1
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, 1998
-----------------
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. [X]
As of March 15, 1999, aggregate market value of the Class A voting stock held by
non-affiliates of the Registrant was approximately $78,244,000 .
DOCUMENTS INCORPORATED BY REFERENCE
Part III of this Report incorporates certain portions of the definitive proxy
material of the Registrant in respect of its 1999 Annual Meeting of
Shareholders.
Number of shares of common stock outstanding as of March 15, 1999
Class A: 20,765,088
Class B: 621,049
2
PART I
ITEM 1. BUSINESS
(a) GENERAL DEVELOPMENT OF BUSINESS
Citizens, Inc. ("Citizens") operates primarily as an insurance
holding company. It was incorporated in 1977. Citizens is the
parent holding company that directly or indirectly owns 100% of
Citizens Insurance Company of America ("CICA"), Computing
Technology, Inc. ("CTI"), Insurance Investors, Inc. ("III"),
Funeral Homes of America ("FHA") (formerly Funeral Homes of
Louisiana), Central Investors Life Insurance Company of Illinois
("CILIC"), United Security Life Insurance Co. ("USLIC") and
National Security Life and Accident Insurance Company ("NSLIC").
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
NSLIC 1954 Texas Life insurance
USLIC 1967 Mississippi Life insurance
CILIC 1965 Illinois Life insurance
CTI 1986 Colorado Data processing
III 1965 Texas Aircraft transportation
FHA 1989 Louisiana Funeral home
On October 28, 1996, CICA announced that it had signed a definitive
written agreement for the acquisition of American Investment
Network, Inc. (AIN), a life insurance holding company headquartered
in Jackson, Mississippi with $7.5 million in assets, $3.4 million
of stockholders' equity, revenues of $3.2 million and $67 million
of life insurance in-force. Following the acquisition by CICA, AIN
shareholders received 1 share of Citizens, Inc. Class A Common
Stock for each 7.2 shares of AIN Common Stock owned. The
transaction closed on June 19, 1997. Citizens issued approximately
700,000 Class A shares in connection with the transaction, which
was accounted for as a purchase.
On October 31, 1996, CICA, CICA Acquisition, Inc. (a subsidiary
organized for purposes of the transaction) and First American
Investment Corporation ("FAIC"), a holding company entered into a
merger agreement for the merger of CICA Acquisition, Inc. into
FAIC. Prior thereto, Citizens had indirectly owned approximately
94.5% of FAIC. As part of this merger, CICA acquired the
approximately 5.5% of FAIC shares owned by minority investors at an
exchange rate of 0.1111 shares of Class A Common Stock for each 1
share of FAIC owned by minority investors. The merger became
effective March 7, 1997, and Citizens issued
2
3
approximately 134,000 shares of Class A Common Stock in this
transaction which was accounted for as a purchase. Subsequently,
FAIC was liquidated.
To streamline its corporate structure, Citizens and American
Liberty Financial Corporation ("ALFC"), a wholly-owned subsidiary
holding company, entered into a merger agreement dated November 22,
1996 for the merger of ALFC into Citizens. No shares of Citizens
were issued in the merger which became effective in January 1997.
Also on November 22, 1996, CICA and American Liberty Life Insurance
Company ("ALLIC"), a subsidiary of ALFC, entered into a merger
agreement for the merger of ALLIC into CICA. These agreements
closed in June, 1997.
Pursuant to a Stock Purchase Agreement, Citizens purchased from
Jansen Enterprises, Inc., a Texas corporation, 100% of the issued
and outstanding shares of National Security Life and Accident
Insurance Company (NSLIC) for $1,700,000, consisting of $1,000,000
cash and restricted shares of Citizen's Class A Common Stock valued
at $700,000 in a transaction that closed on November 20, 1997.
NSLIC is a Texas-domiciled life and accident and health insurer
with assets of approximately $5 million and revenues of
approximately $5 million.
On September 10, 1998, Citizens entered into an agreement with
First Investors Group, Inc. (Investors) of Springfield, Illinois to
acquire 100% of the outstanding preferred and common shares of
Investors for shares of Citizens' Class A Common stock. Investors
is the parent of Excalibur Insurance Corporation, also of
Springfield, Illinois. Pursuant to the agreement which closed on
January 26, 1999, Citizens issued approximately 610,000 shares to
holders of Investors preferred and common stock.
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. 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
3
4
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 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, USLIC, NSLIC and CILIC, operates
principally in two business segments, that of selling selected
lines of individual life and accident and health ("A&H") insurance
policies in domestic and 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 concerning the
operations of the Company for each of the five years ended
December 31, 1998 The information is presented in accordance with
generally accepted accounting principles.
4
5
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)
------------------ ------------------ -------------------
1998 $ 2,250,197 $ 2,340,744 $ 2,295,471
1997 2,231,017 2,250,197 2,240,607
1996 2,151,955 2,231,017 2,191,486
1995 2,144,709 2,151,955 2,148,332
1994 2,030,615 2,144,709 2,087,662
- ---------------------------------
(a) In thousands (000s)
(b) Before ceding reinsurance to reinsurers.
The increases in insurance in-force as shown above reflect the volumes of new
business written by the Company over the past five years. Approximately
$40,243,000 of the 1995 increase relates to the acquisition of ALLIC in 1995,
while $96,803,000 of the 1997 increases resulted from the acquisitions of USLIC
and NSLIC.
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)
--------------------- ----------------- ----------------------- -------------------
1998 $ 100,906 4.4% $ 306,070 $ 3,368,690
1997 95,684 4.3 318,630 1,952,316
1996 101,860 4.6 296,378 2,511,318
1995 87,273 4.1 290,677 2,241,111
1994 84,390 4.0 285,104 2,309,672
- ---------------------------------
(a) In thousands (000s)
(b) Approximately 95% of the reinsurance is yearly renewable term insurance,
with the remainder being coinsurance. Premiums reflect both life and
accident and health business.
The increased lapsation during 1996 reflects the inclusion of the ALLIC
insurance business. The increase in ceded premium in 1998 is due to the cession
of a substantial portion of the major medical accident and health business of
NSLIC.
5
6
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
-------- -------------- ---------- ------------ -----
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
1996 49,563,720 389,084 309,953 4,040,688 54,303,445
1995 45,120,631 119,335 306,256 698,206 46,244,428
1994 42,984,741 75,564 541,370 259,250 43,860,925
- ---------------------
(a) After deduction for reinsurance ceded.
Premium income has grown substantially due to the volume of new business written
each year, as well as the acquisitions. However, new sales of life insurance
decreased in 1995, and remained at similar levels in 1996 and 1997; therefore,
the overall increase since 1995 is less than for previous years. The acquisition
of ALLIC mitigated the total decline in new life insurance sales, although only
three months of ALLIC's premiums are reflected in the above table for 1995. Much
of the 1998 increase relates to the acquisition of USLIC and NSLIC.
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
------------ ------ -------- ------ --------
1998 $ 59,154,329 $ 23,580,491 39.8% $ 66,914,063 131.2%
1997 55,362,616 18,910,594 34.2 58,865,744 106.3
1996 54,303,445 21,948,637 40.4 59,113,575 108.9
1995 46,244,428 17,375,574 37.6 50,767,435 109.8
1994 43,860,925 17,461,910 39.8 48,763,076 111.2
- -------------------------
(a) After premiums ceded to reinsurers.
Prior to 1996, the ratios of expenses to premiums had declined each year since
1989. These declines are the result of three factors: 1) underwriting and
operating expenses have generally not increased at the same rate as premium
income due to the Company's efficient method of operation; 2) sales commissions
as a percentage of total premium income are declining annually as the business
enters renewal stages and commissions are paid at a lower rate than the first
year; and 3) the amount of new insurance written annually represents a smaller
percentage of the Company's total premium income. However, in 1996, with the
addition of ALLIC and the
6
7
considerable expense associated with its marketing operation start-up, the ratio
reached its highest level since 1993. Following the merger of ALLIC in 1997,
significant reductions in operating expenses were realized. The 1997
acquisitions and their related conversion expenses as well as increases in
accident and health benefits were the primary reasons for the 1998 increase.
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
------------ ---------- ------- ---------- -------
1998 $ 311,331 $ 222,496 71.4% $ 88,835 28.6%
1997 286,698 245,547 85.6 41,151 14.4
1996 337,051 294,408 87.3 42,643 12.7
1995 296,811 271,108 91.3 25,703 8.7
1994 380,281 352,542 92.7 27,739 7.3
- -----------------------------
(a) In thousands (000s)
The percentage of the new business produced that was participating prior to 1995
increased steadily due to the fact that the Ultra Expansion products were all
participating and represented the majority of new business throughout the mid
1990's. The decline in new business during 1995 was caused in part by
disruptions in the international market. The decrease in non-participating
business in 1997 results from sales by USLIC and NSLIC, which sell only
non-participating policies. The significant change in 1998 is due to the volume
of credit life business produced by NSLIC that is non-participating. See
Management's Discussion and Analysis.
TABLE VI
The following table sets forth changes in new 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
------------ ---------- ------- ---------- ------- ---------- -------
1998 $ 311,331 $ 224,918 72.2% $ 51,531 16.6% $34,882 11.2%
1997 286,698 245,637 85.7 41,062 14.3 0 -
1996 337,051 296,985 88.1 40,066 11.9 0 -
1995 296,811 270,963 91.3 25,848 8.7 0 -
1994 380,281 352,357 92.7 27,924 7.3 0 -
- -----------------------------
(a) In thousands (000s)
This table illustrates that most of the new business written prior to 1997 is
whole life. The 1995 results reflect a decrease in new life business during the
year, as does 1997. Most of the 1998 increase is due to the credit life business
sold by NSLIC.
7
8
TABLE VII
The following table sets forth deferred policy
acquisition costs capitalized and amortized compared
to new business issued.
DEFERRED POLICY
TOTAL NEW ACQUISITION COSTS
BUSINESS -----------------------------------------
ISSUED CAPITALIZED AMORTIZED
---------------- --------------- ---------------
1998 $ 311,331,000 $ 7,941,829 $ 7,789,513
1997 286,698,000 9,804,022 9,630,705
1996 337,051,000 10,531,222 10,221,917
1995 296,811,000 10,579,704 8,511,876
1994 380,281,000 13,128,049 7,203,593
In 1994, the rate of capitalization was affected by an adjustment due to the
lower interest environment. The amortization of these costs has grown as the
aggregate deferred acquisition cost asset has increased. In 1996, this
amortization increased due to the increase in surrender activity. The decrease
in costs capitalized for 1995 and 1997 reflects the reduction in the amount of
new business produced and lower commission expenses incurred as a result
thereof. In 1996, new business increased; however, the increase in capitalized
costs was not as high due to changes in the commission structure of the Company.
The decrease in the 1998 figures is a result of the shift in the business
mixture to more A&H as well as lower new production in life business compared to
previous years.
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)
------------------- ---------- ----------------------
1998 $ 169,461,908 $ 11,279,125 6.7%
1997 150,481,414 10,038,736 6.7
1996 134,167,938 9,185,506 6.8
1995 111,926,695 7,026,909 6.3
1994 90,419,823 5,295,784 5.9
- ---------------------
(a) The year 1996 includes assets acquired from CILIC on March 12,
1996. The year 1997 includes assets acquired from NSLIC and USLIC.
The year 1995 includes assets acquired from ALLIC on September 14,
1995.
(b) Does not include realized and unrealized gains and losses on
investments.
Available yields began to increase in mid-1994 and the Company was able to
obtain a slight growth in the return on invested assets. This growth continued
throughout most of 1995, and continued through 1996. The Company hired an
investment advisor in 1995, and this action contributed to the increased yield
in 1996. Significant decreases in yields in the bond market caused the return on
invested assets to drop slightly in 1997 and continued throughout 1998.
8
9
(c) NARRATIVE DESCRIPTION OF BUSINESS
(i) BUSINESS OF CITIZENS
Citizens' principal business is ownership of CICA and NSLIC
and their affiliates. Additionally, it provides management
services to these companies under management services
agreements. At December 31, 1998, Citizens had approximately
85 full and part-time employees.
(ii)BUSINESS OF CICA
Historically, CICA's revenues have been derived from 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 life
and individual accident and health policies to United States
residents. During the fiscal year ended December 31, 1998,
93.2% of CICA's premium income was attributable to life,
endowment and term insurance, 0.4% to individual annuities,
and 6.4% to accident and health insurance. During the fiscal
year ended December 31, 1997, 92.5% of CICA's premium income
was attributable to life, endowment and term insurance; 0.5%
to individual annuities; and 7.1% to accident and health
insurance. Of the life policies in force at December 31, 1998
and 1997, 39.6% and 34.4%, were nonparticipating and 60.4% and
65.6%, respectively were participating. The change in
participating policies as a percentage of total results from
the ALLIC merger in 1997.
From 1987 to 1997, CICA offered its Ultra Expansion products,
a series of participating whole life policies targeted for
international markets. All of the Ultra products were
participating with dividends ranging from 2% of the premium in
the first year to 123% in the 20th year. Beginning January 1,
1998, CICA introduced its Millennia 2000 series of policies as
a replacement for the Ultra Expansion plans. The ten plans
that make up the Millennia Series are, like the Ultra
Expansion plans, designed for the international market and
maintain many of the features of the Ultra series, with
several new enhancements. These enhancements include 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.
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
9
10
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. Limits for insuring non-United States
applicants without a medical examination are: $150,000 for
ages 0 through 39; $50,000 for ages 40 through 65; and all
amounts over age 65. The 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) in exchange for which CICA would charge
higher premiums.
CICA has $24.5 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
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
insurance represents less than 1.0% of the total insurance
in-force.
GEOGRAPHICAL DISTRIBUTION OF BUSINESS
For the year ended December 31, 1998, insurance policies held
by residents of Oklahoma accounted for 5.5% of CICA's total
premium income from direct business, policies held by
residents of the Texas accounted for 3.2% of premium income
from direct business, policies held by residents of Louisiana
accounted for 1.2% of premium income from direct business for
the same period. All other states of the United States totaled
6.3% of the premium income from direct business with no single
state, except as set forth above, accounting for as much as 1%
of premium income. Business on foreign residents accounted for
83.3% of premium revenue in 1998. For the year ended December
31, 1997, residents of Oklahoma accounted for 6.2% of CICA's
total premium income, residents of Texas accounted for 2.7%,
Louisiana, 1.5% and Colorado, 1%. No other state in the U.S.
amounted to 1% of total premium income during the period.
Business on foreign citizens represented 82.9% of 1997 premium
income. For the year ended December 31, 1996, residents of
Oklahoma accounted for 7.0% of CICA's total premium income,
residents of Texas accounted for 3.0%, Mississippi, 2.3%,
Louisiana, 1.6% and Georgia, 1.1%. No other state in the U.S.
amounted to 1% of total premium income during the period.
Business on foreign citizens represented 81.0% of 1996 premium
income. The increase in domestic business as a percentage of
total premium income in 1997 results from the above-described
merger of ALLIC into CICA during the year.
The participating whole life policies accepted by CICA on high
net worth residents of foreign countries have an average face
amount of approximately
10
11
$70,000 and are marketed primarily to the top 5% of the
population in terms of household income.
CICA accepts applications for international insurance policies
marketed by several independent international firms with whom
CICA has nonexclusive consulting contracts. These firms market
life insurance products to citizens of foreign countries. Such
life products are specially designed by CICA to be compatible
with marketing methods and commission requirements.
The international firms have many years' experience marketing
life insurance products for CICA. The contract with the
consultants provides that they have the responsibility for
recruiting and training salesmen. They are responsible for all
of their overhead costs and bear the expense of awards. These
firms guarantee any debits 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." The
marketing contracts may be terminated for various causes, at
any time by mutual consent of the parties or upon 30 days'
notice by either party.
These firms 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.
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 30 years experience in the marketplace in which CICA
competes, management believes such risks are not material.
CICA 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.
11
12
MARKETING OPERATIONS
CICA holds licenses to do business in 15 states and accepts
applications from numerous foreign countries. Additionally,
CICA has applications for admission pending in two states.
CICA's operations are conducted on the independent contractor
basis, with a sales force at December 31, 1998 of 615
individuals, 777 individuals at December 31, 1997 and 1,319
individuals at December 31, 1996. The decrease in marketing
consultants in 1997 reflects the termination of all
individuals who had not produced in the last twelve months, a
practice that had not been enforced in several years. The
further decline in 1998 reflects the loss of former ALLIC
sales representatives described below.
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
salesmen 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 generally accepted accounting principles. In
determining such reserves CICA used the 1955 to 1960, 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 Principles. 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.
12
13
(a) INSURANCE CEDED
CICA generally retains $75,000 of risk on any one person. As
of December 31, 1998, the aggregate amount of life insurance
ceded amounted to $278,277,000 or 9.7% of total direct and
assumed life insurance in force, and $281,400,000 or 13.1% in
1997. CICA is contingently liable with respect to ceded
insurance should any reinsurer be unable to meet the
obligations reinsured.
As of December 31, 1998, CICA had in effect automatic
reinsurance agreements 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).
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 provides that on risks reinsured in specified
countries, 100% of the risk in excess of CICA's retention will
be ceded to RAS. CICA pays premiums to ERC, BMA and RAS on an
annual basis and is responsible for the production of the
reporting monthly and annually to ERC, BMA and RAS to allow
proper accounting for the treaties.
The cessions are on a yearly renewable term basis and are
automatic up to $333,333 for ERC, $500,000 for RAS and
$166,667 for BMA at which point the reinsurance is subject to
a facultative review by the reinsurers. At December 31, 1998,
CICA had ceded $168,365,000 in face amount of insurance to
ERC, $26,178,000 to BMA and $75,343,000 to RAS 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.
A reinsurance treaty with Connecticut General Life Insurance
Company (CG) 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, 1998,
13
14
CICA had ceded $1,273,000,000 in face amount of business to CG
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 which have no current or prior history of financial
difficulty.
(b) INSURANCE ASSUMED. At December 31, 1998, 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 $333,719,000
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, 1998.
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.
14
15
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 by certain
specified percentages. CICA's invested assets at December 31,
1998 were distributed as follows: fixed maturities - 86.3%,
equity securities - 0%, mortgage loans - 0.9%, policy loans -
12.7%, government insured student loans - 0%, short-term
investments - 0% and other long-term investments - 0.1% (see
Note 2 of the "Notes to Consolidated Financial Statements").
CICA did not foreclose on any mortgage loans in 1998. All
mortgage loans are supported by independently appraised real
estate. The investment policy of CICA with regard to mortgage
loans is consistent with the provisions of the Colorado
Insurance Code.
At December 31, 1998, 85.1% 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 85.7% at December 31, 1997. 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 began in late 1997
and 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.
Various states, including Colorado, have enacted "Insurance
Holding Company" legislation which requires the registration
and periodic reporting by insurance
15
16
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 10% or more
of an insurance company's voting securities. CICA 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 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 companies.
CICA believes that its premium rates and its policies are
generally competitive with those of other life insurance
companies, many of which are larger than CICA, selling similar
types of insurance.
CICA's 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. A large percentage
of CICA's first year and renewal life insurance premium income
during 1997 and 1998 came from the international market. See
"Business of CICA - Geographical Distribution of Business."
Management believes CICA to be a significant competitor in the
international market and attributes its success in penetrating
that market to the expertise of management, the uniqueness of
its life insurance products and competitiveness of its pricing
methods.
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.
16
17
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 by foreigners. 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.
In CICA's block of accident and health insurance (6.5% 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 the
Internal Revenue Code (the "Code"), section 806. As such, CICA
qualified 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.
17
18
The Omnibus Reconciliation Act of 1993 (the "1993 Act") was
signed into law on August 10, 1993. Among its provisions was
an increase to corporate tax rates to 35% on taxable income
between $10,000,000 and $15,000,000 and to 38% on taxable
income between $15,000,000 and $18,300,000. This legislation
had no material impact on the financial position of the
Company.
The Revenue Reconciliation Act of 1990 revised the method in
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 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, CTI provides data processing
services to the Company for a fixed fee of $53,000 per month.
In August, 1997, this fee was increased to $85,000 per month
to reflect the growth in the Company's business. As of and for
the year ended December 31, 1998, CTI's total assets were
$933,000 and revenues were $1,057,000. All intercompany fees
and expenses have been eliminated in the consolidated
financial statements.
(iv) BUSINESS OF III
In August, 1993, Citizens sold the stock of III to CICA for
its book value. CICA subsequently contributed debit balances
receivable of approximately $169,000 to III. III collected
such receivables and, as additional consideration, received an
airplane which it operates for Citizens and CICA. As of and
for the year ended December 31, 1998, III's total assets were
$1,250,000 and revenues were $770,000. All intercompany fees
and expenses have been eliminated in the consolidated
financial statements.
(v) BUSINESS OF USLIC
USLIC is a Mississippi-domiciled life and accident and health
insurer offering whole life products and specialty accident
and health products to residents of the
18
19
Southeastern United States. USLIC is licensed in the states of
Alabama, Arizona, Arkansas, Georgia, Indiana, Louisiana,
Mississippi, New Mexico, Oklahoma, Tennessee and Texas.
As of December 31, 1998, USLIC had $34,243,000 of life
insurance in force, of which $21,319,000 was reinsured and
$12,924,000 retained. The maximum retention by USLIC on any
one life for life insurance policies is $20,000. All of the
accidental death benefit coverage is reinsured.
USLIC historically offered customary forms of life insurance,
including non-participating whole life, decreasing term, level
term policies, supplementary health policies and a
participating whole life policy. Its leading life policy in
the past has been the "Lifetime Accumulator," a participating
whole life insurance policy. This policy differs from the
usual offering of life insurance in that the premium is
uniform but the amount of insurance varies by the age of the
proposed insured. The product was sold, therefore, in premium
units rather than in face amount units. While this policy was
written only on persons at ages 0 - 40, other life insurance
products were offered at ages 0 - 70.
Since 1994, USLIC has developed several new supplementary
health insurance products, i.e., cancer, hospital indemnity,
mental illness, outpatient sickness, catastrophic illness,
emergency accident, intensive care and disability income and
Medicare supplement. Premiums are employer paid or paid
through payroll deduction. USLIC can issue life insurance on a
rated premium substandard basis up through Table 16 (400%
extra mortality), but in so doing it will reinsure all of the
risk. USLIC only issues through Table 4 (100% extra mortality)
on its Lifetime Accumulator policy to improve the mortality
and potential profitability on that product line. The
substandard risks are those that by reason of health,
occupation or avocation fall outside the normal anticipated
mortality levels of the general population as developed by the
actuarial sciences. It reinsures all of its accidental death
risk. USLIC also has a reinsurance agreement on its cancer
policy which limits its claim risk to $25,000 in any calendar
year on any one claim. It also reinsures various amounts on
several other health products.
USLIC's selling efforts are not usually concentrated on any
one economic, occupational, hazard or age group. The marketing
territory is Alabama, Arkansas, Louisiana, Mississippi,
Oklahoma, Tennessee and Texas. USLIC's products are generally
competitive with those of other insurers in those states.
USLIC's policies are being sold by direct licensed
representatives and licensed general agents. None of these
agents has underwriting authority. The commissions paid are
believed by management to be competitive with commissions paid
by other life insurance companies in the states in which USLIC
is licensed to operate. USLIC is aware that there is
considerable competition for obtaining qualified agents and
that it will be competing with well-established life insurance
companies for agents to sell its policies. USLIC will also
recruit agents
19
20
from among persons who are not now engaged in the selling of
life and accident and health insurance, and USLIC expects to
train such agents. USLIC presently has approximately 300
licensed agents. The agents recruited and licensed by USLIC
hold licenses with other companies and possibly could sell
other companies' policies that are similar in some respects to
USLIC's policies. This arrangement is quite common with
companies that recruit and license general agents.
Through 1993, USLIC had written primarily the Lifetime
Accumulator, which accounted for approximately 98% of premium
income. From late 1993 through 1996, USLIC shifted its
marketing thrust to non-participating ordinary life products
and supplementary accident and health and group dental
products. In 1997 and 1998, virtually all sales were
supplemental accident and health or group dental products. For
1998, 12.5% of premium income was from life policies and 87.5%
was from accident and health policies, and in 1997, 22.8% of
premium income was from life products, and 77.2% from accident
and health.
INVESTMENTS
USLIC invests and reinvests certain of its reserves and other
funds. The investments of USLIC are limited as to type and
amount by the Mississippi insurance laws which are designed to
insure prudent investment policies.
The investment of capital, paid-in and operating surplus and
other funds of insurers organized under the laws of the State
of Mississippi is specified by the Mississippi Insurance Code.
This statute includes general and specific limitations on
investments, records of investments and other matters. The
Mississippi insurance law regulating investments and other
aspects of the management of insurance companies is designed
primarily for the protection of policyholders rather than
investors.
The administration of USLIC's investment portfolio is handled
by the same outside investment manager as CICA's, with all
trades approved by a committee of the Board of Directors. The
guidelines used require that bonds, both government and
corporate, are of high quality and comprise a majority of the
investment portfolio. The assets selected are intended to
mature in accordance with the average maturity of the
insurance products and to provide the cash flow for USLIC to
meet its policyholder obligations. The type, quality and mix
will enable USLIC to compete in the life insurance marketplace
and to provide appropriate interest margins.
USLIC has classified all its investments as securities
available-for-sale which are carried at fair value.
20
21
REINSURANCE
As is customary among insurance companies, USLIC will reinsure
with other companies' portions of the life insurance risks it
will underwrite. The primary purpose of reinsurance agreements
is to enable the company to reduce the amount of its risk on
any particular policy and, by reinsuring the amount exceeding
the maximum amount the insurance company is willing to retain,
to write policies in amounts larger than it could without such
agreements. Even though a portion of the risk may be
reinsured, USLIC will remain liable to perform all obligations
imposed by the policies issued by it and is liable if its
reinsurer should be unable to meet its obligation under the
reinsurance agreements. USLIC's general policy is to reinsure
business with insurance companies with an A.M. Best and
Company rating of "A" or better.
USLIC's life reinsurance is being ceded through automatic and
facultative treaties with two unaffiliated insurance
companies, Businessmen's Assurance Company, Kansas City,
Missouri, and Optimum Re Insurance Company, Dallas, Texas. At
December 31, 1998, USLIC had ceded to BMA, $9,992,000 in face
amount, and $11,327,000 to Optimum Re. It is the practice of
USLIC to reinsure all accidental death benefit risks that are
written. USLIC has a reinsurance agreement with Reliastar
Financial Corporation, Minneapolis, Minnesota, providing
coverage of claims in excess of various amounts on several of
USLIC's accident and health policies. Approximately $336,000
in premiums were ceded under this treaty in 1998.
RESERVES
USLIC has set up actuarially computed reserves as liabilities
to meet the obligations on the policies it writes. These
reserves are the amounts which, with additions from premiums
to be received and with interest in such reserves, compounded
annually at certain assumed rates, are calculated to be
sufficient according to accepted actuarial principles to meet
policy obligations as they mature. The various actuarial
factors are determined from mortality tables and interest
rates in effect when the policies are issued. The reserves to
be included in statutory filings will be valued on a basis
that meets the requirements of law in Mississippi. USLIC
receives an independent actuarial certification of its
reserves prepared in accordance with both GAAP and statutory
practices.
REGULATION
Mississippi insurance laws and regulations generally govern
the accounting practices and prescribe the procedures and
forms for financial reports of insurance companies prepared on
a statutory accounting basis and filed with the Insurance
Department. Reports prepared in accordance with the prescribed
or permitted statutory accounting practices are primarily
intended to insure the ability of an insurance company to meet
its obligations to policyholders and do not necessarily
reflect going concern value. Balance sheets prepared in
accordance with statutory accounting practices are designed
primarily to reflect the financial position of
21
22
insurance companies from the standpoint of solvency. Certain
of the prescribed or permitted accounting practices differ in
some respects from generally accepted accounting principles
followed by other business enterprises in determining
financial position and results of operations.
The insurance laws of Mississippi also provide that a life
insurance company will be assessed a lower premium tax if up
to 25% of the life company's investments are in Mississippi
securities. The management of USLIC has invested its assets in
a manner to incur the lower tax rate.
In common with other insurance companies operating in
Mississippi, USLIC is subject to the regulation and
supervision of the Mississippi Insurance Commissioner. After
making application for admission and receiving proper license,
USLIC may operate in other states and, at that time, will be
subject to regulation and supervision in any other state where
it may be permitted to transact business. Such regulation is
primarily for the benefit and protection of insurance
policyholders. Broad administrative powers are possessed by
the Mississippi Department of Insurance and other supervising
agencies. Although the powers differ from state to state, in
general they include authority to grant and revoke licenses to
transact business, to be an agent, to supervise premium rates,
to approve the form of insurance contracts, to supervise the
form of financial statements filed with such agency, to
regulate capital requirements, to regulate insurable interest
on one life and to require the filing of detailed annual
reports. USLIC's business and accounts are subject to
examination by the Mississippi Department of Insurance, which
conducted an examination of the three years ended December 31,
1996 during 1997. Such regulation includes the filing of
financial statements by USLIC, periodic reporting and
examination by the insurance regulatory authorities, and
review of transactions between members of the holding company
group.
At December 31, 1998, USLIC's capital and surplus, while above
the minimum levels required by law, was below that required by
several states to continue to write new business.
Additionally, its Risk-Based Capital Ratio fell below 200%,
the minimum action level. Immediately upon realization of this
circumstance, management caused a $600,000 capital
contribution to be made to USLIC to increase its capital and
surplus to an amount greater than that required by every state
in which it is licensed to do business. Additionally, USLIC
has subsequently determined that the claim reserves used in
its 1998 Annual Statement filed with regulatory authorities
was approximately $250,000 overstated, and expects to file
amended financial statements which will further strengthen
USLIC's statutory position.
(vi) BUSINESS OF FHA
Formed in 1989, FHA, formerly Funeral Homes of Louisiana, owns
and operates a funeral home in Baker, Louisiana. Constructed
in 1992, the Baker Funeral
22
23
Home constitutes the primary business function of FHA. At
December 31, 1998, FHL had total assets of $565,000 and total
annual revenues of $349,000.
(vii) BUSINESS OF CILIC
CILIC is an Illinois domiciled life insurer admitted to do
business in four states. Dormant for several years, the
Company services a closed block of life insurance policies. At
December 31, 1998, CILIC had assets of $3.1 million and annual
revenues of $200,000.
(viii) BUSINESS OF NSLIC
NSLIC was acquired in November, 1997 by Citizens. Domiciled in
Arlington, Texas, NSLIC's revenues have historically been
derived from revenues generated by the sale of ordinary whole
life insurance, individual supplemental and major medical
health insurance and credit insurance and investment income.
During the year ended December 31, 1998, 7.4% of premium
revenue was attributable to life, endowment and term
insurance; 18.1% to credit insurance; and 74.5% to accident
and health insurance. All of the life insurance in force is
non-participating.
In recent years, NSLIC's sales efforts have centered on a
major medical supplemental hospitalization policy and its
credit business. The claims incurred on the accident and
health policy to date are below the level anticipated in the
development and pricing of the product. The credit business is
sold primarily through a chain of furniture stores in Texas.
As a result, the average contract size is relatively small,
and the average duration is approximately three years.
Beginning in 1998, sale of the major medical products was
discontinued.
During 1998, management discontinued selling the limited major
medical products that NSLIC's prior management had begun to
introduce in 1997. Management believes that the level of
surplus and asset size of NSLIC are not sufficient to support
the potential volatility that is inherent in such types of
business. As such, NSLIC's marketing efforts are focused
solely on the expansion of existing credit life and credit
accident and health business.
GEOGRAPHICAL DISTRIBUTION OF BUSINESS
For the year ended December 31, 1998, 97.3% of NSLIC's total
premium income was derived from residents of Texas and 2.6%
from Louisiana residents. For 1997, 96.6% of total premium
income was derived from residents of Texas; and 3.3% from
Louisiana residents.
MARKETING OPERATIONS
NSLIC holds licenses to do business in three states - Texas,
Oklahoma and Louisiana. NSLIC's operations are conducted
through independent contractors,
23
24
with a sales force of 142 representatives at December 31, 1998
and 218 at December 31, 1997.
RESERVES
NSLIC 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 generally accepted accounting principles.
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. NSLIC receives an independent
actuarial certification of its reserves. The certifications
have noted no deficiencies for the years presented herein.
REINSURANCE
NSLIC 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
NSLIC generally retains $20,000 of risk on any one person. As
of December 31, 1998, the aggregate amount of life insurance
ceded amounted to $5,276,000 or 10.6% of total direct life
insurance in force. Additionally, NSLIC ceded $1,169,000 of
accident and health premium (approximately 32.9% of NSLIC's
total A&H premium). NSLIC is contingently liable with respect
to ceded insurance should any reinsurer be unable to meet the
obligations reinsured.
As of December 31, 1998, NSLIC had in effect automatic
reinsurance agreements that provide for cessions of ordinary
insurance from NSLIC. Additionally, NSLIC 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 NSLIC for life, accident
and health and supplemental benefits above NSLIC's retention
limit on a yearly renewable term basis.
A treaty with Employers Reassurance (ERC) has historically
been the primary vehicle utilized by NSLIC for its life
business. A reinsurance treaty with Continental Assurance
Company covers virtually all of NSLIC's accident and health
business.
NSLIC closely 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 are large,
24
25
well capitalized entities which have no current or prior
history of financial difficulty.
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 by certain
specified percentages. NSLIC's invested assets at December 31,
1998 were distributed as follows: fixed maturities - 99.8%,
equity securities - 0%, mortgage loans - 0%, policy loans -
0.2%, short-term investments - 0%.
REGULATION
NSLIC 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.
NSLIC 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, NSLIC 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. NSLIC's most recent examination
which was completed during 1998, was for the three years ended
December 31, 1997, by the Texas Department of Insurance. NSLIC
is audited annually by an independent public accounting firm.
Various states, including Texas, 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. NSLIC 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.
25
26
At December 31, 1998, NSLIC's capital was impaired by
approximately $131,000. Additionally, its Risk-Based Capital
Ratio fell below 200%, the minimum action level. Immediately
upon realization of this circumstance, management caused a
$500,000 capital contribution to be made to NSLIC to increase
its capital and surplus to an amount greater than that
required by every state in which it is licensed to do
business. Additionally, NSLIC has subsequently determined that
the claim reserves used in its 1998 Annual Statement filed
with regulatory authorities was approximately $1,000,000
overstated, and expects to file amended financial statements
which will further strengthen its statutory position.
COMPETITION
The life insurance business is highly competitive, and NSLIC
competes with a large number of stock and mutual companies.
NSLIC believes that its premium rates and its policies are
generally competitive with those of other life insurance
companies, many of which are larger than NSLIC, selling
similar types of insurance.
In NSLIC's block of accident and health insurance, it is in
competition with many life 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 NSLIC's books.
ITEM 2. DESCRIPTION OF PROPERTIES
CICA owns its principal office in Austin, Texas, consisting of
an 80,000 square foot office building. Approximately 33,000
square feet is occupied by CICA and its affiliates with the
remainder of the building being leased. At December 31, 1998,
the occupancy rate of the property was 100%.
CICA also owned 1.10 acres of land with a 13,000 square foot
office building which previously served as the Company's
executive offices. The property, with a book value of
$104,000, was sold for cash in 1998 for $850,000.
During 1995, CICA acquired through foreclosure, a 7,500 square
foot office property in Wheatridge, Colorado for $116,000.
Subsequently, the Company renovated the property, bringing its
investment to $230,000. The property was sold for $275,000 in
1998, with the Company retaining a $240,000 first lien.
Through the acquisition of American Liberty Financial
Corporation described above, the Company also owns a 6,324
square foot funeral home in Baker,
26
27
Louisiana with a total cost of $473,000. This facility is
owned and operated by a subsidiary, FHA.
AIN owned a 13,000 square foot building in a suburb of
Jackson, Mississippi. In March, 1998, this building was sold
for $537,000, a gain of approximately $50,000 with CICA making
a $430,000 mortgage loan.
ITEM 3. LEGAL PROCEEDINGS
On September 22, 1997, Citizens was notified that class action
certification was granted September 15, 1997 to plaintiffs in
a lawsuit (Dwain Kirkham et al. v. American Liberty Life
Insurance Company et al., No. 25,954, 2nd Judicial District,
Jackson Parish, Louisiana) filed against American Liberty Life
Insurance Company ("ALLIC") on August 19, 1996 and against
Citizens, Inc. on December 20, 1996 (collectively
"Defendants"). In the same ruling, Defendants' motion for
summary judgment and exception of prescription (statute of
limitations) were denied. Defendants believed that these
rulings are significantly in error and filed a motion for
appeal. On August 19, 1998, the Louisiana Second Circuit Court
of Appeals vacated the class action certification by the trial
court, and the case was remanded for further proceedings
consistent with the decision of the Court of Appeals.
The lawsuit was filed by four individuals who purchased from
ALLIC, prior to August 1, 1986, life insurance policies on
their children and grandchildren. In the complaint, plaintiffs
alleged that the insurance policies were fraudulently
misrepresented to be "retirement" and "insured savings" plans
in which, after six or seven years, additional premiums would
be unnecessary and monthly retirement income would be
generated for plaintiffs. Plaintiffs also alleged other causes
of action including breach of contract and are seeking
rescission, unspecified damages, interest and attorneys' fees.
Prior to the class certification ruling, rescission of the
insurance policies purchased by the four plaintiffs would have
resulted in a total payment of $31,000 (including 33% for
contingent attorneys' fees). The activities described in
plaintiffs' complaint allegedly occurred over 10 years ago
with respect to certain types of insurance policies sold by an
independent general agent. Prior to its recent merger into
Citizens' principal subsidiary, CICA, ALLIC was a separate
subsidiary of Citizens since its acquisition in September
1995. In October, all claims were settled for $75,000.
In March 1999, the Company was served with a summons regarding
an action entitled Berdeaux Living Trust v. First Investors
Group, Inc., Donald L. Dennis, H. Marie Dennis, Winona Drewes
and Citizens, Inc. in U.S. District Court, Southern District
of Illinois. The complaint alleges that the defendants
defrauded the plaintiffs and other persons who were preferred
shareholders of First Investors Group, Inc. in connection with
an acquisition of First Investors completed by the Company in
early 1999. In the acquisition, the Company issued
approximately
27
28
610,000 shares of its Class A Common Stock to shareholders of
First Investors pursuant to a registration statement declared
effective by the Securities and Exchange Commission in
December 1998. The plaintiffs are seeking class action
certification on behalf of the approximately 1,860 persons who
where preferred shareholders of First Investors. Damages are
alleged based upon alleged violations of Section 10(b) of the
Securities Exchange Act of 1934 and the Illinois securities
laws as well as under Illinois common law fraud and against
the defendants other than the Company, for breach of fiduciary
duty. The Company is preparing an answer which vigorously
denies the allegations, and it believes the case is without
merit.
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 1998.
PART II
ITEM 5. MARKET FOR THE 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.
1998 1997
--------------------------- -----------------------
QUARTER ENDED HIGH LOW HIGH LOW
----------------------- ----------- ----------- --------- ---------
March 31 $6.81 $5.69 $8.81 $7.63
June 30 6.44 6.00 8.13 7.25
September 30 6.09 5.56 7.88 7.19
December 31 6.00 5.25 7.56 6.38
As of December 31, 1998, the approximate number of record
owners of Citizens' Class A common stock was 19,000.
Management estimates the number of beneficial owners to be
approximately 57,000.
Citizens has not paid dividends in any of the past four years
and does not intend to pay cash dividends in the immediate
future. For restrictions on the present and future ability to
pay dividends, see Note 7 of the "Notes to Consolidated
Financial Statements."
28
29
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).
YEAR ENDED DECEMBER 31,
(IN THOUSANDS EXCEPT PER SHARE DATA)
------------------------------------------------------------------------
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
NET OPERATING REVENUES $ 72,685 $ 65,027 $ 63,822 $ 53,130 $ 49,212
NET INCOME (LOSS) $ (6,721) $ 3,426 $ 2,214 $ 2,750 $ 4,175
NET INCOME (LOSS) PER $ (.31) $ .16 $ .11 $ .16 $ .25
SHARE
TOTAL ASSETS $ 253,384 $ 249,519 $ 218,277 $ 209,308 $ 149,798
NOTES PAYABLE $ 333 $ 937 $ 489 $ 773 $ 712
TOTAL LIABILITIES $ 178,480 $ 169,938 $ 151,394 $ 144,595 $ 114,742
TOTAL STOCKHOLDERS' EQUITY $ 74,904 $ 79,581 $ 66,883 $ 64,713 $ 35,056
BOOK VALUE PER SHARE $ 3.50 $ 3.71 $ 3.29 $ 3.24 $ 1.99
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 October 28, 1996, Citizens announced that it had signed
definitive written agreements for the acquisition of American
Investment Network, Inc. ("American"), a Jackson, Mississippi,
based life insurance holding company and parent of United
Security Life Insurance Company ("USLIC") with $7.5 million in
assets, $3.4 million of stockholders' equity, revenues of $3.2
million and $67 million of life insurance in force.
Approximately 700,000 Citizens' Class A common shares were
issued in connection with the transaction, which was accounted
for as a purchase. The transaction closed on June 19, 1997.
On August 13, 1997, Citizens signed a definitive agreement to
acquire 100% of the outstanding shares of National Security
Life and Accident Insurance Company ("NSLIC") of Arlington,
Texas for $1.7 million in cash and restricted stock. The
transaction closed in November, 1997.
On September 15, 1998 Citizens and First Investors Group, Inc.
("Investors") of Springfield, Illinois reached an agreement
wherein Citizens would acquire 100% of the outstanding
preferred and common shares of Investors for shares of
Citizens' Class A Common stock. Investors is the parent of
Excalibur Insurance Corporation, also of Springfield, Illinois
("Excalibur"), and has consolidated assets of approximately
$3.2 million, annual revenues of $201,000 and capital of
29
30
$3.1 million. Pursuant to the terms of the Agreement, which
was approved by the Illinois Department of Insurance on
October 13, 1998 and the shareholders of Investors on January
26, 1999, Citizens issued one share of Citizens Class A Common
stock for each 6.6836 shares of Investors common and preferred
stock issued and outstanding. Citizens issued approximately
610,000 shares of its Class A Common stock to consummate the
transaction.
RESULTS OF OPERATIONS
A net loss of $6,720,693, or $0.31 per share was incurred
during 1998, compared to net income of $3,425,523 or $.16 per
share in 1997 and net income of $2,213,726 or $.11 per share
in 1996.
A non-recurring charge to goodwill of $9.5 million recorded in
the third quarter of 1998 caused the 1998 loss. The writedown
was related to goodwill recorded in the 1995 acquisition of
American Liberty Financial Corporation. The writedown was
caused by a decline in new production from insurance agents
formerly associated with American Liberty. Subsequent to the
1995 acquisition, management implemented a 45% reduction in
commissions paid to these agents in order to preserve
profitability of the accident and health business which was
negatively impacted by (i) changes in state laws that
established minimum claims ratios, and (ii) a mandated change
in interest rates used to compute reserves. In addition, as a
result of a merger of American Liberty into CICA during 1997,
new policy sales were delayed because CICA had to resubmit
policies formerly sold by American Liberty for approval in
each of the states in which the policies were sold by American
Liberty. Accordingly, the Company experienced what was
believed to be a temporary decline in new production of
American Liberty. The Company continued to monitor production
associated with these products, for which the primary
marketing efforts occur during the months of June to
September, due to the nature of the policies sold. As a result
of obtaining the necessary policy approval and increased sales
efforts during 1998, management was successful in reviving
production from some of the largest producers of American
Liberty. However, management's estimate of future production
was reevaluated during the quarter ended September 30, 1998
based upon the sales activity of the products sold during that
quarter, the size of the active agency force, and the
anticipated future production to be achieved in subsequent
years. As a result of this evaluation, the writedown was
recognized.
Management continues to monitor production associated with
these products. As a result of obtaining the necessary policy
approvals by CICA in 1997 and increased sales efforts during
1998, management was successful in reviving production from
some of the largest producers of American Liberty. Estimates
of future production will continue to be reevaluated based
upon the sales activity of the products sold, the size of the
active agency force, and the anticipated future production.
Management has been successful in returning the largest
producing marketing organization of American Liberty to
production and anticipates continuing increases in new
production in 1999, compared to amounts seen in 1997 and 1998.
30
31
Total revenues for the year ended December 31, 1998 were
$72,684,915 compared to $65,027,298 in 1997 , an increase of
11.8%. In 1996 revenues were $63,822,160. The inclusion of the
revenues from USLIC and NSLIC for the entire year was the
primary reason for the increase during 1998. Decreased writing
of new business by CICA in the international market and by
ALLIC domestically was offset by the premium revenues of USLIC
and NSLIC, which contributed to the increase in revenue in
1997. Additionally, only six months of revenues of USLIC and
only one month of NSLIC's revenues are included in the 1997
results. However, economies of scale created by the
combination of companies contributed to the increase in 1997
income.
Premium income reached $59,154,329 in 1998, a 6.8% increase
over the $55,362,616 in 1997. The 1997 amounts were a 1.9%
increase over the previous year when premium income totaled
$54,303,445. Declines in the production of international
premium by CICA and domestically by ALLIC's former marketing
operations during 1997 resulted in a nominal increase in 1997
compared to 1996. Additionally, as stated above, the results
for USLIC and NSLIC were not included for the entire year
1997. In January, 1998, CICA introduced a new line of
international products known as the Millennia 2000 series.
Management believes that these products will be well received
in the marketplace; however, in 1998, CICA's international
sales were hampered due to the contraction of several Latin
American economies as well as increased competition from new
local insurance companies who are subsidiaries of large U.S.
insurers.
It is management's belief that CICA, utilizing the marketing
representatives who previously represented ALLIC, is better
served to continue to exploit its niche selling specialty
accident and health life products through existing
distribution channels. The acquisition of USLIC also brings
capable sales forces that have historically sold similar
products; therefore, management believes that the ability to
"cross-sell" products between companies is high.
During 1998, management discontinued selling the limited major
medical products that NSLIC's prior management had begun to
introduce in 1997. Management believes that the level of
surplus and asset size of NSLIC are not sufficient to support
the potential volatility that is inherent in such types of
business. As such, NSLIC's marketing efforts are focused
solely on the expansion of existing credit life and credit
accident and health business.
Net investment income increased 12.4% during 1998 to
$11,279,125 from $10,038,736 during 1997. The 1997 results
were up 9.29% compared to the $9,185,506 earned in 1996. The
1998 and 1997 results reflect the continuing expansion of the
Company's asset base as well as the actions taken in previous
years to change the mix and duration of the Company's invested
assets. Overall, the duration was increased to approximately
5.19 years from 4 years.
31
32
The low yields available in the bond market during the
Company's growth period have made it difficult to increase the
return on the Company's invested assets without exposing the
portfolio to undue risk.. Management hired the investment
advisory firm of Asset Allocation and Management, Inc. of
Chicago ("AAM"), Illinois in late 1995 to manage the Company's
fixed maturity portfolio. During 1996, a nominal
reconfiguration was begun. In lieu of purchasing U.S. Treasury
instruments, the Company began to purchase U.S. Government
guaranteed mortgage pass-through securities. This program
continued throughout 1998. Management expects to continue this
strategy throughout 1999 as opportunities present themselves.
Overall policyholder dividends increased to $3,025,746 in
1998, up 8.7% over 1997 when such benefits were $2,782,215.
The 1997 amounts represented an increase of 18% compared to
$2,363,201 in 1996. The 1997 growth is primarily due to the
acquisition of USLIC, which increased the current year results
by approximately $397,000. Virtually all CICA's policies that
have been sold since 1989 are participating. However, sales of
credit life by NSLIC are non-participating and have had the
effect of lowering the overall growth in dividends.
Participating policies represent a large majority (71%) of the
Company's business in-force, although the percentage of
participating business has declined from approximately 91% due
to the acquisitions in recent years. Additionally, due to the
disruption in the Argentine market mentioned above and the
lower than usual persistency in that market, the growth in
overall dividends has been slowed as policies lapse before the
dividend amount can grow. Management expects continued growth
in this item due to the fact that CICA will continue to focus
on participating products internationally, subject to factors
such as persistency and future sales, although dividends are
factored into the policies, although dividends are factored
into the policies.
Claims and surrenders increased to $31,592,740 in 1998, an
increase of 13.4% over 1997 when such benefits were
$27,852,907. In 1996 claims and surrenders were $25,919,054.
The increase in benefits can be attributed to the inclusion of
NSLIC and USLIC for an entire year in 1998, as well as
increases in accident and health benefits attributable to the
respective blocks of business of these companies. Death
benefits increased to $5,150,647 in 1998, up from $4,475,083
in 1997, and $3,667,159 in 1996. The 1998 increase can be
traced directly to the inclusion of NSLIC and USLIC for an
entire year. During 1998, claims on NSLIC were $421,801, while
claims from USLIC were $35,570. The increase in such claims in
1997 does not appear to be due to any trend. Rather, it is the
result of the growing block of business written by the
Company. Additionally, the pre-need and burial policies
formerly sold by ALLIC were marketed to an older clientele and
as such, higher claims are anticipated and factored into the
product. The Company has historically adhered to a strict
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. For 1996 and future years, management
initiated a change to more selective
32
33
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 grew to $6,160,966 in 1998 from
$2,963,636 in 1997. Such claims were $1,719,244 in 1996. The
increase reflects the growing block of accident and health
premium on the Company's books, and more specifically the
inclusion of NSLIC and USLIC for the entire year. Claims on
USLIC's A&H benefits were $2,513,680, while NSLIC's were
$1,653,367. In 1997, the addition of USLIC and NSLIC
contributed approximately $740,000 to the benefit amounts. In
1996, the acquisition of ALLIC caused such benefits to
increase sharply because of the volume of A&H premium on
ALLIC's books compared to the amount on CICA's books. During
the second half of 1998, the Company experienced a significant
increase in the volume of claims which resulted in a backlog.
During the fourth quarter of 1998, management increased the
number of individuals processing claims from approximately 13
to 30. Management believes the Company will be current on its
claims processing in the second quarter of 1999. In the
meantime, significant effort has been made to ensure that the
pending claims reserve and provisions for incurred but not
reported claims are conservative and reasonable.
Endowment expense grew to $5,258,881 in 1997 from $5,192,607
in 1996. In 1998, such expenses declined to $5,027,937.
Beginning in late 1990, Citizens introduced a new series of
plans called "Ultra Expansion Plus" which 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. The relatively small increase from 1996 to
1997 and the decline in 1998 reflects the decline in
production of this policy over the last three years.
In 1998, policy surrenders remained flat at $14,481,335.
Policy surrenders were $14,322,593 in 1997, compared to
$14,421,683 in 1996. The decrease in 1997 and relative
stability in 1998 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 $1,020,410 in 1998, $848,093
in 1997 and $918,361 in 1996. These expenses are comprised of
supplemental contract benefits, interest on policy funds and
assorted other miscellaneous policy benefits.
33
34
During 1998, commissions increased to $12,501,426 from
$11,918,192. In 1996, commission expense was $12,447,664. The
majority of such amounts paid relates to first year
commissions which were $8,169,835, $8,120,748, and $8,677,297
in 1998, 1997, and 1996, respectively. The 1996 increases
relate to improved sales activity in CICA and approximately
$1.5 million associated with ALLIC. The decline in first year
commissions reflected in 1998 and 1997 compared to 1996
relates to the slowdown in new sales discussed earlier.
Additionally, the increase in new sales of accident and health
and credit business contributed to the decline. These products
typically carry lower commissions than do ordinary life
products.
Underwriting, acquisition and insurance expenses increased to
$11,079,065 compared to $6,992,402 in 1997 and $9,500,973 in
1996. Approximately $2.5 million of the increase in 1998
relates to the inclusion of NSLIC and USLIC for the entire
year. Additionally, because of the increased claims volume
mentioned above, management was forced to significantly
increase staff size and thus overhead on a temporary basis.
Due to the consolidation of ALLIC's operations with CICA,
management was able to achieve significant reductions in
expenses through economies of scale which were reflected in
the 1997 results.
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 sold internationally in exchange for the
absorption of all marketing management and promotion
activities. Management has utilized firms such as this in
previous periods with great success at obtaining increases in
sales and expense reductions.
Capitalized deferred policy acquisition costs were $7,941,829
in 1998, $9,804,022 in 1997, and $10,531,222 in 1996. The
large drop in 1998 reflects the sale of accident and health
products described above which carry lower levels of
commission and thus capitalization. The decline in amounts in
1997 reflects the lower level of new sales experienced during
the year, as well as the lower interest rate environment.
Amortization of these costs was $7,789,513, $9,630,705 and
$10,221,917, respectively in 1998, 1997 and 1996.
Amortization of cost of insurance acquired and excess of cost
over net assets acquired declined in 1998 to $2,100,433 from
$2,305,127 in 1997. In 1996, such amortization was $1,398,859
in 1996. The increase in 1997 was attributable to the goodwill
and cost of insurance recorded on the acquisitions of USLIC,
NSLIC, ALLIC and IIH. As discussed above, management wrote off
$9.5 million of the goodwill associated with the acquisition
of American Liberty during the third quarter of 1998.
34
35
LIQUIDITY AND CAPITAL RESOURCES
Stockholders' equity decreased to $74,903,679 at December 31,
1998 from $79,581,698 in 1997. The loss from operations caused
by the non-recurring charge offset improvement in the market
value of the Company's fixed maturity portfolio and caused the
decline in equity.
Invested assets grew to $176,572,123 in 1998 from $162,651,692
in 1997, an increase of 8.6%. The growth is attributable to
the internal growth achieved by the Company. At December 31,
1998 and 1997, 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 market. The Company does not have a
plan to make material dispositions of fixed maturities during
1999; however, because of continued uncertainty regarding
long-term interest rates, management cannot rule out sales
during 1999. Fixed maturities held to maturity, amounting to
$5,606,374 at December 31, 1998 consist of U.S. Treasury
securities. Management has the intent and believes the Company
has the ability to hold the securities to maturity.
In order to monitor the market risk associated with the
Company's investment policy, management measures the
sensitivity of the portfolio to instantaneous interest rate
changes. At December 31, 1998, decreases in interest rates of
100, 200 and 300 basis points, respectively, would result in
increases in market values of approximately $12,402,000,
$19,666,000 and $23,588,000, respectively. Conversely,
increases in rates of 100, 200 and 300 basis points would
generate losses of $1,041,000, $7,484,000 and $13,738,000,
respectively. Under either interest rate scenario the
portfolio carries positive convexity.
The Company's mortgage loan portfolio, which constitutes 0.9%
of invested assets at December 31, 1998 and 1997, has
historically been composed of small residential loans in
Texas. At December 31, 1998 and 1997, one mortgage loan with a
principal balance of approximately $38,400 was in default.
Management has established a reserve of $50,000 at December
31, 1998 and 1997 (approximately 3% of the mortgage
portfolio's balance) to cover potential unforeseen losses in
the Company's mortgage portfolio. During the first quarter of
1999 while foreclosure on the above-referenced loan was in
progress, the Company was notified that the property had been
sold and a payoff of its lien was forthcoming.
Policy loans comprise 11.9% of invested assets at December 31,
1998 compared to 12.6% at December 31, 1997. 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 of Texas, Austin, Texas, were significantly in excess of
Federal Deposit Insurance
35
36
Corporation coverage at December 31, 1998 and 1997. Management
monitors the solvency of all financial institutions in which
it has funds to minimize the exposure for loss. Management
does not believe the Company is at risk for such a loss.
During 1999, the Company intends to utilize highly-rated
commercial paper as a cash management tool to minimize excess
cash balances and enhance return.
In February 1992, the Company paid cash for an 80,000 square
foot office building in Austin, Texas to serve as its primary
office. Renovation and remodeling of the property began in the
third quarter of 1992 and the Company relocated to the
building in September 1993. The Company occupies approximately
33,000 square feet of space in the building. The Company's
former office property, consisting of approximately 13,000
square feet in Austin, with a carrying value of $104,000 was
sold during 1998 for $850,000.
CICA owned 1,821,332 shares of Citizens Class A common stock
at December 31, 1998 and 1997. Statutory accounting practices
prescribed by Colorado require that the Company carry its
investment at market value reduced by the percentage ownership
of Citizens by CICA, limited to 2% of admitted assets. As of
December 31, 1997 and 1998, the Company valued the shares in
accordance with prescribed statutory accounting practices. In
the Citizens' consolidated financial statements, this stock is
shown as treasury stock.
CICA had outstanding at December 31, 1998, a $333,333 surplus
debenture payable to Citizens. For statutory accounting
purposes, this debenture is a component of surplus, while for
GAAP it is eliminated in consolidation. Citizens has
recognized a liability for its related obligation to a bank in
a like amount.
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 practices, 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,
1997, CICA, and CILIC were well above required minimum levels.
NSLIC and USLIC fell below the 200% level as reported on their
December 31, 1998 Annual Statement to insurance regulatory
authorities. Management immediately made capital contributions
to both companies to raise them above the minimum levels.
Additionally, during the 1998 annual audit, it was discovered
that the provisions for pending claims in both companies were
overstated. Management expects to amend the 1998 statutory
financial statements of USLIC and NSLIC to increase surplus by
approximately $250,000 and $1,000,000, respectively as a
result of the overstatement, bringing both companies further
above the 200% level of RBC.
36
37
INFORMATION SYSTEMS AND THE YEAR 2000
Company management has been actively involved in life and
health insurance software development since the 1960's. The
Company continues to develop and maintain its core information
systems with a professional staff of program designers,
analysts and programmers through its wholly-owned subsidiary
Computing Technology, Inc.
During the past 15 years, the Company has undertaken numerous
major systems projects, including but not limited to,
development of interactive, simulated-real-time transaction
collection and user inquiry programs, conversion from
CSC/Continuum's Life/70 to in-house developed core processing
systems, transition from a Harris minicomputer to a Wang VS,
transition from an IBM plug-compatible mainframe to a Wang VS
and conversion of at least seven life and health insurance
company operations to its systems. During 1998, Company
personnel have successfully completed conversion of two
insurance company operations, namely United Security Life
Insurance Company and National Security Life and Accident
Insurance Company, from non-compliant UNIX and IBM systems to
systems designed and operated by Citizens. The Company's
electronic systems department ("ESD") staff believes year 2000
issues will continue to be addressed as a top priority until
the Company can certify its systems are Year 2000 compliant.
The effort needed to complete the task is expected to be
effected with existing staff by June 30, 1999, thus leaving
ample time to assess and resolve any significant remaining
issues.
Company personnel have been actively planning, identifying and
resolving year 2000 issues for more than a year. These
activities are expected to continue through the early part of
1999 with parallel testing and final remediation actions
concluding within the second half of 1999.
In the late 1980's, the Company began developing software to
routinely audit its data bases and its source code. These
internal audit tools run daily and provide perpetual balancing
of the Company's policy and agency master files to its general
ledger. The source code audit tool has been an instrumental
key to identifying system code that may need year 2000
remediation. By using this automated "bloodhound" combined
with visual review of record and screen layouts/documentation,
the Company's ESD staff have identified the "worst case"
scenario for a year 2000 impact. Under this scenario, the
Company does not expect material costs, because the remaining
functions that could be non-compliant can be handled manually.
The overall expenditure for addressing year 2000 issues is
minimal because all planning, remediation and testing have
been, and will continue to be, performed with existing staff
during normal business hours.
37
38
The Company utilizes a Wang VS 7160 for providing core
processing and on-line support in conjunction with a
local-area-network (LAN) based upon CISCO 5500 and 2900
intelligent switching components. The Company's Mitel
telephone system was replaced during 1998 with a Mitel 2000
Light, nodal, fiber-optic system which is year 2000 compliant.
Wang has certified the 7.53.00 operating system to be year
2000 compliant and the Company successfully completed
installation and testing of this system in July, 1998. The
Company uses Microsoft's WFW 3.11 and NT Server 3.51 (SP5),
for its LAN, both of which are certified by Microsoft to be
year 2000 compliant. The Company uses Word 6.0, EXCEL 5.0, and
Notes 3.3 as applications on the LAN which are certified to be
compliant except for the Notes product which is not compliant,
but is reported to have no loss of data or functionality.
However, only the Wang system is mission-critical with the
in-house developed code for Host Daily Cycle systems being
considered a part thereof.
As for electronic data exchanges, the Company interacts with
Chase Bank, Rudd and Wisdom, Dataplex, PCS Health Systems and
certain reinsurance companies. The Chase Bank relationship is
the only third-party interface that could be considered
mission-critical and it can be circumvented (in less than one
man-hour) by using paper drafts instead of electronic
transactions should the Company find such to be desirable.
Other vendor interfaces can be circumvented with hard-copy
reporting should an electronic interface become untenable for
some reason.
The Company believes it has addressed its Year 2000 concerns.
The Company has developed contingency and recovery plans aimed
at ensuring the continuity of critical business functions
before, on and after December 31, 1999. The contingency and
recovery planning is substantially complete. The Year 2000
contingency plans will be reviewed periodically throughout
1999 and revised as needed. The Company believes its Year 2000
contingency plan, coupled with existing "disaster recovery"
and "business resumption" plans, minimize the impact Year 2000
issues may have on the organization
FINANCIAL ACCOUNTING STANDARDS
In February 1997, the Financial Accounting Standards Board
("FASB") issued Statement 128 "Earnings per Share" ("Statement
128"). Statement 128 establishes the standards for computing
and presenting earnings per share ("EPS"). This statement
replaces the presentation of primary EPS with a presentation
of basic EPS and requires dual presentation of basic and
diluted EPS. Statement 128 is effective for fiscal years
ending after December 15, 1997. Implementation did not have a
material impact on the Company's earnings per share.
In June 1997, the FASB issued Statement 130 "Reporting
Comprehensive Income" ("Statement 130"). Statement 130
establishes the standards for reporting
38
39
and display of comprehensive income and its components in a
full set of general-purpose financial statements. Statement
130 is effective for fiscal periods beginning after December
15, 1997. Implementation has not had a material impact on the
Company.
Also in June, 1997, Statement 131, "Disclosures about Segments
of an Enterprise and Related Information," was issued by the
Financial Accounting Standards Board. This Statement requires
that companies disclose segment data on the basis that is used
internally by management for evaluating segment performance
and allocating resources to segments. This Statement requires
that a company report a measure of segment profit or loss,
certain specific revenue and expense items, and segment
assets. It also requires various reconciliations of total
segment information to amounts in the consolidated financial
statements. The Company's current definition of its business
segments, significant lines of business (life and health
products), will be expanded to significant lines of business
by geographic location of policyholder (international and
domestic).
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK
Information required by this item is set forth in Item 7.
"Management's Discussion and Analysis of Financial Condition
and Results of Operations -- Liquidity and Capital Resources."
39
40
ITEM 8. FINANCIAL STATEMENTS
CITIZENS, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND
FINANCIAL STATEMENT SCHEDULES
PAGE
REFERENCE
---------
Independent auditors' report 5
Consolidated statements of financial position at
December 31, 1998 and 1997 46-47
Consolidated statements of operations
- years ended December 31, 1998, 1997 and 1996 48-49
Consolidated statements of stockholders' equity and comprehensive
Income (loss) - years ended December 31, 1998, 1997 and 1996 50
Consolidated statements of cash flows
- years ended December 31, 1998, 1997 and 1996 51-53
Notes to consolidated financial statements 54-77
Schedules at December 31, 1998 and 1997:
Schedule II - Condensed Financial
Information of Registrant 78-80
Schedules for each of the years in the three-year
period ended December 31, 1998:
Schedule IV - Reinsurance 81
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. DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
During the 24 months preceding the date of the audited
financial statements of Citizens included herein, there has
been no change of accountants made by Citizens, nor has it
reported on Form 8-K any disagreements between the Company and
its independent accountants.
40
41
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, 1998.
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
EXHIBIT
EXHIBIT NO. DESCRIPTION PAGE NO.
----------- ----------- --------
(1) Underwriting Agreement N/A
(2) Plan of acquisition, reorganization, arrangement, liquidation or succession (e)
(3) 3.1 Articles of Incorporation; as amended (d)
3.2 Bylaws Filed
herewith
(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
10.1 Automatic Yearly Renewable term (NR) 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)
41
42
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 (j)
10.11 Stock Purchase Agreement dated November 20, 1997 between
Jansen Enterprises, Inc. and Citizens, Inc. (j)
10.12 Plan and Agreement of Merger dated September 10, 1998
between First Investors Group, Inc., Citizens, Inc., and
Excalibur Acquisition, Inc. (k)
(11) Statement re: Computation of per share earnings N/A
(12) Statement re: Computation of ratios N/A
(13) Annual report to security holders, Form 10-Q or quarterly report to N/A
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
42
43
(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) Financial Data Schedule Filed
herewith
(28) (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.
(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.
(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.
(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.
(b) REPORTS ON FORM 8-K
No Reports on Form 8-K were filed by Citizens during the fourth quarter of 1998.
43
44
CITIZENS, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND
FINANCIAL STATEMENT SCHEDULES
PAGE
REFERENCE
---------
Independent auditors' report 45
Consolidated statements of financial position at
December 31, 1998 and 1997 46-47
Consolidated statements of operations
- years ended December 31, 1998, 1997 and 1996 48-49
Consolidated statements of stockholders' equity and comprehensive
income- years ended December 31, 1998, 1997 and 1996 50
Consolidated statements of cash flows
- years ended December 31, 1998, 1997 and 1996 51-53
Notes to consolidated financial statements 54-77
Schedules at December 31, 1998 and 1997:
Schedule II - Condensed Financial
Information of Registrant 78-80
Schedules for each of the years in the three-year period ended December 31,
1998:
Schedule IV - Reinsurance 81
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.
44
45
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
Citizens, Inc.:
We have audited the consolidated financial statements of Citizens, Inc. and
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 generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Citizens,
Inc. and subsidiaries as of December 31, 1998 and 1997, and the results of
their operations and their cash flows for each of the years in the three-year
period ended December 31, 1998, in conformity with generally accepted
accounting principles. 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
Dallas, Texas
March 18, 1999
45
46
CITIZENS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
DECEMBER 31, 1998 AND 1997
ASSETS 1998 1997
------ ------------ ------------
Investments:
Fixed maturities held-to-maturity,
at amortized cost $ 5,606,374 $ 5,617,131
Fixed maturities available-for-sale at fair value 146,645,842 133,021,681
Equity securities available-for-sale, at fair value 862,287 978,391
Mortgage loans on real estate 1,560,757 1,287,295
Policy loans 20,996,919 20,466,184
Guaranteed student loans 4,673 81,681
Other long-term investments 595,271 899,329
Short-term investments 300,000 300,000
------------ ------------
Total investments 176,572,123 162,651,692
Cash and cash equivalents 9,868,728 6,454,956
Other receivables 433,320 1,007,878
Accrued investment income 1,806,065 2,010,512
Reinsurance recoverable 1,755,561 2,069,423
Deferred policy acquisition costs 37,259,386 37,107,070
Other intangible assets 2,289,725 2,596,925
Deferred federal income tax 699,848 572,430
Cost of insurance acquired 8,290,853 10,639,667
Excess of cost over net assets acquired 8,375,799 17,466,123
Property, plant and equipment 5,155,088 5,795,573
Other assets 877,699 1,147,186
------------ ------------
$253,384,195 $249,519,435
============ ============
46
47
CITIZENS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL POSITION, CONTINUED
DECEMBER 31, 1998 AND 1997
LIABILITIES AND STOCKHOLDERS' EQUITY 1998 1997
------------------------------------ -------------- --------------
Liabilities:
Future policy benefit reserves:
Life insurance $ 147,170,436 $ 140,003,642
Annuities 3,675,937 3,819,861
Accident and health 9,329,956 8,295,539
Dividend accumulations 4,818,915 4,789,194
Premium deposits 2,013,274 2,010,102
Policy claims payable 4,801,548 3,488,484
Other policyholders' funds 1,632,662 1,873,588
-------------- --------------
Total policy liabilities 173,442,728 164,280,410
Other liabilities 2,067,392 2,703,346
Commissions payable 833,881 880,811
Notes payable 333,333 937,430
Federal income tax payable 1,534,269 762,992
Amounts held on deposit 268,913 372,748
-------------- --------------
Total liabilities 178,480,516 169,937,737
-------------- --------------
Stockholders' equity:
Common stock:
Class A, no par value, 50,000,000 shares
authorized 22,708,910 shares issued
in 1998 and 1997, including shares in
treasury of 1,943,822 in 1998 and 1997 52,790,643 52,790,643
Class B, no par value, 1,000,000 shares
authorized, 621,049 shares issued and
outstanding in 1998 and 1997 283,262 283,262
Retained earnings 20,135,464 26,856,157
Accumulated other comprehensive income:
Unrealized investment gain 3,623,464 1,580,790
-------------- --------------
76,832,833 81,510,852
Treasury stock, at cost (1,929,154) (1,929,154)
-------------- --------------
Total stockholders' equity 74,903,679 79,581,698
-------------- --------------
Commitments and contingencies
$ 253,384,195 $ 249,519,435
============== ==============
See accompanying notes to consolidated financial statements.
47
48
CITIZENS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
1998 1997 1996
------------ ------------ ------------
Revenues:
Premiums:
Life insurance $ 49,032,491 $ 49,696,698 $ 49,873,673
Accident and health 9,857,844 5,299,783 4,040,688
Annuity and universal life
considerations 263,994 366,135 389,084
Net investment income 11,279,125 10,038,736 9,185,506
Realized gains (losses) 1,614,388 (320,125) 226,212
Other income 664,084 23,945 136,566
Interest expense (27,011) (77,874) (29,569)
------------ ------------ ------------
Total revenues 72,684,915 65,027,298 63,822,160
Benefits and expenses:
Insurance benefits paid or provided:
Increase in future
policy benefit reserves 8,279,056 8,958,166 8,198,243
Policyholders' dividends 3,025,746 2,782,215 2,363,201
Claims and surrenders 31,592,740 27,852,907 25,919,054
Annuity expenses 436,030 361,862 684,440
------------ ------------ ------------
Total insurance benefits paid
or provided 43,333,572 39,955,150 37,164,938
Commissions 12,501,426 11,918,192 12,447,664
Other underwriting, acquisition
and insurance expenses 11,079,065 6,992,402 9,500,973
Capitalization of deferred policy
acquisition costs (7,941,829) (9,804,022) (10,531,222)
Amortization of deferred policy
acquisition costs 7,789,513 9,630,705 10,221,917
Amortization of cost of insurance
acquired and excess of cost
over net assets acquired 11,600,433 2,305,127 1,398,859
------------ ------------ ------------
Total benefits and expenses 78,362,180 60,997,554 60,203,129
------------ ------------ ------------
(Continued)
48
49
CITIZENS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS, CONTINUED
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
1998 1997 1996
------------ ------------ ------------
Income (loss) before federal income
tax $ (5,677,265) $ 4,029,744 $ 3,619,031
Federal income tax expense 1,043,428 604,221 1,405,305
------------ ------------ ------------
Net income (loss) $ (6,720,693) $ 3,425,523 $ 2,213,726
============ ============ ============
Basic and diluted earnings (loss)
per share of common stock $ (.31) $ .16 $ .11
============ ============ ============
See accompanying notes to consolidated financial statements.
49
50
CITIZENS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY AND COMPREHENSIVE INCOME (LOSS)
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
COMMON STOCK ACCUMULATED
OTHER TOTAL
-------------------------- RETAINED COMPREHENSIVE TREASURY STOCKHOLDERS'
CLASS A CLASS B EARNINGS INCOME STOCK EQUITY
------------ ------------ ------------ ------------ ----------- ------------
BALANCE AT DECEMBER 31, 1995 $ 44,007,339 $ 283,262 $ 21,216,908 $ 1,267,747 $(2,062,266) $ 64,712,990
------------ ------------ ------------ ------------ ----------- ------------
Comprehensive income:
Net income -- -- 2,213,726 -- -- 2,213,726
Unrealized investment gains, net -- -- -- (1,977,913) -- (1,977,913)
------------ ------------ ------------ ------------ ----------- ------------
Comprehensive income -- -- 2,213,726 (1,977,913) -- 235,813
Acquisition of IIH 1,542,501 -- -- -- -- 1,542,501
Sale of stock 445,462 -- -- -- -- 445,462
Stock issuance costs (157,500) -- -- -- -- (157,500)
Exercise of options 103,750 -- -- -- -- 103,750
------------ ------------ ------------ ------------ ----------- ------------
BALANCE AT DECEMBER 31, 1996 $ 45,941,552 $ 283,262 $ 23,430,634 $ (710,166) $(2,062,266) $ 66,883,016
------------ ------------ ------------ ------------ ----------- ------------
Comprehensive income:
Net income -- -- 3,425,523 -- -- 3,425,523
Unrealized investment gains, net -- -- -- 2,290,956 -- 2,290,956
------------ ------------ ------------ ------------ ----------- ------------
Comprehensive income -- -- 3,425,523 2,290,956 -- 5,716,479
Acquisition of minority interest in FAIC 932,584 -- -- -- 133,112 1,065,696
Acquisition of AIN 5,320,895 -- -- -- -- 5,320,895
Acquisition of NSLIC 700,000 -- -- -- -- 700,000
Stock options exercised 130,500 -- -- -- -- 130,500
Stock issuance costs (234,888) -- -- -- -- (234,888)
------------ ------------ ------------ ------------ ----------- ------------
BALANCE AT DECEMBER 31, 1997 $ 52,790,643 $ 283,262 $ 26,856,157 $ 1,580,790 $(1,929,154) $ 79,581,698
------------ ------------ ------------ ------------ ----------- ------------
Comprehensive income:
Net loss -- -- (6,720,693) -- -- (6,720,693)
Unrealized investment gains, net -- -- -- 2,042,674 -- 2,042,674
------------ ------------ ------------ ------------ ----------- ------------
Comprehensive loss -- -- (6,720,693) 2,042,674 -- (4,678,019)
------------ ------------ ------------ ------------ ----------- ------------
BALANCE AT DECEMBER 31, 1998 $ 52,790,643 $ 283,262 $ 20,135,464 $ 3,623,464 $(1,929,154) $ 74,903,679
============ ============ ============ ============ =========== ============
See accompanying notes to consolidated financial statements.
50
51
CITIZENS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
1998 1997 1996
------------ ------------ ------------
Cash flows from operating activities:
Net income (loss) $ (6,720,693) $ 3,425,523 $ 2,213,726
Adjustments to reconcile net income to
net cash provided by operating activities,
net of assets acquired:
Realized (gains) losses on sale of
investments and other assets
(1,614,388) 320,125 (226,212)
Accrued investment income 204,447 (236,828) 372,781
Net deferred policy acquisition costs (152,316) (173,317) (309,305)
Amortization of cost of insurance
acquired and excess cost over
net assets acquired 11,600,433 2,305,127 1,398,859
Change in:
Other receivables 574,558 (134,853) 626,300
Future policy benefit reserves 8,057,287 9,511,158 8,357,859
Other policy liabilities 1,105,031 (291,121) 34,343
Deferred federal income tax (1,477,949) (1,008,907) (407,226)
Federal income tax 771,277 1,120,600 (1,368,629)
Commissions payable and other liab (682,884) (569,763) 226,675
Amounts held on deposit (103,835) 204,491 (99,348)
Other, net 1,574,659 (544,901) 1,124,509
------------ ------------ ------------
Net cash provided by
operating activities
13,135,627 13,927,334 11,944,332
------------ ------------ ------------
Cash flows from investing activities:
Sale of fixed maturities available for sale 28,476,347 19,967,749 16,403,929
Maturity of fixed maturities available for sale 688,037 3,596,134 5,811,179
Purchase of fixed maturities available for sale (39,392,056) (36,553,342) (33,759,945)
Sale of equity securities 151,923 619,277 66,251
Purchase of equity securities -- (511,231) --
Principal payments on mortgage loans 391,538 510,561 391,804
Mortgage loans funded (665,000) (125,334) (203,718)
Guaranteed student loans funded (32,338) (60,131) (100,902)
Guaranteed student loans sold 119,346 277,133 135,606
Purchase of short-term investments -- (100,000) (200,000)
Sale of other long-term investments and property, plant
and equipment 2,702,877 21,291 (303,567)
(Continued)
51
52
CITIZENS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS, CONTINUED
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
1998 1997 1996
------------ ------------ ------------
Cash and short-term investments
provided by mergers -- 834,290 355,654
Acquisition of NSLIC -- (1,000,000) --
Increase in policy loans (net) (530,735) (638,141) (801,105)
Purchase of other long-term investments and
property, plant and equipment (1,027,697) (197,286) (691,632)
------------ ------------ ------------
Net cash used by investing activities (9,117,758) (13,359,030) (12,896,446)
------------ ------------ ------------
Cash flows from financing activities:
Payments on notes payable (604,097) (94,343) (603,068)
Sale of stock, net -- (104,388) 391,712
------------ ------------ ------------
Net cash provided (used) by
financing activities (604,097) (198,731) (211,356)
------------ ------------ ------------
Net increase (decrease) in cash and
cash equivalents 3,413,772 369,573 (1,163,470)
------------ ------------ ------------
Cash and cash equivalents at
beginning of year 6,454,956 6,085,383 7,248,853
------------ ------------ ------------
Cash and cash equivalents
at end of year 9,868,728 6,454,956 6,085,383
============ ============ ============
Supplemental
1998 1997 1996
------------ ------------ ------------
Cash paid during the year for:
Interest $ 41,650 $ 77,874 $ 38,826
------------ ============ ============
Income taxes $ 1,750,100 $ 800,000 $ 3,195,245
============ ============ ============
52
53
CITIZENS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS, CONTINUED
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
Supplemental disclosures of non-cash investing and financing activities:
The Company issued Class A stock and cash to purchase all of the
capital stock of AIN, NSLIC, and the minority ownership in FAIC in 1997 and IIH
in 1996. In conjunction with the acquisitions, liabilities were assumed as
follows:
1997 1996
------------ ------------
Fair value of tangible assets acquired $ 9,726,825 $ 2,381,252
Fair value of intangible assets acquired, gross
6,795,488 614,665
------------ ------------
Net assets acquired 16,522,313 2,995,917
Capital stock issued and cash paid (8,086,591) (1,542,501)
------------ ------------
Liabilities assumed $ 8,435,722 $ 1,453,416
============ ============
Issuance of 134,125 treasury shares in 1997
$ 133,112 $ --
============ ============
See accompanying notes to consolidated financial statements.
53
54
CITIZENS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998, 1997 AND 1996
(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), National Security Life and
Accident Insurance Company (NSLIC), United Security Life Insurance
Company (USLIC) and Central Investors Life Insurance Company of
Illinois (CILIC). Citizens and its 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 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.
Citizens provides life and health insurance policies through four
of its subsidiaries - CICA, USLIC, NSLIC and CILIC. CICA sells
ordinary whole-life policies internationally, burial insurance,
pre-need policies, accident and health specified disease, hospital
indemnity, and accidental death policies, throughout the southern
United States and USLIC and NSLIC sell participating whole-life
policies and specialty individual accident and health policies.
CILIC does not actively market insurance policies, but does
administer 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.
54
55
(b) BASIS OF PRESENTATION
The accompanying consolidated financial statements of the Company
and its wholly-owned subsidiaries have been prepared in conformity
with generally accepted accounting principles (GAAP). All
significant intercompany accounts and transaction have been
eliminated.
(C) INVESTMENTS, OTHER THAN AFFILIATES
Investments are shown on the following basis:
1. Fixed maturities, primarily consisting of bonds 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.
Unrealized appreciation (depreciation) of equity securities
and fixed maturities held as available-for-sale are shown
as a separate component of stockholders' equity, net of
tax, and is not included in the determination of net
income. The unrealized holding gains or losses included in
the separate component of equity for securities transferred
from available-for-sale to held-to-maturity are maintained
and amortized into earnings over the remaining life of the
security as an adjustment to yield in a manner consistent
with the amortization or accretion of premium or discount
on the associated security.
2. Equity securities include non-redeemable preferred stock
and are reported at fair value.
3. 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, 1998 and 1997. Guaranteed student loans had an
allowance for uncollectible amounts of $10,000 at December
31, 1997.
4. Other long-term investments consist primarily of real
estate which 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.
5. Short-term investments consist of treasury bills and
commercial paper with maturities of greater than ninety
days but less than one year, or commercial paper, and are
carried at cost, which approximates fair market value.
55
56
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 are 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 $8,745,400 at December
31, 1998, and $10,652,298 at December 31, 1997, on deposit with
various state regulatory authorities to fulfill statutory
requirements.
The Company holds no derivative investments.
(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 which 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.
56
57
The Company uses the factor method to determine the amount of
costs to be capitalized and the ending asset balance. This method
limits the amount of deferred cost to their estimated realizable
value.
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.
(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 (see Note 4).
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.
(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 over 10 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.
57
58
(h) PARTICIPATING POLICIES
At December 31, 1998 and 1997, participating business approximated
59% and 82%, respectively, of life insurance in-force and premium
income. The amount of dividends to be paid is determined annually
by the Board of Directors.
58
59
(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, 1998, 1997 and 1996 were 21,386,137,
20,868,921, and 20,236,469, respectively.
(j) INCOME TAXES
For the years ended December 31, 1998 and 1997 the Company files
six separate tax returns as follows: 1) Citizens, Inc., CICA and
all direct non-life subsidiaries, excluding FAIC and AIN, 2) FAIC
and its subsidiaries, 3) AIN, 4) USLIC, 5) NSLIC and 6) CILIC.
For the year ended December 31, 1996 the Company filed three
separate tax returns as follows: 1) Citizens, Inc., CICA, and all
direct non-life subsidiaries, excluding FAIC, 2) CILIC, and 3)
FAIC and its subsidiaries.
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.
(k) ACCOUNTING PRONOUNCEMENTS
In 1998, the Company adopted and implemented the provisions of
SFAS No. 131 "Disclosures about Segments of an Enterprise and
Related Information." This Statement established standards for
reporting information about a Company's operating segments. The
adoption of SFAS No. 131 resulted in revised and additional
disclosures but had no effect on the financial position, results
of operations or liquidity of the Company.
In June 1998, the FASB issued SFAS No. 133 "Accounting for
Derivative Instruments and Hedging Activities," which is effective
January 1, 2000. SFAS No. 133 will not impact the Company since
they intend to not invest in derivatives.
On January 1, 1998, the Company adopted SFAS No. 130 "Reporting
Comprehensive Income" and restated prior years' financial
statements to conform to the reporting standard. SFAS No. 130
establishes standards for reporting and displaying comprehensive
income and its components in a full set of general-purpose
financial statements. Comprehensive income includes all changes in
equity during a period except those resulting from investments by
shareholders and distributions to
59
60
shareholders. The adoption of SFAS No. 130 resulted in revised and
additional disclosures, but had no effect on the financial
position, results of operations or liquidity of the Company.
In February 1997, the Financial Accounting Standards Board (FASB)
issued Statement of Financial Accounting Standards (SFAS) No. 128
"Earnings per Share". SFAS No. 128 establishes the standards for
computing and presenting earnings per share ("EPS"). This
statement replaces the presentation of primary EPS with a
presentation of basic EPS and requires dual presentation of basic
and diluted EPS. SFAS No. 128 is effective for fiscal years ending
after December 15, 1997. Implementation did not have a material
impact on the Company's earnings per share.
In December 1997, the AICPA issued Statement of Position ("SOP")
97-3. SOP 97-3 provides (1) guidance for determining when an
entity should recognize a liability for guaranty-fund and other
insurance-related assessments, (2) guidance on how to measure the
liability, (3) guidance on when an asset may be recognized for a
portion or all of the assessment liability or paid assessment that
can be recovered through premium tax offsets or policy surcharges,
and (4) requirements for disclosure of certain information. This
SOP is effective for financial statements for fiscal years
beginning after December 15, 1998. The Company does not anticipate
implementation of SOP 97-3 to have a material impact on the
Company's financial statements.
In March 1998, the AICPA issued SOP 98-1. "Accounting for the
Costs of Computer Software Development or Obtained for Internal
Use." This SOP provides guidance for determining whether costs of
software developed or obtained for internal use should be
capitalized or expensed as incurred. In the past, the Company has
expensed such costs as they were incurred. This SOP is also
effective for fiscal years beginning December 15, 1998. The
Company is currently completing its evaluation of the financial
impact as well as the changes to its related disclosures.
(l) CASH EQUIVALENTS
The Company considers as cash equivalents all securities whose
duration does not exceed ninety 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
generally accepted accounting principles requires management to
make estimates and assumptions that
60
61
affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of 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 1997 and 1996
amounts to conform with the 1998 presentation.
61
62
(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, 1998 and 1997, are as
follows:
1998
------------------------------------------------------
GROSS GROSS
UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
------------ ------------ ------------ ------------
Fixed maturities held-to-maturity:
US Treasury securities $ 5,606,374 $ 562,626 $ -- 6,169,000
============ ============ ============ ============
Fixed maturities available-for-sale:
US Treasury securities and
obligations of US government
corporations and agencies 44,081,875 1,821,645 65,070 45,838,450
Public Utilities 2,944,282 67,591 16,245 2,995,628
Debt securities issued by States
of the United States and political
subdivisions of the States
5,506,803 290,026 2,829 5,794,000
Corporate securities 14,540,959 928,747 31,986 15,437,720
Mortgage-backed securities 74,128,842 2,577,863 126,661 76,580,044
------------ ------------ ------------ ------------
Total fixed maturities
available-for-sale $141,202,761 $ 5,685,872 $ 242,791 $146,645,842
============ ============ ============ ============
Total equity securities
available-for-sale $ 815,271 $ 76,572 $ 29,556 $ 862,287
============ ============ ============ ============
1997
------------------------------------------------------
GROSS GROSS
UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
------------ ------------ ------------ ------------
Fixed maturities held-to-maturity:
US Treasury securities $ 5,617,131 $ 86,869 $ -- $ 5,704,000
============ ============ ============ ============
Total
Fixed maturities available-for-sale:
US Treasury securities and
obligations of US government
corporations and agencies 65,413,351 961,435 398,435 65,976,351
Public Utilities 5,227,886 42,574 67,761 5,202,699
Debt securities issued by States
of the United States and
political subdivisions of the
States 1,192,979 75,127 -- 1,268,106
62
63
Debt securities issued by
foreign governments 207,807 7,373 -- 215,180
Corporate securities 12,140,899 463,698 19,474 12,585,123
Mortgage-backed securities 46,438,498 1,477,627 141,903 47,774,222
------------ ------------ ------------ ------------
Total fixed maturities
available-for-sale $130,621,420 $ 3,027,834 $ 627,573 $133,021,681
============ ============ ============ ============
Total equity securities
available-for-sale $ 983,513 $ 49,226 $ 54,348 $ 978,391
============ ============ ============ ============
The amortized cost and fair value of fixed maturities at December 31,
1998, 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 $5,606,374 $6,169,000
========== ==========
63
64
FIXED MATURITIES AVAILABLE-FOR-SALE
AMORTIZED
COST FAIR VALUE
------------ ------------
Due in one year or less $ 1,802,690 $ 1,821,676
Due after one year through five years 16,163,912 16,690,404
Due after five years through ten years 16,171,951 16,523,648
Due after ten years 32,935,366 35,030,070
------------ ------------
Mortgage-backed securities 74,128,842 76,580,044
------------ ------------
Totals $141,202,761 $146,645,842
============ ============
The Company had no investments in any one entity which exceeded 10% of
stockholders' equity at December 31, 1998 other than investments
guaranteed by the U.S. Government.
The Company's investment in mortgage loans is concentrated 30% in
Colorado, 41% in Texas, 28% in Mississippi and 1% in other states as of
December 31, 1998.
Major categories of net investment income are summarized as follows:
YEAR ENDED DECEMBER 31
--------------------------------------------
1998 1997 1996
------------ ------------ ------------
Investment income on:
Fixed maturities $ 9,070,636 $ 8,086,920 $ 6,999,425
Equity securities 61,623 37,042 --
Mortgage loans on real estate 145,325 140,629 178,330
Policy loans 1,492,733 1,425,301 1,442,423
Short-term investments 207,159 197,912 526,910
Other 1,310,075 1,156,090 910,223
------------ ------------ ------------
12,287,551 11,043,894 10,057,311
Investment expenses (1,008,426) (1,005,158) (871,805)
------------ ------------ ------------
Net investment income $ 11,279,125 $ 10,038,736 $ 9,185,506
============ ============ ============
Equity securities of $58,874 as of December 31, 1998, did not produce income
during the preceding 12 months.
64
65
Proceeds and gross realized gains (losses) from sales and maturities of fixed
maturities available-for-sale for 1998, 1997 and 1996 are summarized as follows:
YEAR ENDED DECEMBER 31,
--------------------------------------------
1998 1997 1996
------------ ------------ ------------
Proceeds $ 29,164,384 $ 23,563,883 $ 22,215,108
============ ============ ============
Gross realized gains $ 452,105 $ 373,557 $ 175,125
============ ============ ============
Gross realized (losses) $ (45,268) $ (178,296) $ (199,890)
============ ============ ============
Proceeds and gross realized gains (losses) from sales of equity securities
available-for-sale for 1998, 1997 and 1996 are summarized as follows:
YEAR ENDED DECEMBER 31,
--------------------------------------------
1998 1997 1996
------------ ------------ ------------
Proceeds $ 151,923 $ 619,277 $ 66,251
============ ============ ============
Gross realized gains $ -- $ -- $ --
============ ============ ============
Gross realized (losses) $ (16,319) $ (482,792) $ --
============ ============ ============
Realized gains (losses) are as follows:
YEAR ENDED DECEMBER 31,
--------------------------------------------
1998 1997 1996
------------ ------------ ------------
Realized gains (losses):
Fixed maturities $ 406,837 $ 195,261 $ (24,765)
Equity securities (16,319) (480,819) --
Other 1,223,870 (34,567) 250,977
------------ ------------ ------------
Net realized gains (losses) on
investments $ 1,614,388 $ (320,125) $ 226,212
============ ============ ============
(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,
--------------------------------------------
1998 1997 1996
------------ ------------ ------------
Balance at beginning of period $ 10,639,667 $ 7,219,594 $ 7,522,827
Increase (decrease) related to acquisitions (877,904) 4,253,354 121,000
Interest 797,975 541,470 564,212
Amortization (2,268,885) (1,374,751) (988,445)
Balance at end of period -- -- --
$ 8,290,853 $ 10,639,667 $ 7,219,594
============ ============ ============
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%.
65
66
Estimated amortization in each of the next five years is as follows.
These amounts are greater than the carrying value due to interest
accretion. Actual future amortization will differ from these estimates
due to variances from estimated future withdrawal assumptions.
1999 $1,566,486
2000 1,258,130
2001 1,125,372
2002 1,002,290
2003 920,128
Thereafter 2,418,447
Excess of cost over net assets acquired is summarized as follows:
YEAR ENDED DECEMBER 31,
--------------------------------------------
ACCUMULATED
GROSS AMORTIZATION NET
------------ ------------ ------------
Balance at January 1, 1996 $ 17,819,626 $ (695,145) $ 17,124,481
Increase related to acquisitions 419,879 -- 419,879
Amortization -- (787,927) (787,927)
------------ ------------ ------------
Balance at December 31, 1996 18,239,505 (1,483,072) 16,756,433
Increase related to acquisitions 1,939,837 -- 1,939,837
Amortization -- (1,230,147) (1,230,147)
------------ ------------ ------------
Balance at December 31, 1997 20,179,342 (2,713,219) 17,466,123
Increase related to acquisitions 852,498 -- 852,498
Impairment loss (9,500,000) -- (9,500,000)
Amortization -- (442,822) (442,822)
------------ ------------ ------------
Balance at December 31, 1998 $ 11,531,840 $ (3,156,041) $ 8,375,799
============ ============ ============
During 1998, the Company recognized an impairment loss in the amount of
$9,500,000 relating to the goodwill recorded in the 1995 acquisition of
ALLIC. The impairment loss was the result of a decline in production from
agents formerly associated with ALLIC.
The acquisition of NSLIC was consummated on November 20,1997, therefore
the balance of cost of insurance acquired as of December 31, 1997 was
management's estimate based on the information available as of December
31, 1997. The Company revised its estimate related to this acquisition in
1998, which resulted in a reallocation of the purchase price.
(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.
The following table presents information on changes in the liability for
accident and health policy and contract claims for the years ended
December 31,1998 and 1997.
66
67
1998 1997
------------ ------------
Policy and contract claims payable at January 1 $ 2,083,591 $ 1,238,729
Policy and contract claims payable, acquired through
acquisition -- 686,903
Add claims incurred, related to:
Current year 7,442,563 3,388,328
Prior years (1,281,597) (424,692)
------------ ------------
6,160,966 2,963,636
Deduct claims paid, related to:
Current year 5,295,960 2,190,820
Prior years 557,979 614,857
------------ ------------
5,853,939 2,805,677
Policy and contract claims payable, December 31 $ 2,390,618 2,083,591
============ ============
In 1998 and 1997, as a result of changes in estimates of insured events
in prior years, the liability for policy and contract claims decreased.
(5) REINSURANCE
In the normal course of business, the Company reinsures portions of
certain policies that it underwrites to limit disproportionate risks. The
Company retains varying amounts of individual insurance up to a maximum
retention of $75,000 on any life and $35,000 on health policies. Amounts
not retained are ceded to other insurance enterprises or reinsurers,
through yearly renewable term insurance or coinsurance contracts. Risks
are reinsured with other companies to permit the recovery of a portion of
any direct losses. 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 1998 and 1997 is summarized as
follows:
1998 1997
---------------- ----------------
Aggregate assumed life insurance in force $ 333,719,000 $ 334,953,000
================ ================
Aggregate ceded life insurance in force $ (306,070,000) $ (318,630,000)
================ ================
Total life insurance in force $ 2,024,756,000 $ 2,250,197,000
================ ================
67
68
Premiums and claims and surrenders assumed and ceded for the years ended
December 31, 1998, 1997 and 1996:
1998 1997 1996
------------ ------------ ------------
Premiums assumed $ 231,410 $ 284,632 $ 309,953
============ ============ ============
Premiums ceded $ (3,368,690) $ (2,257,556) $ (2,582,599)
============ ============ ============
Claims and surrenders assumed $ 234,037 $ 269,000 $ 314,000
============ ============ ============
Claims and surrenders ceded $ (1,690,643) $ (976,000) $ (264,000)
============ ============ ============
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) NOTES PAYABLE
Notes payable as of December 31, 1998 and 1997 consist of:
1998 1997
----------- -------------
Note A; payable to bank, 7%, dated June 20, 1988, payable in annual
installments of $66,667 beginning June 30, 1989, with remainder due June
30, 2003. $ 333,333 $ 400,000
Note B; payable to bank, prime plus 1.5%, payable in monthly installments
of $5,751 including interest, with a balloon payment due
on December 19, 1999. -- 537,430
----------- -------------
$ 333,333 $ 937,430
============= =============
Note A is secured by proceeds from the surplus debenture between CICA and
the Company.
Note B was collateralized by property. The property was disposed of in
1998 and the proceeds were applied to the note.
(7) STOCKHOLDERS' EQUITY AND RESTRICTIONS
The two classes of stock of Citizens are equal in all respects, except
(a) 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; and (b) each Class A share receives twice the cash dividends
paid on a per share basis to the Class B common stock.
68
69
Generally, the net assets of the insurance subsidiaries available for
transfer to the Company 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 operation and surplus of the
individual insurance companies as of and for the year ended December 31,
1998 approximately $5,489,797 of dividends could be paid to the Company
without prior regulatory approval.
CICA, USLIC, NSLIC, and CILIC 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 and CILIC
exceeded levels requiring company or regulatory action.
The RBC as calculated for USLIC and NSLIC at December 31, 1998, failed to
maintain the minimum policyholder surplus equivalent under the RBC
calculation. In 1999, CICA contributed $600,000 and $500,000 in capital
to USLIC and NSLIC, respectively. USLIC and NSLIC expect to revise their
1998 statutory annual statements filed with regulatory authorities based
upon an error in the calculation of claim reserves at December 31, 1998.
The anticipated reduction in claim reserves and the additional capital
contributions made during 1999 will be sufficient for USLIC and NSLIC to
exceed the RBC levels as required by the National Association of
Insurance Commissioners.
(8) STOCK OPTIONS
During 1989, the Company entered into an agreement granting, a financial
public relations consultant providing services to the Company, the right
and option to purchase 100,000 shares of Class A no par common stock of
the Company at $2.50 per share, the fair market value of the common stock
at the date of the agreement. The option which would have expired on
February 8, 1994 was extended for an additional 36 months during 1993.
During 1996, options to purchase 41,500 shares were exercised. During
1997, 52,200 shares were issued in conjunction with the exercise of this
option. The remaining options expired in 1997. The outstanding options
had no impact on diluted earnings per share for the years ended December
31, 1996.
(9) MERGER AND ACQUISITIONS
During March 1997, the Company acquired the 5.52% minority interest in
FAIC, a 94.8% subsidiary of ALFC. The Company issued 134,125 shares of
the Company's Class A stock to consummate this transaction. The excess of
cost over net assets acquired amounted to $1,065,696 of which $399,353
was written off concurrent with the acquisition. Effective January 1,
1997, AFLC was merged into Citizens and FAIC was merged into CICA.
On October 28, 1996, CICA announced that it had signed definitive written
agreements for the acquisition of AIN, a Jackson, Mississippi, based life
insurance holding company and
69
70
its wholly-owned subsidiary USLIC with $7.5 million in assets, $3.4
million of stockholders' equity, revenues of $3.2 million and $67 million
of life insurance in-force.
The AIN agreement provided that following the acquisition by CICA, AIN
shareholders will receive 1 share of Citizens, Inc. Class A Common Stock
for each 7.2 shares of AIN Common Stock owned. The Company issued
approximately 700,000 Class A common shares in connection with the
transaction, which was accounted for as a purchase. The transaction was
consummated on June 19, 1997. During 1998, AIN was liquidated and USLIC
was merged into CICA.
On August 13, 1997, Citizens signed a definitive agreement to acquire
100% of the outstanding shares of NSLIC of Arlington, Texas for $1.7
million in cash and restricted stock. The transaction, which was
accounted for as a purchase, was consummated on November 20, 1997.
In conjunction with the acquisition the Company and two executives of
NSLIC executed employment agreements which require the executives to
provide services to the Company for 42 months. The employees will be
compensated $8,333 a month for the first twelve months escalating to
$12,500 a month for the remaining thirty months.
The pro-forma unaudited results of operations for the years ended
December 31, 1997 and 1996, assuming the purchase of AIN, NSLIC and the
minority ownership in FAIC, had been consummated at the beginning of
fiscal 1996, are presented below. Adjustments have been made for
amortization of amounts assigned to the fair value of historical assets.
It is assumed in the pro-forma basic earnings per share calculations that
the shares issued in connection with the acquisitions were outstanding
from the beginning of the period presented (stated in thousands other
than per share amounts).
1997 1996
---- ----
Revenue $ 70,931 $ 72,903
Net income 3,037 2,872
Basic earnings per share $ .14 $ .13
The IIH agreement closed on March 12, 1996 and provided that Investors'
shareholders would receive one share of Citizens' Class A Common Stock
for each eight shares of Investors Common Stock owned. Additionally,
Citizens acquired all shares of CILIC (a 94% owned subsidiary of
Investors) not already owned by Investors, based upon an exchange ratio
of one share of Citizens' Class A common stock for each four shares of
Central Investors owned. The acquisition of these two companies involved
the issuance of approximately 171,000 of Citizens' Class A shares which
was accounted for as a purchase. During 1998, IIH was liquidated and
CILIC was merged into CICA.
On September 15, 1998, Citizens announced that a definitive agreement had
been reached between Citizens and First Investors Group, Inc. (Investors)
of Springfield, Illinois wherein Citizens would acquire 100% of the
outstanding shares of Investors for approximately 610,000 shares of
Citizens Class A Common stock. Investors is the parent of Excalibur
70
71
Insurance Corporation (Excalibur), also of Springfield, Illinois.
This transaction closed on January 26, 1999.
Pursuant to the terms of the Agreement, which was approved by Investors'
shareholders and regulatory authorities, Citizens issued one share of
Citizens Class A Common stock for each 6.6836 shares of Investors common
and preferred stock issued and outstanding. Citizens issued approximately
610,000 shares of its Class A Common stock to consummate the transaction.
(10) CONTINGENCIES
The Company is a party to various legal proceedings incidental to its
business. Contingent liabilities that might arise from litigation are not
considered material in relation to the financial position 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.
(11) SEGMENT INFORMATION
The Company has two reportable segments identified by geographic area:
International Business and Domestic Business. International Business
consists of ordinary whole-life business. International sales are
throughout Latin America with policies sold to residents of Central and
South America. The Company has no assets, offices or employees outside of
the United States of America (U.S.) and requires that all transactions be
in U.S. dollars paid in the U.S. Domestic Business consisting of
traditional life and burial insurance, pre-need policies, accident and
health specified disease, hospital indemnity and accidental death
policies are sold throughout the Southern U.S.
The accounting policies of the segments are the same as those described
in the summary of significant accounting policies. The Company evaluates
performance based on GAAP net income (loss) before federal income taxes
for its two reportable segments.
Geographic Areas - The following summary represents financial data of the
Company's continuing operations based on their location.
1998 1997 1996
----------- ----------- -----------
REVENUES
U.S. $21,189,781 $13,137,109 $ 3,870,814
Non-U.S. 51,495,134 51,890,189 59,951,346
----------- ----------- -----------
Total Revenues $72,684,915 $65,027,298 $63,822,160
=========== =========== ===========
71
72
The following summary represents revenues and pretax income from
continuing operations and identifiable assets for the Company's
reportable segments as of and for the years ended December 31, 1998, 1997
and 1996, is as follows:
YEARS ENDED DECEMBER 31 1998 1997 1996
------------- ------------- -------------
Revenue, excluding net investment income and
realized gain (loss) on investments
Domestic $ 17,430,945 $ 11,173,711 $ 3,299,993
International 42,360,457 44,134,976 51,110,449
------------- ------------- -------------
Total consolidated revenue $ 59,791,402 $ 55,308,687 $ 54,410,442
============= ============= =============
Net investment income:
Domestic 3,288,195 2,028,071 557,101
International 7,990,930 8,010,665 8,628,405
------------- ------------- -------------
Total consolidated net investment income $ 11,279,125 $ 10,038,736 $ 9,185,506
============= ============= =============
Amortization expense:
Domestic 12,383,209 2,411,331 704,800
International 7,006,737 9,524,501 10,915,976
------------- ------------- -------------
Total consolidated amortization expense $ 19,389,946 $ 11,935,832 $ 11,620,776
============= ============= =============
Realized gain (loss) on investments
Domestic 470,641 (64,673) 13,720
International 1,143,747 (255,452) 212,492
------------- ------------- -------------
Total consolidated realized gain (loss)
on investments $ 1,614,388 $ (320,125) $ 226,212
============= ============= =============
Net income (loss) before federal income tax:
Domestic (1,655,089) 814,107 219,494
International (4,022,176) 3,215,637 3,399,537
------------- ------------- -------------
Total consolidated net income (loss)
before federal income taxes $ (5,677,265) $ 4,029,744 $ 3,619,031
============= ============= =============
Year Ended December 31 1998 1997
------------- -------------
Assets:
Domestic 80,069,406 78,848,141
International 173,314,789 170,671,294
------------- -------------
Total $ 253,384,195 $ 249,519,435
============= =============
72
73
(12) 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 are as follows:
1998 1997 1996
----------- ----------- -----------
Computed normal tax expense (benefit) $(1,930,270) $ 1,370,113 $ 1,230,470
Small life insurance company deduction (447,690) (441,356) (472,541)
Change in valuation allowance (24,479) (575,147) (10,097)
Small life deduction rate change -- -- 218,438
Amortization of excess of costs over
net assets acquired 3,444,038 481,728 331,373
Other 1,829 (231,117) 107,662
----------- ----------- -----------
Federal income tax expense $ 1,043,428 $ 604,221 $ 1,405,305
=========== =========== ===========
Income tax expense (benefit) for the years ended December 31, 1998, 1997
and 1996 consists of:
1998 1997 1996
----------- ----------- -----------
Current $ 2,521,377 $ 1,613,128 $ 1,812,531
Deferred (1,477,949) (1,008,907) (407,226)
----------- ----------- -----------
$ 1,043,428 $ 604,221 $ 1,405,305
=========== =========== ===========
73
74
The tax effects of temporary differences that give rise to significant portions
of the deferred tax assets and deferred tax liabilities at December 31, 1998 and
1997 are presented below.
1998 1997
----------- -----------
Deferred tax assets:
Future policy benefit reserves $14,568,354 $13,431,989
Net operating loss carryforwards and alternative minimum
tax credits 589,233 614,598
Other 1,109,691 1,078,423
----------- -----------
Total gross deferred tax assets 16,267,278 15,125,010
Less valuation allowance 173,350 197,829
----------- -----------
Net deferred tax assets $16,093,928 $14,927,181
----------- -----------
Deferred tax liabilities:
Deferred policy acquisition costs $12,388,415 $ 9,181,507
Cost of insurance acquired 97,920 2,132,016
Investments available for sale 1,866,633 814,347
Other 1,041,112 2,226,881
----------- -----------
Total gross deferred tax liabilities 15,394,080 14,354,751
----------- -----------
Net deferred tax asset $ 699,848 $ 572,430
=========== ===========
During 1998 the Company released the valuation allowance associated with ALFC
net operating losses as these losses can be utilized by Citizens, Inc. as a
result of the merger of these two entities.
The Company has established a valuation allowance for net operating losses of
IIH and other entities which may not be used prior to their expiration. The
Company and its subsidiaries have net operating losses at December 31, 1998
available to offset future taxable income of approximately $1,733,000 for
Federal income tax which expire through 2008. The net operating loss
carryforward is subject to limitations under Section 382 of the Internal Revenue
Code.
At December 31, 1998, 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, 1998 become taxable, the
tax computed at present rates would be approximately $1,119,000.
74
75
(13) 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 for the
financial assets and liabilities on the consolidated balance sheets at
each year-end were:
1998 1997
--------------------------- ---------------------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
------------ ------------ ------------ ------------
Financial assets:
Fixed maturities $152,252,216 $152,814,842 $138,638,812 $138,725,681
Equity securities 862,287 862,287 978,391 978,391
Cash and
short-term 10,168,728 10,168,728 6,754,956 6,754,956
investments
Mortgage Loans 1,560,757 1,560,757 1,287,295 1,287,295
Student Loans 4,673 4,673 81,681 81,681
Financial Liabilities:
Note Payable 333,333 333,333 937,430 937,430
Annuities 3,675,937 3,675,937 3,819,861 3,819,861
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 rate for these loans as of December 31, 1998,
was approximately 8.7% with maturities ranging from one to fifteen years.
Management believes that reported amounts approximate fair value.
Student loans are guaranteed by the government. Weighted average interest
rate for these loans as of December 31, 1998, was approximately 7.44%.
Management believes that the reported amounts approximate fair value as
these loans are sold as soon as possible.
The carrying value of the note payable approximates fair value as the
interest rate charged on the note payable is indexed with the prime rate.
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
75
76
adjusted by the Company to reflect market conditions. The fair values 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 7.15% as of
December 31, 1998 and 1997 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, and short-term investments, 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.
(14) 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, 1998
--------------------------------------------
PRE-TAX TAX NET
AMOUNT EFFECT AMOUNT
------------ ------------ ------------
Unrealized gain on securities:
Unrealized holding gain
arising during the period $ 3,485,479 $ (1,185,063) $ 2,300,416
Less: reclassification adjustment for
gains included in net income (390,518) 132,776 (257,742)
------------ ------------ ------------
Other comprehensive income $ 3,094,961 $ (1,052,287) $ 2,042,674
============ ============ ============
YEAR ENDED DECEMBER 31, 1997
-------------------------------------------
PRE-TAX TAX NET
AMOUNT EFFECT AMOUNT
------------ ------------ ------------
Unrealized gain on securities:
Unrealized holding gain
arising during the period $ 3,185,587 $ (1,083,099) $ 2,102,488
Add: reclassification adjustment for
losses included in net income 285,558 (97,090) 188,468
------------ ------------ ------------
Other comprehensive income $ 3,471,145 $ (1,180,189) $ 2,290,956
============ ============ ============
76
77
YEAR ENDED DECEMBER 31, 1996
--------------------------------------------
PRE-TAX TAX NET
AMOUNT EFFECT AMOUNT
------------ ------------ ------------
Unrealized gain on securities:
Unrealized holding (loss)
arising during the period $ (3,021,603) $ 1,027,345 $ (1,994,258)
Add: reclassification adjustment for
losses included in net income 24,765 (8,420) 16,345
------------ ------------ ------------
Other comprehensive (loss) $ (2,996,838) $ 1,018,925 $ (1,977,913)
============ ============ ============
(15) QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
The following table contains selected unaudited consolidated financial
data for each quarter.
1998
------------------------------------------------------------
FOURTH THIRD SECOND FIRST
QUARTER QUARTER QUARTER QUARTER
------------ ------------ ------------ ------------
Revenues $ 19,013,107 $ 19,049,146 $ 18,162,381 $ 16,460,281
Expenses 16,673,560 27,487,836 17,890,009 16,310,775
Other (733,120) (200,870) (72,516) (36,922)
Net income (loss) 1,606,377 (8,639,510) 199,856 112,584
Basic and diluted earnings
per share .08 (.40) .01 .01
1997
------------------------------------------------------------
FOURTH THIRD SECOND FIRST
QUARTER QUARTER QUARTER QUARTER
------------ ------------ ------------ ------------
Revenues $ 16,795,936 $ 18,172,671 $ 15,918,698 $ 14,139,993
Expenses 15,309,437 16,267,692 15,089,776 14,330,649
Other 178,033 (543,363) (307,863) 68,972
Net income 1,664,532 1,361,616 521,059 (121,684)
Basic and diluted earnings
per share .08 .06 .03 (.01)
1996
------------------------------------------------------------
FOURTH THIRD SECOND FIRST
QUARTER QUARTER QUARTER QUARTER
------------ ------------ ------------ ------------
Revenues $ 17,666,077 $ 16,976,294 $ 15,484,789 $ 13,695,000
Expenses 16,221,781 16,093,457 14,936,524 12,951,367
Other (542,568) (237,302) (366,799) (258,636)
Net income 901,728 645,535 181,466 484,997
Basic and diluted earnings
per share .04 .03 .01 .03
77
78
(16) YEAR 2000 ISSUES (UNAUDITED)
The Company has investigated the potential impact of the Year 2000 on its
systems, procedures, customers and business processes. The Year 2000
assessment provided information used to determine what system components
must be changed or replaced to minimize the impact of the calendar change
from 1999 to 2000.
The Company continues to use internal resources to modify, replace and
test the Year 2000 modifications. Management estimates 90% of the
identified modifications to mission critical systems and 60% of the
identified modifications to other systems have been completed for its
Year 2000 project. The project completion is scheduled to occur prior to
any anticipated impact on the Company operations. The total cost for the
project is negligible as it is being performed with existing staff, with
costs being expensed as incurred until completion.
The Company faces the risk that one or more of its critical suppliers or
customers (external relationships) will not be able to interact with the
Company due to the third party's inability to resolve their own Year 2000
issues. The Company has identified its external relationships and has
determined the overall Year 2000 readiness of its external relationships.
The Company has received information as to those parties' Year 2000 plans
and state of readiness. The Company has determined that all mission
critical systems are either Year 2000 compliant or can be circumvented
(at minimal cost and time) by using non-electronic transactions. In
addition, any other systems that were deemed to not be Year 2000
compliant, have been reported to have no loss of data or functionality.
The Company believes it has addressed its Year 2000 concerns. The Company
has begun to develop contingency and recovery plans aimed at ensuring the
continuity of critical business functions before, on and after December
31, 1999. The contingency and recovery planning is substantially
complete. The Year 2000 contingency plans will be reviewed periodically
throughout 1999 and revised as needed. The Company believes its Year 2000
contingency plan, coupled with existing "disaster recovery" and "business
resumption" plans, minimize the impact Year 2000 issues may have on the
organization.
78
79
SCHEDULE II
CITIZENS, INC. AND SUBSIDIARIES
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
CITIZENS, INC. (PARENT COMPANY)
STATEMENTS OF FINANCIAL POSITION
DECEMBER 31, 1998 AND 1997
1998 1997
------------ ------------
Assets
Investment in subsidiaries 71,163,025 76,379,058
Accrued investment income 14,410 17,254
Real estate 464,962 436,287
Cash 1,789,608 752,907
Notes receivable (1) 333,333 400,000
Other assets 1,536,456 2,072,751
------------ ------------
$ 75,301,794 $ 80,058,257
============ ============
Liabilities and Stockholders' Equity
Liabilities:
Notes payable $ 333,333 $ 400,000
Accrued expense and other 64,782 76,559
------------ ------------
$ 398,115 $ 476,559
Stockholders' equity:
Common stock:
Class A $ 52,790,643 $ 52,790,643
Class B 283,262 283,262
Retained earnings 20,135,464 26,856,157
Accumulated other comprehensive income:
Unrealized investment gain (loss) of securities held by
subsidiaries, net 3,623,464 1,580,790
Treasury stock (1,929,154) (1,929,154)
------------ ------------
74,903,679 79,581,698
------------ ------------
$ 75,301,794 $ 80,058,257
============ ============
(1) Eliminated in consolidation.
See accompanying independent auditors' report.
79
80
SCHEDULE II, CONTINUED
CITIZENS, INC. AND SUBSIDIARIES
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
CITIZENS, INC. (PARENT COMPANY)
STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)
YEARS ENDED DECEMBER 31, 1998 AND 1997 AND 1996
1998 1997 1996
------------ ------------ ------------
Revenues:
Management service fees (1) $ 13,033,492 $ 10,462,052 $ 10,428,468
Investment income (1) 79,882 125,746 83,957
Other 4,425 82,668 2,357
Realized gain (loss) -- -- 151,334
------------ ------------ ------------
13,117,799 10,670,466 10,666,116
------------ ------------ ------------
Expenses:
General 12,019,676 9,516,881 9,374,706
Interest 27,011 30,186 34,853
Taxes 533,098 323,635 447,450
------------ ------------ ------------
$ 12,579,785 $ 9,870,702 $ 9,857,009
------------ ------------ ------------
Income (loss) before equity in income of
unconsolidated subsidiaries 538,014 799,764 809,107
Equity in income (loss) of
unconsolidated subsidiaries (7,258,707) 2,625,759 1,404,619
------------ ------------ ------------
Net income (loss) $ (6,720,693) $ 3,425,523 $ 2,213,726
============ ============ ============
(1) Eliminated in consolidation.
See accompanying independent auditors' report.
80
81
SCHEDULE II, CONTINUED
CITIZENS, INC. AND SUBSIDIARIES
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
CITIZENS, INC. (PARENT COMPANY)
STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
1998 1997 1996
------------ ------------ ------------
Cash flows from operating activities:
Net income (loss) $ (6,720,693) $ 3,425,523 $ 2,213,726
Adjustments to reconcile net (loss) income to net cash
used by operating activities:
Realized gains on sales of investments -- -- (151,334)
Equity in net (income) loss of unconsolidated
subsidiaries 7,258,707 (2,625,759) (795,318)
Accrued expenses and other liabilities (11,777) (105,565) (604,315)
Accrued investment income 2,844 2,835 4,257
Other assets 536,295 (246,993) (393,323)
------------ ------------ ------------
Net cash provided by operating activities
1,065,376 450,041 273,693
------------ ------------ ------------
Cash flows from investing activities:
Acquisition of NSLIC -- (1,000,000) --
Capital contribution to subsidiaries -- (374,000) (400,000)
Cash provided by merger -- 540,450 --
Payments on notes receivable 66,667 69,198 152,267
Investment in real estate (28,675) (79,948) --
Sale of real estate -- -- 82,974
------------ ------------ ------------
Net cash provided (used) by investing
activities 37,992 (844,300) (164,759)
------------ ------------ ------------
Cash flows from financing activities:
Sale of common stock, net -- (104,388) 391,712
Payment on notes payable (66,667) (66,667) (66,666)
------------ ------------ ------------
Net cash provided (used) by financing
activities (66,667) (171,055) 325,046
------------ ------------ ------------
Net increase (decrease) in cash 1,036,701 (565,314) 433,980
Cash at beginning of year 752,907 1,318,221 884,241
------------ ------------ ------------
Cash at end of year $ 1,789,608 $ 752,907 $ 1,318,221
============ ============ ============
See accompanying independent auditors' report.
81
82
SCHEDULE IV
CITIZENS, INC. AND SUBSIDIARIES
REINSURANCE
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
CEDED ASSUMED PERCENTAGE
GROSS TO OTHER FROM OTHER NET OF AMOUNT
AMOUNT COMPANIES COMPANIES AMOUNT ASSUMED TO NET
-------------- -------------- -------------- -------------- --------------
Year ended December 31, 1998:
Life insurance in-force $2,340,744,000 $ 306,070,000 $ 333,719,000 $2,368,393,000 16.3%
============== ============== ============== ==============
Premiums:
Life insurance 50,569,111 1,768,030 231,410 49,032,491 .5%
Accident and health insurance 11,458,504 1,600,660 -- 9,857,844 --
-------------- -------------- -------------- --------------
Total premiums $ 62,027,615 3,368,690 231,410 58,890,335 .4%
============== ============== ============== ==============
Year ended December 31, 1997:
Life insurance in-force $2,250,197,000 $ 318,630,000 $ 334,953,000 $2,266,520,000 15.5%
============== ============== ============== ==============
Premiums:
Life insurance 51,364,382 1,952,316 284,632 49,696,698 .6%
Accident and health insurance 5,605,023 305,240 0 5,299,783 --
-------------- -------------- -------------- --------------
Total premiums $ 56,969,405 2,257,556 284,632 54,996,481 .5%
============== ============== ============== ==============
Year ended December 31, 1996:
Life insurance in-force $2,231,017,000 $ 296,378,000 $ 304,380,000 $2,239,019,000 13.7%
============== ============== ============== ==============
Premiums:
Life insurance 52,075,038 2,511,318 309,953 49,873,673 0.6%
Accident and health insurance 4,111,969 71,281 0 4,040,688 -%
-------------- -------------- -------------- --------------
Total premiums $ 56,187,007 2,582,599 309,953 53,914,361 0.6%
============== ============== ============== ==============
See accompanying independent auditors' report.
82
83
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 30, 1999 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 /s/ Harold E. Riley
- ------------------------------- -------------------------------------
Mark A. Oliver, Director Harold E. Riley, Chairman of the
Board and Director
/s/ Ralph M. Smith /s/ Joe R. Reneau
- ------------------------------- -------------------------------------
Ralph M. Smith, Director Joe R. Reneau, Director
/s/ James C. Mott /s/ Timothy T. Timmerman
- ------------------------------- -------------------------------------
James C. Mott, Director Timothy T. Timmerman, Director
/s/ Rick D. Riley /s/ Steve Shelton
- ------------------------------- -------------------------------------
Rick D. Riley, Director Steve Shelton, Director
/s/ T. Roby Dollar
- -------------------------------
T. Roby Dollar, Director
83
84
INDEX TO EXHIBITS
EXHIBIT PAGE
------- -----
Exhibit 3.2
Exhibit 21
Exhibit 23
Exhibit 27
84