SFAS No. 133 will have a material effect on the financial position,
results of operation or liquidity of the Company.
SFAS No. 140, "Accounting for Transfers and Servicing of Financial
Assets and Extinguishments of Liabilities - A Replacement of FASB
Statement 125" was effective after March 31, 2001. The Company
adopted SFAS No. 140 during 2001. Implementation did not have an
impact on the Company's financial statements since it was not
involved in any such transfers, servicing or extinguishments. Based
on current operations, the Company does not anticipate that SFAS No.
140 will have a material effect on the financial position, results
of operation 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 on the Company 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 June 2001, The Financial Accounting Standards Board (FASB) issued
SFAS No. 141, "Business Combinations," (SFAS No. 141) and SFAS No.
142, "Goodwill and Other Intangible Assets" (SFAS No. 142). 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 that intangible assets acquired
in a business combination must meet to be recognized and reported
separately from goodwill. 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 also
requires that intangible assets with estimable useful lives be
amortized over their respective estimated useful lives to their
estimated residual values, and reviewed for
51
impairment in accordance with SFAS No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be
Disposed Of" and subsequently, SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets," after its adoption.
The Company adopted the provisions of SFAS No. 141 as of July 1,
2001, and SFAS No. 142 is effective January 1, 2002. Goodwill and
intangible assets acquired in business combinations completed before
July 1, 2001 continued to be amortized and tested for impairment in
accordance with the appropriate pre-SFAS No. 142 accounting
literature prior to the full adoption of SFAS No. 142.
Upon adoption of SFAS No. 142, the Company is required to evaluate
its existing intangible assets and goodwill that were acquired in
purchase business combinations, and to make any necessary
reclassifications in order to conform with the new classification
criteria in SFAS No. 141 for recognition separate from goodwill. The
Company will be required to reassess the useful lives and residual
values of all intangible assets acquired, and make any necessary
amortization period adjustments by the end of the first interim
period after adoption. If an intangible asset is identified as
having an indefinite useful life, the Company will be required to
test the intangible asset for impairment in accordance with the
provisions of SFAS No. 142 within the first interim period.
Impairment is measured as the excess of carrying value over the fair
value of an intangible asset with an indefinite life. Any impairment
loss will be measured as of the date of adoption and recognized as
the cumulative effect of a change in accounting principle in the
first interim period.
In connection with transitional goodwill impairment evaluation of
SFAS No. 142, the Statement requires the Company to perform an
assessment of whether there is an indication that goodwill is
impaired as of the date of adoption. To accomplish this, the Company
must identify its reporting units and determine the carrying value
of each reporting unit by assigning the assets and liabilities,
including the existing goodwill and intangible assets, to those
reporting units as of January 1, 2002. The Company will then have up
to six months from January 1, 2002 to determine the fair value of
each reporting unit and compare it to the carrying amount of the
reporting unit. To the extent the carrying amount of a reporting
unit exceeds the fair value of the reporting unit, an indication
will exist that the reporting unit goodwill may be impaired and the
Company must perform the second step of the transitional impairment
test. The second step is required to be completed as soon as
possible, but no later than the end of the year of adoption. In the
second step, the Company must compare the implied fair value of the
reporting unit goodwill with the carrying amount of the reporting
unit goodwill, both of which would be measured as of the date of
adoption. The implied fair value of goodwill is determined by
allocating the fair value of the reporting unit to all of the assets
(recognized and unrecognized) and liabilities of the reporting unit
in a manner similar to a purchase price allocation, in accordance
with SFAS No. 141. The residual fair value after this allocation is
the implied fair value of the reporting unit goodwill. Any
transitional impairment loss will be recognized as the cumulative
effect of a change in accounting principle in the Company's
statement of operations.
52
As of the date of adoption of SFAS No. 142, the Company expects to
have unamortized goodwill in the amount of $6,767,244 and
unamortized identifiable intangible assets in the amount of
$1,368,125, all of which will be subject to the transition
provisions of SFAS No. 141 and 142. Amortization expense related to
goodwill was $595,410, $658,390 and $658,458 for the years ended
December 31, 2001, 2000 and 1999, respectively. In addition, the
amortization expense related to intangible assets was $307,200 for
each of the years ended December 31, 2001, 2000 and 1999. Because of
the extensive effort needed to comply with adopting SFAS No. 141 and
No. 142, it is not practicable to reasonably estimate the impact of
adopting the Statements on the Company's financial statements at the
date of this report, including whether the Company will be required
to recognize any transitional impairment losses as the cumulative
effect of a change in accounting principle.
In August 2001, the FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations." SFAS No. 143 addresses financial accounting
and for obligations associated with the retirement of tangible
long-lived assets that result from the acquisition, construction,
development or normal operations of a long-lived asset. SFAS No. 143
is effective for fiscal years beginning after June 15, 2002.
Management does not believe SFAS No. 143 will have a significant
effect on the financial position, results of operations or liquidity
of the Company.
In October 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets." SFAS No. 144
supersedes and amends SFAS No. 121 and relevant portions of SFAS No.
30. SFAS No. 144 is required to be adopted on January 1, 2002.
Because of the extensive effort needed to comply with adopting SFAS
No. 144, and its close relationship to SFAS No. 141 and 142, it is
not practicable to reasonably estimate the impact of adopting the
statement of the Company's financial statements at the date of this
report.
(l) CASH EQUIVALENTS
The Company considers as cash equivalents all securities whose
duration does not exceed 90 days at the date of acquisition.
(m) DEPRECIATION
Depreciation is calculated on a straight-line basis using estimated
useful lives ranging from 3 to 10 years. Leasehold improvements are
depreciated over the estimated life of 30 years.
(n) USE OF ESTIMATES
The preparation of financial statements in conformity with U.S. GAAP
requires management to make estimates and assumptions that affect
the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of
53
the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ
from these estimates.
(o) RECLASSIFICATIONS
Certain reclassifications have been made to the 2000 and 1999
amounts to conform to the 2001 presentation.
(2) INVESTMENTS
The cost, gross unrealized gains and losses and fair value of
investments of fixed maturities and equity securities
available-for-sale, as of December 31, 2001 and 2000, are as
follows:
2001
-----------------------------------------------------------
GROSS GROSS
UNREALIZED UNREALIZED FAIR
COST GAINS (LOSSES) VALUE
---- ----- -------- -----
Fixed maturities held-to-maturity:
US Treasury securities $ 5,569,899 $ 252,001 $ -- $ 5,821,900
============ =========== ============= ============
Fixed maturities available-for-sale:
US Treasury securities and
obligations of US government
corporations and agencies 18,521,452 1,075,165 (13,980) 19,582,637
Public utilities 1,935,441 4,440 (106,807) 1,833,074
Debt securities issued by States
of the United States and political
subdivisions of the States 1,021,298 39,551 (781) 1,060,068
Corporate securities 13,678,178 147,958 (315,003) 13,511,133
Securities not due at a single maturity date 142,168,570 1,994,409 (1,702,544) 142,460,435
------------ ----------- ------------- ------------
Total fixed maturities
available-for-sale $177,324,939 $ 3,261,523 $ (2,139,115) $178,447,347
============ =========== ============= ============
Total equity securities
available-for-sale $ 588,505 $ 1,082 $ (21,189) $ 568,398
============ =========== ============= ============
54
2000
-----------------------------------------------------------
GROSS GROSS
UNREALIZED UNREALIZED FAIR
COST GAINS (LOSSES) VALUE
---- ----- -------- -----
Fixed maturities held-to-maturity:
US Treasury securities $ 5,582,802 $ 6,198 $ -- $ 5,589,000
============ =========== ============= ============
Fixed maturities available-for-sale:
US Treasury securities and
obligations of US government
corporations and agencies 36,355,133 467,241 (422,705) 36,399,669
Public utilities 2,327,073 793 (141,665) 2,186,201
Debt securities issued by States
of the United States and
political subdivisions of the States 3,583,666 17,216 (28,583) 3,572,299
Corporate securities 17,235,989 135,458 (869,857) 16,501,590
Securities not due at a single maturity date 106,494,411 946,837 (1,155,309) 106,285,939
------------ ----------- ------------- ------------
Total fixed maturities
available-for-sale $165,996,272 $ 1,567,545 $ (2,618,119) $164,945,698
============ =========== ============= ============
Total equity securities
available-for-sale $ 713,235 $ 15,872 $ (53,381) $ 675,726
============ =========== ============= ============
The amortized cost and fair value of fixed maturities at December 31, 2001
by contractual maturity are shown below. Expected maturities will differ
from contractual maturities because borrowers may have the right to call
or prepay obligations with or without call or prepayment penalties.
FIXED MATURITIES HELD-TO-MATURITY
AMORTIZED
COST FAIR VALUE
---- ----------
Due after ten years $ 5,569,899 $ 5,821,900
============ ============
FIXED MATURITIES AVAILABLE-FOR-SALE
AMORTIZED
COST FAIR VALUE
---- ----------
Due in one year or less $ 680,465 $ 705,040
Due after one year through five years 6,135,543 6,312,951
Due after five years through ten years 9,704,400 9,961,924
Due after ten years 18,635,961 19,006,997
------------ ------------
35,156,369 35,986,912
Securities not due at a single maturity date 142,168,570 142,460,435
------------ ------------
Totals $177,324,939 $178,447,347
============ ============
55
The Company had no investments in any one entity that exceeded 10% of
stockholders' equity at December 31, 2001 other than investments
guaranteed by the U.S. Government.
The Company's investment in mortgage loans is concentrated 28% in
Colorado, 41% in Texas and 31% in Mississippi as of December 31, 2001.
Major categories of net investment income are summarized as follows:
YEAR ENDED DECEMBER 31,
--------------------------------------------
2001 2000 1999
---- ---- ----
Investment income on:
Fixed maturities $ 11,673,562 $ 10,885,567 $ 9,795,297
Equity securities 47,745 51,401 52,252
Mortgage loans on real estate 99,049 124,092 121,818
Policy loans 1,508,733 1,532,238 1,571,863
Long-term investments 825,329 852,117 829,599
Other 176,221 191,354 451,411
------------ ------------ ------------
14,330,639 13,636,739 12,822,240
Investment expenses (1,034,158) (1,086,015) (1,185,300)
------------ ------------ ------------
Net investment income $ 13,296,481 $ 12,550,754 $ 11,636,940
============ ============ ============
Proceeds and gross realized gains (losses) from sales and maturities of fixed
maturities available-for-sale for 2001, 2000 and 1999 are summarized as follows:
YEAR ENDED DECEMBER 31,
--------------------------------------------
2001 2000 1999
---- ---- ----
Proceeds $ 88,796,080 $ 40,885,946 $ 11,890,850
============ ============ ============
Gross realized gains $ 337,169 $ 284,038 $ 344,002
============ ============ ============
Gross realized (losses) $ (613,826) $ (193,801) $ (36,325)
============ ============ ============
Proceeds and gross realized gains (losses) from sales of equity securities
available-for-sale for 2001, 2000 and 1999 are summarized as follows:
YEAR ENDED DECEMBER 31,
--------------------------------------------
2001 2000 1999
---- ---- ----
Proceeds $ 97,500 $ 88 $ 92,500
============ ============ ============
Gross realized gains $ -- $ -- $ --
============ ============ ============
Gross realized (losses) $ (27,230) $ (2,970) $ (6,477)
============ ============ ============
Realized gains (losses) are as follows:
56
YEAR ENDED DECEMBER 31,
--------------------------------------------
2001 2000 1999
---- ---- ----
Realized gains (losses):
Fixed maturities $ (276,657) $ 90,237 $ 307,677
Equity securities (27,230) (2,970) (6,477)
Other 155,472 (698) 9,690
------------ ------------ ------------
Net realized gains (losses) $ (148,415) $ 86,569 $ 310,890
============ ============ ============
(3) COST OF INSURANCE ACQUIRED AND EXCESS OF COST OVER NET ASSETS ACQUIRED
Cost of insurance acquired is summarized as follows:
YEAR ENDED DECEMBER 31,
--------------------------------------------
2001 2000 1999
---- ---- ----
Balance at beginning of period $ 6,156,424 $ 7,186,494 $ 8,290,853
Increase (decrease) related to:
Acquisitions -- -- 50,000
Interest 461,732 538,988 625,251
Amortization (1,467,805) (1,569,058) (1,779,610)
------------ ------------ ------------
Balance at end of period $ 5,150,351 $ 6,156,424 $ 7,186,494
============ ============ ============
Accretion of interest on cost of insurance acquired is calculated based on the
rates of interest used in setting the related policy reserves. These rates range
from 6.5% to 8.5%. Estimated amortization in each of the next five years is as
follows. These amounts are equal to the carrying value due and exclude interest
accretion at rates ranging from 6.5% to 8.5%. Actual future amortization will
differ from these estimates due to variances from estimated future withdrawal
assumptions.
YEAR AMOUNT
---- ------
2002 $1,043,703
2003 756,874
2004 674,825
2005 597,711
2006 555,132
Thereafter 1,522,106
57
Excess of cost over net assets acquired is summarized as follows:
YEAR ENDED DECEMBER 31,
------------------------------------------
ACCUMULATED
GROSS AMORTIZATION NET
----- ------------ ---
Balance at December 31, 1998 $ 11,531,840 $(3,156,041) $ 8,375,799
Increase related to acquisitions 303,703 -- 303,703
Amortization -- (658,458) (658,458)
------------ ----------- -----------
Balance at December 31, 1999 $ 11,835,543 $(3,814,499) $ 8,021,044
Amortization -- (658,390) (658,390)
------------ ----------- -----------
Balance at December 31, 2000 $ 11,835,543 $(4,472,889) $ 7,362,654
Amortization -- (595,410) (595,410)
------------ ----------- -----------
Balance at December 31, 2001 $ 11,835,543 $(5,068,299) $ 6,767,244
============ =========== ===========
(4) POLICY LIABILITIES
Various assumptions used to determine the future policy benefit reserves
include the following: a) valuation interest rates from 4 to 9%, b)
mortality assumptions are from the 1955 to 1960, 1965 to 1970, and 1975 to
1980 Select and Ultimate mortality tables and c) withdrawals are based
primarily on actual historical termination rates.
58
The following table presents information on changes in the liability for
accident and health policy and contract claims for the years ended December 31,
2001 and 2000.
2001 2000
---- ----
Policy and contract claims payable at January 1 $ 1,370,419 $ 2,009,144
Add claims incurred, related to:
Current year 3,565,692 5,176,481
Prior years (264,351) (17,858)
----------- -----------
3,301,341 5,158,623
Deduct claims paid, related to:
Current year 2,512,382 4,080,331
Prior years 1,092,188 1,717,017
----------- -----------
3,604,570 5,797,348
----------- -----------
Policy and contract claims payable, December 31 $ 1,067,190 $ 1,370,419
=========== ===========
The development of prior year claim reserves reflects normal changes in
actuarial estimates.
A summary of the policy claims payable is as follows:
DECEMBER 31
-----------------------
2001 2000
---- ----
Liability for accident and health policy and
contract claims $1,067,190 $1,370,419
Liability for life policy and contract claims 1,915,279 1,495,691
---------- ----------
Policy claims payable $2,982,469 $2,866,110
========== ==========
(5) REINSURANCE
In the normal course of business, the Company reinsures portions of
certain policies that it underwrites to limit disproportionate risks.
During 2001, the Company retained varying amounts of individual insurance
up to a maximum retention of $100,000 on any life. On health policies
there are varying retention limits ranging from $25,000 to $75,000
depending on the product with some of the supplemental hospital and
surgical policies reinsured on a quota share basis. The Company's share of
risk on the quota share reinsurance is 50%. The Company remains
contingently liable to the extent that the reinsuring companies cannot
meet their obligations under these reinsurance treaties.
Assumed and ceded reinsurance activity for 2001 and 2000 is summarized as
follows:
2001 2000
---- ----
Aggregate assumed life insurance
in-force $ 440,023,000 $ 326,267,000
=============== ===============
Aggregate ceded life insurance
in-force $ (206,386,000) $ (272,150,000)
=============== ===============
Total life insurance in-force $ 2,650,247,000 $ 2,294,640,000
=============== ===============
59
Premiums and claims and surrenders assumed and ceded for the years ended
December 31, 2001, 2000 and 1999:
2001 2000 1999
---- ---- ----
Premiums assumed $ 543,792 $ 95,068 $ 484,746
=========== =========== ===========
Premiums ceded $(2,312,232) $(2,494,798) $(2,539,155)
=========== =========== ===========
Claims and surrenders assumed $ 533,452 $ 87,025 $ 481,899
=========== =========== ===========
Claims and surrenders ceded $(1,554,866) $(1,710,160) $(1,762,195)
=========== =========== ===========
Amounts paid or deemed to have been paid for reinsurance contracts are
recorded as reinsurance receivables. The cost of reinsurance related to
long duration contracts is accounted for over the life of the underlying
reinsured policies using assumptions consistent with those used to account
for the underlying policies.
(6) STOCKHOLDERS' EQUITY AND RESTRICTIONS
The two classes of stock of Citizens are equal in all respects, except (a)
each Class A share receives twice the cash dividends paid on a per share
basis to the Class B common stock; and (b) the Class B common stock elects
a simple majority of the Board of Directors of Citizens and the Class A
common stock elects the remaining directors.
Generally, the net assets of the insurance subsidiaries available for
transfer to Citizens are limited to the greater of the subsidiary net gain
from operations during the preceding year or 10% of the subsidiary net
statutory surplus as of the end of the preceding year as determined in
accordance with accounting practices prescribed or permitted by insurance
regulatory authorities. Payments of dividends in excess of such amounts
would generally require approval by the regulatory authorities. Based upon
statutory net gain from operations and surplus of the individual insurance
companies as of and for the year ended December 31, 2001 approximately
$6,100,000 of dividends could be paid to Citizens without prior regulatory
approval.
CICA, CILIC and Excalibur have calculated their risk based capital (RBC)
in accordance with the National Association of Insurance Commissioners'
Model Rule and the RBC rules as adopted by their respective state of
domicile. The RBC as calculated for CICA, CILIC and Excalibur as of
December 31, 2001 exceeded levels requiring company or regulatory action.
(7) MERGERS AND ACQUISITIONS
On January 26, 1999 Citizens acquired Investors in exchange for 609,269
shares of its Class A Common stock. The excess of cost over net assets
acquired amounted to $303,703 and is being amortized over 10 years.
Effective January 1, 2000, NSLIC was merged with and into CICA.
Additionally, effective October 1, 2000, USLIC was merged with and into
CICA.
60
On November 20, 2001, Citizens announced that definitive agreements had
been reached between Citizens and Combined Underwriters Life Insurance
Company (Combined) and between Citizens and Lifeline Underwriters Life
Insurance Company (Lifeline), whereby Citizens would acquire 100% of the
outstanding shares of both Combined and Lifeline.
Pursuant to the terms of the agreements, which were approved by Combined's
and Lifeline's shareholders and regulatory authorities, Citizens issued
approximately 753,000 shares of its Class A Common Stock to acquire
Combined and approximately 305,000 shares of its Class A Common Stock to
acquire Lifeline. The transactions closed on March 19, 2002 and were
accounted for as purchases.
(8) CONTINGENCIES
The Company is a party to various legal proceedings incidental to its
business. The Company has been named as a defendant in various legal
actions seeking payments for claims denied by the Company and other
monetary damages. In the opinion of management, the ultimate liability, if
any, resulting from any contingent liabilities that might arise from
litigation are not considered material in relation to the financial
position or results of operations of the Company.
Reserves for claims payable are based on the expected claim amount to be
paid after a case by case review of the facts and circumstances relating
to each claim. A contingency exists with regard to these reserves until
such time as the claims are adjudicated and paid.
(9) 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 primarily 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, is 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 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.
2001 2000 1999
---- ---- ----
REVENUES
U.S. $11,991,619 $14,340,251 $19,844,710
Non-U.S. 55,655,205 52,337,865 52,032,348
----------- ----------- -----------
Total Revenues $67,646,824 $66,678,116 $71,877,058
=========== =========== ===========
61
The following summary, representing revenues and pre-tax income from
continuing operations and identifiable assets for the Company's reportable
segments as of and for the years ended December 31, 2001, 2000 and 1999,
is as follows:
YEARS ENDED DECEMBER 31 2001 2000 1999
---- ---- ----
Revenue, excluding net investment income and
realized gains (losses)
Domestic $ 9,660,887 $11,622,382 $16,546,005
International 44,837,871 42,418,411 43,383,223
------------ ----------- -----------
Total consolidated revenue $ 54,498,758 $54,040,793 $59,929,228
============ =========== ===========
Net investment income:
Domestic $ 2,357,041 $ 2,699,251 $ 3,212,871
International 10,939,440 9,851,503 8,424,069
------------ ----------- -----------
Total consolidated net investment
income $ 13,296,481 $12,550,754 $11,636,940
============ =========== ===========
Amortization expense:
Domestic $ 1,896,086 $ 1,922,308 $ 1,766,439
International 8,581,042 8,595,324 10,382,384
------------ ----------- -----------
Total consolidated amortization
expense $ 10,477,128 $10,517,632 $12,148,823
============ =========== ===========
Realized gains (losses)
Domestic $ (26,309) $ 18,618 $ 85,834
International (122,106) 67,951 225,056
------------ ----------- -----------
Total consolidated realized gains
(losses) $ (148,415) $ 86,569 $ 310,890
============ =========== ===========
Income before federal income tax:
Domestic $ 829,277 $ 290,577 $ 67,571
International 4,199,353 2,233,164 904,878
------------ ----------- -----------
Total consolidated income before federal
income taxes $ 5,028,630 $ 2,523,741 $ 972,449
============ =========== ===========
2001 2000
---- ----
Assets as of December 31:
Domestic $ 93,652,639 $ 93,476,985
International 188,433,624 174,365,379
------------ ------------
Total $282,086,263 $267,842,364
============ ============
62
Major categories of premiums are summarized as follows:
YEAR ENDED DECEMBER 31,
-----------------------------------------
2001 2000 1999
Premiums:
Ordinary life $48,142,397 $45,892,621 $47,687,414
Annuity and universal life 216,905 228,479 261,880
Group life 543,792 95,068 484,746
Accident and health 5,059,843 7,235,685 10,886,317
----------- ----------- -----------
Total premiums $53,962,937 $53,451,853 $59,320,357
=========== =========== ===========
(10) INCOME TAXES
A reconciliation of Federal income tax expense computed by applying the
Federal income tax rate of 34% to income before Federal income tax expense
is as follows:
2001 2000 1999
---- ---- ----
Computed normal tax expense $ 1,709,734 $ 858,072 $ 330,633
Small life insurance company
deduction (612,000) (573,000) (597,755)
Change in valuation allowance -- -- (173,350)
Amortization of excess of costs
over net assets acquired 202,439 224,000 223,876
Adjustment of prior year taxes (276,492) -- --
Other 41,836 (38,072) (82,027)
----------- --------- ---------
Federal income tax expense
(benefit) $ 1,065,517 $ 471,000 $(298,623)
=========== ========= =========
Income tax expense (benefit) for the years ended December 31, 2001, 2000
and 1999 consists of:
2001 2000 1999
---- ---- ----
Current $ 646,636 $ 459,000 $ 1,405,698
Deferred 418,881 12,000 (1,704,321)
---------- --------- -----------
$1,065,517 $ 471,000 $ (298,623)
========== ========= ===========
63
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at
December 31, 2001 and 2000 are presented below.
2001 2000
---- ----
Deferred tax assets:
Future policy benefit reserves $16,186,294 $15,472,000
Net operating loss carryforwards 87,000 760,000
Due and accrued dividends and expenses 656,333 139,000
Investments available-for-sale -- 369,948
Other 128,217 697,802
----------- -----------
Total gross deferred tax assets 17,057,844 17,438,750
Deferred tax liabilities:
Deferred policy acquisition costs, cost of insurance
acquired and intangible assets $12,253,001 $11,847,000
Reinsurance 673,826 671,160
Investments available-for-sale 374,782 --
Other 291,097 291,840
----------- -----------
Total gross deferred tax liabilities 13,592,706 12,810,000
----------- -----------
Net deferred tax asset $ 3,465,138 $ 4,628,750
=========== ===========
During 1999, the Company released the valuation allowance associated with
NSLIC net operating losses. These losses have been utilized in 2001 by the
Company and CICA.
The Company and its subsidiaries had net operating losses at December 31,
2001 available to offset future taxable income of approximately $87,000
for Federal income tax substantially all of which expire through 2020. A
portion of the net operating loss carryforward is subject to limitations
under Section 382 of the Internal Revenue Code.
At December 31, 2001, the Company had accumulated approximately $3,291,000
in its "policyholders' surplus account." This is a special memorandum tax
account into which certain amounts not previously taxed, under prior tax
laws, were accumulated. No new additions will be made to this account.
Federal income taxes will become payable thereon at the then current tax
rate (a) when and if distributions to the shareholder, other than stock
dividends and other limited exceptions, are made in excess of the
accumulated previously taxed income; or (b) when a company ceases to be a
life insurance company as defined by the Internal Revenue Code and such
termination is not due to another life insurance company acquiring its
assets in a nontaxable transaction. The Company does not anticipate any
transactions that would cause any part of this amount to become taxable.
However, should the balance at December 31, 2001 become taxable, the tax
computed at present rates would be approximately $1,119,000.
(11) FAIR VALUE OF FINANCIAL INSTRUMENTS
Estimates of fair values are made at a specific point in time, based on
relevant market prices and information about the financial instrument. The
estimated fair values of financial instruments presented below are not
necessarily indicative of the amounts the Company might realize in actual
market transactions. The carrying amount and fair value
64
for the financial assets and liabilities on the consolidated balance
sheets at each year-end were.
2001 2000
--------------------------- ---------------------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
------ ----- ------ -----
Financial assets:
Fixed maturities $184,017,246 $184,269,247 $170,528,500 $170,534,698
Equity securities 568,398 568,398 675,726 675,726
Cash and cash
equivalents 6,793,852 6,793,852 4,064,035 4,064,035
Mortgage Loans 1,109,547 1,109,547 1,178,668 1,178,668
Financial
liabilities:
Annuities 3,839,023 3,839,023 4,170,884 4,170,884
Fair values for fixed income securities and equity securities are based on
quoted market prices. In cases where quoted market prices are not
available, fair values are based on estimates using present value or other
assumptions, including the discount rate and estimates of future cash
flows.
Mortgage loans are secured principally by residential properties. Weighted
average interest rates for these loans as of December 31, 2001 and 2000,
were approximately 8.7% and 8.6%, respectively, with maturities ranging
from one to fifteen years. Management believes that reported amounts
approximate fair value.
The carrying value and fair values for the Company's liabilities under
annuity contract policies are the same as the interest rates credited to
these products and are periodically adjusted by the Company to reflect
market conditions. The fair value of liabilities under all insurance
contracts are taken into consideration in the overall management of
interest rate risk, which minimizes exposure to changing interest rates
through the matching of investment maturities with amounts due under
insurance contracts.
Policy loans have a weighted average interest rate of 7.6% and 7.5% as of
December 31, 2001 and 2000, respectively, and have no specified maturity
dates. The aggregate fair value of policy loans approximates the carrying
value reflected on the consolidated balance sheet. These loans typically
carry an interest rate that is tied to the crediting rate applied to the
related policy and contract reserves. Policy loans are an integral part of
the life insurance policies which the Company has in-force and cannot be
valued separately.
For cash, accrued investment income, amounts recoverable from reinsurers,
other assets, federal income tax payable and receivable, dividend
accumulations, commissions payable, amounts held on deposit, and other
liabilities, the carrying amounts approximate fair value because of the
short maturity of such financial instruments.
65
(12) OTHER COMPREHENSIVE INCOME (LOSS)
The changes in the components of other comprehensive income (loss) are
reported net of income taxes of 34% for the periods indicated as follows:
YEAR ENDED DECEMBER 31, 2001
------------------------------------------
PRE-TAX TAX NET
AMOUNT EFFECT AMOUNT
------ ------ ------
Unrealized gain on securities:
Unrealized holding gain
arising during the period $ 1,886,498 $ (641,409) $ 1,245,089
Add: reclassification adjustment for
losses included in net income 303,887 (103,322) 200,565
------------ ----------- -----------
Other comprehensive income $ 2,190,385 $ (744,731) $ 1,445,654
============ =========== ===========
YEAR ENDED DECEMBER 31, 2000
------------------------------------------
PRE-TAX TAX NET
AMOUNT EFFECT AMOUNT
------ ------ ------
Unrealized gain on securities:
Unrealized holding gain
arising during the period $ 4,622,602 $(1,571,685) $ 3,050,917
Less: reclassification adjustment for
gains included in net income (87,267) 29,671 (57,596)
------------ ----------- -----------
Other comprehensive income $ 4,535,335 $(1,542,014) $ 2,993,321
============ =========== ===========
YEAR ENDED DECEMBER 31, 1999
------------------------------------------
PRE-TAX TAX NET
AMOUNT EFFECT AMOUNT
------ ------ ------
Unrealized loss on securities:
Unrealized holding loss
arising during the period $(10,812,316) $ 3,676,186 $(7,136,130)
Add: reclassification adjustment for gains
included in net income (301,200) 102,410 (198,790)
------------ ----------- -----------
Other comprehensive loss $(11,113,516) $ 3,778,596 $(7,334,920)
============ =========== ===========
66
(13) QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
The following table contains selected unaudited consolidated financial
data for each calendar quarter.
2001
------------------------------------------------------------
FOURTH THIRD SECOND FIRST
QUARTER QUARTER QUARTER QUARTER
------- ------- ------- -------
Revenues $ 18,228,560 $ 17,582,734 $ 16,353,749 $ 15,481,781
Expenses 16,593,461 15,637,391 15,617,737 14,769,605
Federal income tax expense 135,517 585,000 155,000 190,000
Net income 1,499,582 1,360,343 581,012 522,176
Basic and diluted earnings
per share .06 .06 .02 .02
2000
------------------------------------------------------------
FOURTH THIRD SECOND FIRST
QUARTER QUARTER QUARTER QUARTER
------- ------- ------- -------
Revenues $ 17,621,342 $ 17,010,084 $ 16,468,250 $ 15,578,440
Expenses 15,224,838 17,631,964 15,298,624 15,998,949
Federal income tax expense
(benefit) 705,398 (335,073) 220,512 (119,837)
Net income (loss) 1,691,106 (286,807) 949,114 (300,672)
Basic and diluted earnings
(loss) per share .07 (.01) .03 (.01)
1999
------------------------------------------------------------
FOURTH THIRD SECOND FIRST
QUARTER QUARTER QUARTER QUARTER
------- ------- ------- -------
Revenues $ 18,883,005 $ 17,946,816 $ 18,229,167 $ 16,818,070
Expenses 19,150,093 16,816,910 18,455,771 16,481,835
Federal income tax expense
(benefit) (481,050) 239,427 (115,484) 58,484
Net income (loss) 213,962 890,479 (111,120) 277,751
Basic and diluted earnings
(loss) per share .01 .04 (.01) .01
67
SCHEDULE II
CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
CITIZENS, INC. (PARENT COMPANY)
STATEMENTS OF FINANCIAL POSITION
DECEMBER 31, 2001 AND 2000
2001 2000
---- ----
Assets
Investment in subsidiaries (1) $ 77,922,929 $ 72,435,637
Fixed maturities available-for-sale, at fair value 2,690,942 2,583,419
Accrued investment income 30,277 44,683
Real estate 817,584 800,114
Cash 950,614 220,273
Notes receivable (1) -- 200,000
Other assets 1,142,365 1,449,198
------------ ------------
$ 83,554,711 $ 77,733,324
============ ============
Liabilities and Stockholders' Equity
Liabilities -
Accrued expense and other $ 832,913 $ 420,293
------------ ------------
Stockholders' equity:
Common stock:
Class A 79,701,590 79,701,590
Class B 910,482 910,482
Retained earnings 5,274,768 1,311,655
Accumulated other comprehensive income:
Unrealized investment gain (loss) of
securities held by subsidiaries, net
of tax 727,519 (718,135)
Treasury stock (3,892,561) (3,892,561)
------------ ------------
82,721,798 77,313,031
------------ ------------
$ 83,554,711 $ 77,733,324
============ ============
(1) Eliminated in consolidation.
See accompanying independent auditors' report.
68
SCHEDULE II, CONTINUED
CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
CITIZENS, INC. (PARENT COMPANY)
STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 2001 AND 2000 AND 1999
2001 2000 1999
---- ---- ----
Revenues:
Management service fees (1) $ 13,529,199 $12,252,079 $ 13,333,733
Investment income 178,815 129,515 79,872
Other 6,541 35,174 6,437
Realized gain (loss) 18,857 -- (7,281)
------------ ----------- ------------
13,733,412 12,416,768 13,412,761
------------ ----------- ------------
Expenses:
General 12,273,653 11,047,326 12,126,181
Interest -- -- 18,537
Taxes 1,495,025 806,657 812,896
------------ ----------- ------------
13,768,678 11,853,983 12,957,614
------------ ----------- ------------
Income (loss) before equity in income
of unconsolidated subsidiaries (35,266) 562,785 455,147
Equity in income of unconsolidated
subsidiaries 3,998,379 1,489,956 815,925
------------ ----------- ------------
Net income $ 3,963,113 $ 2,052,741 $ 1,271,072
============ =========== ============
- ----------
(1) Eliminated in consolidation.
See accompanying independent auditors' report.
69
SCHEDULE II, CONTINUED
CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
CITIZENS, INC. (PARENT COMPANY)
STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
2001 2000 1999
---- ---- ----
Cash flows from operating activities:
Net income $ 3,963,113 $ 2,052,741 $ 1,271,072
Adjustments to reconcile net income to net cash used by
operating activities:
Realized (gains) losses on sales (18,857) -- 7,281
Equity in net income of unconsolidated subsidiaries (3,998,379) (1,489,956) (815,925)
Accrued expenses and other liabilities 412,620 251,494 104,018
Change in accrued investment income 14,406 (30,273) --
Other 354,325 300,896 (138,184)
----------- ----------- -----------
Net cash provided by operating activities 727,228 1,084,902 428,262
----------- ----------- -----------
Cash flows from investing activities:
Purchase of fixed maturities, available-for-sale (3,022,974) (2,540,066) --
Maturities of fixed maturities, available-for-sale 2,865,000 -- --
Payments on notes receivable 200,000 66,667 66,666
Investment in real estate (38,913) (58,280) (284,153)
----------- ----------- -----------
Net cash provided (used) by investing
activities 3,113 (2,531,679) (217,487)
----------- ----------- -----------
Cash flows from financing activities:
Payment on notes payable -- -- (333,333)
----------- ----------- -----------
Net cash used by financing activities -- -- (333,333)
----------- ----------- -----------
Net increase (decrease) in cash 730,341 (1,446,777) (122,558)
Cash at beginning of year 220,273 1,667,050 1,789,608
----------- ----------- -----------
Cash at end of year $ 950,614 $ 220,273 $ 1,667,050
=========== =========== ===========
See accompanying independent auditors' report.
70
SCHEDULE III
CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
SUPPLEMENTARY INSURANCE INFORMATION
AS OF DECEMBER 31, 2001 AND 2000
DECEMBER 31
---------------------------
2001 2000
---- ----
Deferred policy acquisition cost:
Domestic $ 13,477,873 $ 13,280,271
International 27,118,130 24,772,081
------------ ------------
Total consolidated deferred policy
acquisition costs: $ 40,596,003 $ 38,052,352
============ ============
Future policy benefits, losses, claims and loss expenses:
Domestic $ 61,348,209 $ 62,169,261
International 123,435,554 115,966,156
------------ ------------
Total consolidated future policy benefits, losses,
claims, and loss expenses $184,783,763 $178,135,417
============ ============
Unearned premiums:
Domestic $ 113,451 $ 131,554
International 228,270 245,392
------------ ------------
Total consolidated unearned premiums $ 341,721 $ 376,946
============ ============
Other policy claims and benefits payable:
Domestic $ 3,731,420 $ 3,368,491
International 7,507,798 6,283,345
------------ ------------
Total consolidated other policy claims
and benefits payable $ 11,239,218 $ 9,651,836
============ ============
See accompanying independent auditors' report.
71
SCHEDULE III, CONTINUED
CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
SUPPLEMENTARY INSURANCE INFORMATION, CONTINUED
YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
2001 2000 1999
---- ---- ----
Premium revenue:
Domestic $ 9,565,894 $11,495,721 $16,377,900
International 44,397,043 41,956,132 42,942,457
----------- ----------- -----------
Total consolidated premium revenue $53,962,937 $53,451,853 $59,320,357
=========== =========== ===========
Net investment income:
Domestic $ 2,357,041 $ 2,699,251 $ 3,212,871
International 10,939,440 9,851,503 8,424,069
----------- ----------- -----------
Total consolidated net investment income $13,296,481 $12,550,754 $11,636,940
=========== =========== ===========
Benefits, claims, losses and settlement expenses:
Domestic $ 9,699,316 $11,244,773 $13,763,602
International 29,473,937 29,897,665 31,716,592
----------- ----------- -----------
Total consolidated benefits, claims, losses and $39,173,253 $41,142,438 $45,480,194
expenses settlement =========== =========== ===========
Amortization of deferred policy
Acquisition costs:
Domestic $ 1,512,837 $ 1,477,795 $ 2,660,970
International 7,055,608 7,044,177 7,367,836
----------- ----------- -----------
Total consolidated amortization of deferred policy
acquisition costs $ 8,568,445 $ 8,521,972 $10,028,806
=========== =========== ===========
Other operating expenses:
Domestic $ 1,937,713 $ 2,647,320 $ 3,965,367
International 8,697,926 7,492,219 6,363,629
----------- ----------- -----------
Total consolidated other operating expenses $10,635,639 $10,139,539 $10,328,996
=========== =========== ===========
See accompanying independent auditors' report.
72
SCHEDULE IV
CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
REINSURANCE
YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
CEDED ASSUMED PERCENTAGE
GROSS TO OTHER FROM OTHER NET OF AMOUNT
AMOUNT COMPANIES COMPANIES AMOUNT ASSUMED TO NET
------ --------- --------- ------ --------------
Year ended December 31, 2001:
Life insurance in-force $2,416,610,000 $206,386,000 $440,023,000 $2,650,247,000 16.6%
============== ============ ============ ==============
Premiums:
Life insurance 49,865,195 1,722,798 543,792 48,686,189 1.1%
Accident and health insurance 5,649,277 589,434 -- 5,059,843 --
-------------- ------------ ------------ --------------
Total premiums $ 55,514,472 $ 2,312,232 $ 543,792 $ 53,746,032 1.0%
============== ============ ============ ==============
Year ended December 31, 2000
Life insurance in-force $2,240,523,000 $272,150,000 $326,267,000 $2,294,640,000 14.2%
============== ============ ============ ==============
Premiums:
Life insurance 48,046,655 2,154,034 95,068 45,987,689 .2%
Accident and health insurance 7,576,449 340,764 -- 7,235,685 --
-------------- ------------ ------------ --------------
Total premiums $ 55,623,104 $ 2,494,798 $ 95,068 $ 53,223,374 .2%
============== ============ ============ ==============
Year ended December 31, 1999
Life insurance in-force $2,197,844,000 $278,689,000 $273,146,000 $2,192,301,000 12.5%
============== ============ ============ ==============
Premiums:
Life insurance 49,654,207 1,966,793 484,746 48,172,160 1.0%
Accident and health insurance 11,458,679 572,362 -- 10,886,317 --
-------------- ------------ ------------ --------------
Total premiums $ 61,112,886 $ 2,539,155 $ 484,746 $ 59,058,477 .8%
============== ============ ============ ==============
See accompanying independent auditors' report.
73
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, hereunto duly authorized.
CITIZENS, INC.
Date: March 26, 2002 By: /s/ MARK A. OLIVER
------------------------------------
Mark A. Oliver, President
By: /s/ JEFFREY J. WOOD
------------------------------------
Jeffrey J. Wood, Executive Vice
President, Chief Financial Officer
and Secretary / Treasurer
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.
Each individual whose signature appears below hereby designates and appoints
Harold E. Riley and Mark A. Oliver, and each of them, as such person's true and
lawful attorney's-in-fact and agents (the "Attorneys-in-Fact") with full power
of substitution and resubstitution, for each person and in such person's name,
place, and stead, in any and all capacities, to sign any and all amendments
(including post-effective amendments) to this Annual Report on Form 10-K, which
amendments may make such changes in this Annual Report on Form 10-K as either
Attorney-in-Fact deems appropriate and to file therewith, with the Securities
and Exchange Commission, granting unto such Attorneys-in-Fact and each of them,
full power and authority to do and perform each and every act and think
requisite and necessary to be done in and about the premises, as fully to all
intents and purposes as such person might or could do in person, hereby
ratifying and confirming all that such Attorneys-in-Fact or either of them, in
their substitute or substitutes, may lawfully do or cause to be done by virtue
hereof.
/s/ MARK A. OLIVER March 26, 2002
- ----------------------------------------
Mark A. Oliver, Director
/s/ RALPH M. SMITH March 26, 2002
- ----------------------------------------
Ralph M. Smith, Director
/s/ DR. RICHARD C. SCOTT March 26, 2002
- ----------------------------------------
Dr. Richard C. Scott, Director
/s/ RICK D. RILEY March 26, 2002
- ----------------------------------------
Rick D. Riley, Director
/s/ DR. E. DEAN GAGE March 26, 2002
- ----------------------------------------
Dr. E. Dean Gage, Director
/s/ HAROLD E. RILEY March 26, 2002
- ----------------------------------------
Harold E. Riley, Chairman of the
Board and Director
/s/ WALDEN P. LITTLE March 26, 2002
- ----------------------------------------
Walden P. Little, Director
/s/ TIMOTHY T. TIMMERMAN March 26, 2002
- ----------------------------------------
Timothy T. Timmerman
/s/ STEVE SHELTON March 26, 2002
- ----------------------------------------
Steve Shelton, Director
74
INDEX TO EXHIBITS
EXHIBIT DESCRIPTION
------- -----------
Exhibit 21 Subsidiaries of Registrant
Exhibit 23 Independent Auditors' Consent