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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, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
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Commission file number 1-13004
CITIZENS, INC.
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(Exact name of registrant as specified in its charter)
Colorado 84-0755371
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(State of incorporation) (IRS Employer Identification No.)
400 East Anderson Lane, Austin, Texas 78752
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(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
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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 .
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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
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As of March 1, 2001, aggregate market value of the Class A voting stock held by
non-affiliates of the Registrant was approximately $129,960,000.
DOCUMENTS INCORPORATED BY REFERENCE
Part III of this Report incorporates certain portions of the definitive proxy
material of the Registrant in respect of its 2001 Annual Meeting of
Shareholders.
Number of shares of common stock outstanding as of March 1, 2001
Class A: 24,396,564
Class B: 711,040
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PART I
ITEM 1. BUSINESS
(a) GENERAL DEVELOPMENT OF BUSINESS
Citizens, Inc. (Citizens) operates primarily as an insurance holding
company. It was incorporated in Colorado in 1977. Citizens is the
parent company that directly or indirectly owns 100% of Citizens
Insurance Company of America (CICA), Computing Technology, Inc. (CTI),
Insurance Investors, Inc. (III), Funeral Homes of America (FHA),
Central Investors Life Insurance Company of Illinois (CILIC), First
Investors Group, Inc. (Investors) and Excalibur Insurance Corporation
(Excalibur). Collectively, Citizens and its subsidiaries are referred
to herein as the "Company." Pertinent information relating to Citizens'
subsidiary companies is set forth below:
YEAR STATE OF BUSINESS
SUBSIDIARY INCORPORATED INCORPORATION ACTIVITY
- ---------- ------------ ------------- --------
CICA 1968 Colorado Life insurance
CILIC 1965 Illinois Life insurance
Investors 1996 Illinois Holding company
Excalibur 1996 Illinois Life insurance
CTI 1986 Colorado Data processing
III 1965 Texas Aircraft transportation
FHA 1989 Louisiana Funeral home
In June, 1997, CICA acquired American Investment Network, Inc. (AIN), a
life insurance holding company and United Security Life Insurance
Company (USLIC), its wholly-owned subsidiary, headquartered in Jackson,
Mississippi with $7.5 million in assets, $3.4 million of stockholders'
equity, annual revenues of $3.2 million and $67 million of life
insurance in-force. Subsequently, AIN was liquidated. USLIC was merged
into CICA in October, 2000.
To streamline corporate structure, in June, 1997, American Liberty
Financial Corporation (ALFC), a wholly owned subsidiary, was merged
into Citizens. American Liberty Life Insurance Company (ALLIC), a
subsidiary of ALFC, was also merged into CICA.
In November, 1997, Citizens purchased 100% of the issued and
outstanding shares of National Security Life and Accident Insurance
Company (NSLIC). NSLIC was a Texas-domiciled life and accident and
health insurer with assets of approximately $5 million and revenues of
approximately $5 million. It was merged into CICA in June, 2000.
In January, 1999, Citizens acquired Investors, the parent of Excalibur.
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Certain statements contained in this Annual Report on Form 10-K are
not statements of historical fact and constitute forward-looking
statements within the meaning of the Private Securities Litigation
Reform Act (the "Act"), including, without limitation, the
italicized statements and the statements specifically identified as
forward-looking statements within this document. Many of these
statements contain risk factors as well. In addition, certain
statements in future filings by the Company with the Securities and
Exchange Commission, in press releases, and in oral and written
statements made by or with the approval of the Company which are
not statements of historical fact constitute forward-looking
statements within the meaning of the Act. Examples of
forward-looking statements, include, but are not limited to: (i)
projections of revenues, income or loss, earnings or loss per
share, the payment or non-payment of dividends, capital structure,
and other financial items, (ii) statements of plans and objectives
of the Company or its management or Board of Directors including
those relating to products or services, (iii) statements of future
economic performance and (iv) statements of assumptions underlying
such statements. Words such as "believes", "anticipates",
"expects", "intends", "targeted", "may", "will" and similar
expressions are intended to identify forward-looking statements but
are not the exclusive means of identifying such statements.
Forward-looking statements involve risks and uncertainties, which
may cause actual results to differ materially from those in such
statements. Factors that could cause actual results to differ from
those discussed in the forward-looking statements include, but are
not limited to: (i) the strength of foreign and U.S. economies in
general and the strength of the local economies in which operations
are conducted; (ii) the effects of and changes in trade, monetary
and fiscal policies and laws; (iii) inflation, interest rates,
market and monetary fluctuations and volatility; (iv) the timely
development of and acceptance of new products and services and
perceived overall value of these products and services by existing
and potential customers; (v) changes in consumer spending,
borrowing and saving habits; (vi) concentrations of business from
persons residing in third world countries; (vii) acquisitions;
(viii) the persistency of existing and future insurance policies
sold by the Company and its subsidiaries; (ix) the dependence of
the Company on its Chairman of the Board; (x) the ability to
control expenses; (xi) the effect of changes in laws and
regulations (including laws and regulations concerning insurance)
with which the Company and its subsidiaries must comply, (xii) the
effect of changes in accounting policies and practices, as may be
adopted by the regulatory agencies as well as the Financial
Accounting Standards 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.
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(b) FINANCIAL INFORMATION REGARDING THE INSURANCE BUSINESS
Citizens, through CICA, CILIC, and Excalibur, operates principally
in two business segments: selling selected lines of individual
life and accident and health (A&H) insurance policies in domestic
markets and individual ordinary life insurance in international
markets. Except for certain insignificant operations, Citizens has
no present intention to engage in any non-insurance related
business. The following tables set forth certain statistical
information on the basis of accounting principles generally
accepted in the United States of America (U.S. GAAP) concerning
the operations of the Company for each of the five years ended
December 31, 2000.
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)
------- ------- -------
2000 $2,197,844 $2,240,523 $2,219,184
1999 2,340,744 2,197,844 2,269,294
1998 2,250,197 2,340,744 2,295,471
1997 2,231,017 2,250,197 2,240,607
1996 2,151,955 2,231,017 2,191,486
(a) In thousands (000s)
(b) Before ceding reinsurance to reinsurers
The increases in insurance in-force prior to 1999 reflect the volumes of new
business written by the Company as well as the impact of acquisitions. Economic
and other market disruptions in the Company's international markets had a
negative impact on the Company's persistency in 1999, contributing to the
decline in insurance in-force. Improved persistency in 2000 combined with
increased sale of new policies contributed to the growth in insurance in-force
during 2000. Approximately $96,803,000 of the 1997 numbers resulted from the
acquisitions of USLIC and NSLIC.
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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)
-------------- -------- --------------- -----------
2000 $112,676 5.1% $272,150 $2,494,798
1999 115,018 5.1 278,689 2,539,155
1998 100,906 4.4 306,070 3,368,690
1997 95,684 4.3 318,630 2,257,556
1996 101,860 4.6 296,378 2,511,318
(a) In thousands (000s)
(b) Approximately 95 percent of the reinsurance is yearly renewable term
insurance, with the remainder being coinsurance. Premiums reflect both
life and accident and health business.
As described above, the disruption in certain international markets contributed
to the increased lapsation and surrender activity in 1999. The decline in ceded
premium in 1999 and 2000 was related to the termination of a substantial portion
of NSLIC's major medical business, much of which had been ceded. The increase in
ceded premium in 1998 was due to the cession of a substantial portion of the
major medical accident and health business of NSLIC.
TABLE III
The following table sets forth information with respect to total insurance
premiums.
ORDINARY ANNUITY & ACCIDENT
LIFE (a) UNIVERSAL LIFE GROUP LIFE & HEALTH (a) TOTAL
-------- -------------- ---------- ------------ -----
2000 $45,892,621 $228,479 $ 95,068 $ 7,235,685 $53,451,853
1999 47,687,414 261,880 484,746 10,886,317 59,320,357
1998 48,801,081 263,994 231,410 9,857,844 59,154,329
1997 49,412,066 366,135 284,632 5,299,783 55,362,616
1996 49,563,720 389,084 309,953 4,040,688 54,303,445
(a) After deduction for reinsurance ceded.
New sales of life insurance remained relatively flat from 1996 to 1999. In 2000,
new life sales increased, but overall life premium declined due to the lower
level of sales in previous years coupled with the surrender activity shown in
Table II above. Much of the 1998 increase in accident and health premiums
related to the acquisition of USLIC and NSLIC. Additionally, much of the 2000
decline in accident and health premiums related to management's decision to
cancel a large portion of USLIC's group dental business and NSLIC's major
medical business during the third quarter of 1999 in order to curtail both
claims and operating expenses.
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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
------------ ------ -------- ------ --------
2000 $53,451,853 $22,550,592 42.2% $63,693,030 119.2%
1999 59,320,357 22,563,049 38.0 68,043,243 114.7
1998 59,154,329 23,580,491 39.9 66,914,063 113.1
1997 55,362,616 18,910,594 34.2 58,865,744 106.3
1996 54,303,445 21,948,637 40.4 59,113,575 108.9
(a) After premiums ceded to reinsurers.
Following the merger of ALLIC in 1997, significant reductions in operating
expenses were realized. The 1997 acquisitions of NSLIC and USLIC and their
related conversion expenses as well as increases in accident and health benefits
were the primary reasons for the 1998 and 1999 increase in policyholder benefits
and the 1998 increase in commission, underwriting and operating expenses. During
2000, accident and health premiums and claims decreased as discussed above due
to the cancellation of major portions of the group dental and major medical
business; however, due to the development of a domestic ordinary life sales
program and the administrative costs of managing the run-off of the cancelled
accident and health business, the ratio of expenses to premium increased.
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
------------ ---------- ------- ---------- -------
2000 $327,753 $217,303 66.3% $110,450 33.7%
1999 287,238 180,800 62.9 106,438 37.1
1998 311,331 222,496 71.5 88,835 28.5
1997 286,698 245,547 85.6 41,151 14.4
1996 337,051 294,408 87.3 42,643 12.7
(a) In thousands (000s)
Non-participating business increased beginning in 1996 because USLIC and NSLIC
sold only non-participating policies and a change was made in benefits in the
Company's international business, as new or ordinary life products shifted away
from participating to non-participating.
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The significant changes in 1998 and 1999 were due to the volume of credit life
business produced by NSLIC that is non-participating. During 2000 the percentage
of participating new business increased due to the cancellation of USLIC's and
NSLIC's group dental and individual major medical non-participating policies and
due to an increase in new life sales.
TABLE VI
The following table sets forth changes in new life insurance business issued
according to policy types.
WHOLE LIFE
AND ENDOWMENT TERM CREDIT
TOTAL NEW --------------------- ---------------------- ----------------------
BUSINESS (a) AMOUNT (a) PERCENT AMOUNT (a) PERCENT AMOUNT (a) PERCENT
------------ ---------- ------- ---------- ------- ---------- -------
2000 $327,753 $220,691 67.3% $56,747 17.3% $50,315 15.4%
1999 287,238 183,726 63.9 43,607 15.2 59,905 20.9
1998 311,331 224,918 72.2 51,531 16.6 34,882 11.2
1997 286,698 245,637 85.7 41,061 14.3 0 --
1996 337,051 296,985 88.1 40,066 11.9 0 --
(a) In thousands (000s)
This table illustrates that virtually all of the new business written prior to
1997 was whole life. The 1997 results reflect a decrease in new life business
during the year, which continued through 1999. Most of the 1998 and 1999
increases were due to the credit life business sold by NSLIC. The decline in
1998 and 1999 whole life production related to the disruption in the Company's
international market. In 2000, new life sales measured in paid annualized
premiums increased 21.4%.
TABLE VII
The following table sets forth deferred policy acquisition costs capitalized and
amortized compared to new business life insurance issued.
DEFERRED POLICY
TOTAL NEW ACQUISITION COSTS
BUSINESS -----------------
ISSUED CAPITALIZED AMORTIZED
------ ----------- ---------
2000 $327,753,000 $10,056,287 $ 8,521,972
1999 287,238,000 9,287,457 10,028,806
1998 311,331,000 7,941,829 7,789,513
1997 286,698,000 9,804,022 9,630,705
1996 337,051,000 10,531,222 10,221,917
The decrease in costs capitalized for 1997 and 1998 reflected the reduction in
the amount of new business produced and lower commission expenses incurred as a
result thereof. Amortization in 1999 was high due to increased surrender
activity. The increase in 2000 capitalized costs related to the increase in new
business issued, while the decrease in amortized costs was due to improved
persistency during the year.
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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)
------------------- ---------- ----------------------
2000 $184,270,944 $12,550,754 6.8%
1999 175,305,342 11,636,940 6.6
1998 169,461,908 11,279,125 6.7
1997 150,481,414 10,038,736 6.7
1996 134,167,938 9,185,506 6.8
(a) The year 1997 includes assets acquired from NSLIC and USLIC. The
year 1996 includes assets acquired from CILIC on March 12, 1996.
(b) Does not include realized and unrealized gains and losses on
investments.
Significant decreases in yields in the bond market caused the return on invested
assets to drop slightly in 1997, which continued throughout 1998 and 1999.
During 2000, the Company terminated its outside investment manager and changed
the mix of new investments, resulting in improved performance for the year.
(c) NARRATIVE DESCRIPTION OF BUSINESS
(i) BUSINESS OF CITIZENS
Citizens' principal business is ownership of CICA, Investors
and their affiliates. Additionally, it provides management
services to these companies under management services
agreements. At December 31, 2000, Citizens had approximately
90 full and part-time employees. All intercompany fees and
expenses have been eliminated in the consolidated financial
statements.
(ii)BUSINESS OF CICA
Historically, CICA's revenues have been derived from life
insurance premiums and revenues from investments. CICA is a
Colorado-domiciled life insurance company marketing primarily
ordinary whole-life products on an international basis through
marketing companies. Additionally, it offers specialty
individual accident and health policies to United States
residents, and following the merger of NSLIC in 2000, credit
life insurance policies to U.S. residents. All intercompany
fees and expenses have been eliminated in the consolidated
financial statements.
During the year ended December 31, 2000, 89.7% of CICA's
premium income was attributable to life, endowment and term
insurance, .4% to individual annuities and 13.6% to accident
and health insurance. During the year ended December 31, 1999,
93.1% of CICA's premium income was attributable to life,
endowment and term insurance, 0.5% to individual annuities,
and 6.4% to
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accident and health insurance. Of the life policies in force
at December 31, 2000 and 1999, 43.1% and 39.9%, were
nonparticipating and 56.9% and 59.1%, respectively were
participating. The increase in accident and health premiums
between years resulted from the merger of NSLIC and USLIC
during 2000.
From 1987 to 1997, CICA offered a series of participating
whole life policies designed for international markets.
Beginning January 1, 1998, CICA introduced a new series of
policies to replace the policies then offered. Ten plans make
up this series and, like those previously sold, are designed
for the international market. These plans maintain many of the
features of the previous series and incorporate several new
enhancements, such as terminal illness protection as well as
dismemberment provisions.
Additionally, following the merger with ALLIC, CICA began
offering specialty individual accident and health products as
well as ordinary whole life policies to residents of the
United States. The sale of these products is focused in
Oklahoma, Louisiana and Mississippi.
In 1999 management began developing a domestic ordinary life
sales program and received regulatory approval of the product
and related sales material in Texas during April of 2000.
Management began recruiting efforts for associates in the
State of Texas for the new product in mid-2000 and sales began
late during second quarter 2000. This program, targeting rural
areas of the United States, is expected to provide a new
entree into the domestic life market for the Company. The
Company intends to expand sales efforts beyond Texas to other
states in which CICA is licensed. Because sales efforts have
recently begun, management is unable to predict the success of
this new program.
The CICA underwriting policy requires a medical examination of
applicants for ordinary insurance in excess of certain
prescribed limits. These limits are graduated according to the
age of the applicant and the amount of insurance. Generally,
the maximum amount of ordinary life insurance issued
domestically without a medical examination is $200,000 for
ages 0 through 35; $100,000 for ages 36 through 45; $50,000
for ages 46 through 50; $15,000 for ages 51 through 55; and
$10,000 for ages 56 and over. Limits for insuring non-United
States applicants without a medical examination are: $150,000
for ages 0 through 39 and $50,000 for ages 40 through 65; and
all amounts over age 40. 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).
CICA has $27.5 million of insurance in-force on individuals
that are classified as substandard risks, the majority of such
business having been acquired in the
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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
this insurance represents approximately 1.0% of the total
insurance in-force.
GEOGRAPHICAL DISTRIBUTION OF BUSINESS
The following table sets forth CICA's total yearly premium
income by geographic area for the years indicated.
AREA 2000 1999 1998
---- ---- ---- ----
Oklahoma 5.2% 5.4% 5.5%
Texas 4.4% 2.3% 3.2%
Louisiana 1.1% 1.2% 1.2%
All Other States 6.6% 5.6% 6.8%
Foreign 82.7% 85.5% 83.3%
The participating whole life policies accepted by CICA on high
net worth residents of foreign countries have an average face
amount of approximately $70,000 and are marketed primarily to
the top 5% of the population in terms of household income.
CICA has neither offices nor employees overseas. It accepts
applications for international insurance policies submitted by
several independent firms in these markets with whom CICA has
non-exclusive consulting contracts. These firms specialize in
marketing life insurance products to citizens of foreign
countries and have many years of experience marketing life
insurance products. They provide recruitment, training and
supervision of their managers and associates in the placement
of dollar-denominated life insurance products; however, all
consultants and associates contract directly with CICA and
receive their compensation from CICA. Accordingly, should the
consulting arrangement between any firm and CICA be canceled
for any reason, CICA believes it could continue suitable
marketing arrangements with the individuals of the consulting
firms without appreciable loss of present and future sales, as
it has done in the past. There is, however, always a risk that
sales could decrease. The contract with the consultants
provides that they are the representative of the prospective
insured, have the responsibility for recruiting and training
their sales associates and are responsible for all of their
overhead costs including the expense of contests and awards.
These firms guarantee any debts of marketers and their
associates. In consideration for the services rendered, the
marketing consultants receive a fee on all new policies placed
by them or their associates. See "Business of CICA -
Commissions." Either party may terminate the marketing
contracts for various causes at any time by mutual consent of
the parties or upon 30 days' notice.
At present, CICA is dependent on the non-U.S. markets for a
large percentage of its new life insurance business. This
subjects CICA to potential risks with regard to the continued
ability to write such business should adverse events occur in
the
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countries from which CICA receives applications. These
potential risks include lapses of policies if funds that flow
out of such countries were to become restricted. Based on more
than 35 years experience in the marketplace in which CICA
competes, management believes such risks are not material. The
Company maintains no assets outside the U.S. and requires all
premiums to be paid in the U.S. with U.S. dollars via drafts
drawn on banks in the U.S.; therefore, it could lose no funds
from currency devaluation or foreign appropriation. Many of
the inherent risks in foreign countries, such as political
instability, hyper-inflation and economic disruptions tend to
improve rather than hurt CICA's business because it encourages
individuals to convert assets out of local currencies to the
more stable U.S. dollar.
MARKETING OPERATIONS
CICA holds licenses to do business in 15 states and accepts
applications for consideration from any foreign country.
CICA's operations are conducted on the independent contractor
basis, with 1,302 individuals contracted at December 31, 2000
and 1,415 at December 31, 1999 and 615 individuals at December
31, 1998.
COMMISSIONS
CICA's marketing managers are independent contractors,
responsible for their respective expenses, and are compensated
on a percentage of premium basis. Percentage amounts paid to
contractors on individual term, annuity and accident and
health insurance are substantially less than the levels paid
for individual ordinary life insurance. The marketing managers
receive overriding first year and renewal commissions on
business written by individuals under their supervision and
all marketing expenses related thereto are included in the
above percentages.
RESERVES
CICA establishes actuarial reserves as liabilities to meet
obligations on all outstanding policies. Reserves and deferred
acquisition costs are prepared in conformity with the American
Academy of Actuaries Committee on Financial Reporting
Principles and accounting principles generally accepted in the
United States of America. In determining such reserves CICA
used the 1955 to 1960, 1965 to 1970, and 1975 to 1980 Select
and Ultimate Mortality Tables with interest rates at 4% or in
a range graded from 9% to 5% with recent issues reserved at 7%
graded to 6 1/2%. Withdrawal assumptions are based primarily
on actual historical experience. Statutory reserves are used
for paid-up life business. Claims reserves include an amount
equal to the expected benefit to be paid on reported claims in
addition to an estimate of claims that are incurred but not
reported based on actual historical experience. CICA receives
an independent actuarial certification of its reserves
prepared in accordance with both Generally Accepted Accounting
Principles and Statutory Accounting Practices. The
certifications have noted no deficiencies for the years
presented herein.
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REINSURANCE
CICA assumes and cedes insurance with other insurers,
reinsurers and members of various reinsurance pools.
Reinsurance arrangements are utilized to provide greater
diversification of risk and minimize exposure on larger risks.
(a) INSURANCE CEDED
CICA has historically retained $75,000 of risk on any one
person. Effective January 1, 2001, this amount was increased
to $100,000 based upon CICA's capital growth. The increase in
retention is based upon the relative size and financial
strength of CICA. As of December 31, 2000, the aggregate
amount of life insurance ceded amounted to $270,515,000 or
10.6% of total direct and assumed life insurance in-force, and
was $259,060,000 or 10.8% in 1999. CICA is contingently liable
with respect to ceded insurance should any reinsurer be unable
to meet the obligations reinsured.
As of December 31, 2000, CICA had in effect automatic
reinsurance agreements with reinsurers that provide for
cessions of ordinary insurance from CICA. Additionally, CICA
has reinsurance treaties in force with several reinsurers of
life and accident and health insurance. These treaties provide
for both automatic and facultative reinsurance of standard and
substandard risks ceded to them by CICA for life, accident and
health and supplemental benefits above CICA's retention limit
on a yearly renewable term, coinsurance or modified
coinsurance basis.
Treaties with Employers Reassurance (ERC) and Businessmen's
Assurance (BMA) historically have been the primary vehicles
utilized by CICA for its international business. The treaties
are structured in such a way as to allow CICA to "self
administer" the cessions on a reduced cost basis. During 1995,
a third carrier was added as a principal reinsurer, Riunione
Adriatica di Sicurta, of Italy (RAS). American United Life
Insurance Company (AUL) replaced RAS in 2000.
The ERC and BMA agreements provide that for risks reinsured in
specified countries, 70% of each risk in excess of CICA's
retention will be ceded to ERC and 30% to BMA. The RAS
agreement provided that on risks reinsured in specified
countries, 100% of the risk in excess of CICA's retention was
ceded to RAS. AUL's treaty provides for the same share of
business that RAS previously reinsured. CICA pays premiums to
ERC, BMA and AUL on an annual basis and is responsible for the
production of the reporting monthly and annually to ERC and
BMA to allow proper accounting for the treaties. The RAS
agreement contained similar terms.
The cessions are on a yearly renewable term basis and are
automatic over the Company's retention up to $350,000 for ERC,
$150,000 for BMA and $500,000 for AUL, after which the
reinsurance is subject to a facultative review by the
reinsurers. At December 31, 2000, CICA had ceded $147,791,000
in face amount
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of insurance to ERC, $29,864,000 to BMA, $65,087,000 to RAS
and $17,610,000 to AUL under these agreements.
RAS is an unauthorized reinsurer in the state of Colorado;
however, RAS has agreed to comply with Colorado statutes
regarding such companies. Under these statutes, RAS will
provide a letter of credit, issued by a U.S. bank meeting the
Colorado requirements, equal to any liabilities it incurs
under this agreement. RAS notified CICA in late 1999 that it
was withdrawing from the reinsurance market effective January
1, 2000 and AUL replaced it.
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, 2000, CICA had ceded $1.2 billion 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, 2000, 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 $326,267,000
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, 2000.
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.
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INVESTMENTS
State insurance statutes prescribe the quality and percentage
of the various types of investments which may be made by
insurance companies and generally permit investment in
qualified state, municipal, federal and foreign government
obligations, high quality corporate bonds, preferred and
common stock, real estate and mortgage loans within certain
specified percentages. CICA's invested assets at December 31,
2000 were distributed as follows: fixed maturities - 87.7%,
mortgage loans - .6%, policy loans - 11.3% and other long-term
investments - .4%. CICA did not foreclose on any mortgage
loans in 2000. All mortgage loans are supported by
independently appraised real estate. The investment policy of
CICA is consistent with the provisions of the Colorado
Insurance Code.
At December 31, 2000, 86.4% 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 81.3% at December 31, 1999. Of these
mortgage-backed securities, all were guaranteed by U.S.
government agencies or corporations that are backed by the
full faith and credit of the U.S. government or that bear the
implied full faith and credit of the U.S. government.
REGULATION
CICA is subject to regulation and supervision by the insurance
department of each state or other jurisdiction in which it is
licensed to do business. These departments have broad
administrative powers relating to the granting and revocation
of licenses to transact business, the licensing of marketing
persons, the approval of policy forms, the advertising and
solicitation of insurance, the form and content of mandatory
financial statements, the reserve requirements, and the type
of investments which may be made. CICA is required to file
detailed annual reports with each such insurance department,
and its books and records are subject to examination at any
time. In accordance with state laws and the rules and
practices of the National Association of Insurance
Commissioners, CICA is examined periodically by examiners of
its domiciliary state and by representatives (on an
"association" or "zone" basis) of the other states in which it
is licensed to do business. An examination was concluded in
1998 for the five years ended December 31, 1996, by a public
accounting firm under contract with and supervision by the
Colorado Division of Insurance. CICA is audited annually by an
independent public accounting firm.
Various states, including Colorado, have enacted "Insurance
Holding Company" legislation, which requires the registration
and periodic reporting by insurance companies which control,
or are controlled by, other corporations or persons. Under
most of such legislation, control is presumed to exist with
the ownership of ten percent or more of an insurance company's
voting securities. The Company is subject to such regulation
and has registered under such statutes as a member of an
"insurance holding company system." The legislation typically
requires
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periodic disclosure concerning the transactions between the
registered insurer, the ultimate controlling party, and all
affiliates and subsidiaries of the ultimate controlling party,
and in many instances requires prior approval of
intercorporate transfers of assets (including in some
instances payment of dividends by the insurance subsidiary)
within the holding company system.
Since CICA does not physically conduct business in countries
outside the U.S. but rather accepts applications for
consideration from overseas marketers, it is not subject to
regulation in countries where most of its insureds are
residents. The prospect of such regulation is viewed as remote
by management of CICA because obtaining insurance through
application by mail outside of one's country is a common
practice in many foreign countries, particularly those where
CICA's insureds reside.
COMPETITION
The life insurance business is highly competitive, and CICA
competes with a large number of stock and mutual 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 international marketing plan stresses making available
dollar-denominated life insurance products available to high
net worth individuals residing in foreign countries and the
sale of individual, whole life and supplemental accident and
health products to United States residents. A large percentage
of CICA's first year and renewal life insurance premium income
during the last five years came from the international market.
See "Business of CICA - Geographical Distribution of
Business." Management believes CICA to be a significant
competitor in the international market and attributes its
market position 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 CICA's
unique policies, allows CICA to compete effectively in
pursuing new business.
Management believes that CICA competes indirectly with
non-U.S. companies, particularly with respect to Latin
American companies. CICA, as a U.S. domestic insurer paying
claims in U.S. dollars in the U.S., has a different clientele
and product than foreign-domiciled companies. CICA's product
is usually acquired by persons in the top 5% of income of
their respective countries. The policies sold by foreign
companies are sold broadly and are priced based on the
mortality
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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.
CICA initiated a new domestic marketing program during 2000
focusing on the sale of individual ordinary life insurance
products to residents of rural communities. This program is
being initiated through one state at a time, and began in
Texas. Management believes this market is overlooked by the
majority of U.S. insurers. Competition from many U.S.
companies is significantly greater in the domestic market,
particularly as banking institutions enter the insurance
market due to the passage of the Graham Leach Bliley Act in
1999.
In CICA's block of accident and health insurance (13.6% of
total premium income), it is in competition with many
insurance companies as well as with voluntary and
government-sponsored plans for meeting hospitalization and
medical expenses such as Blue Cross/Blue Shield, "Medicare"
and "Medicaid." Future expansion of such programs or the
establishment of additional government health programs could
adversely affect the future of accident and health insurance
on CICA's books, most of which has been acquired in the
acquisition of other companies.
FEDERAL INCOME TAXATION
CICA is a "small company" as that term is defined in Section
806 of the Internal Revenue Code (the "Code"). As such, CICA
qualifies for a special small company deduction (presently
equal to 60% of "tentative life insurance company taxable
income") which serves to decrease significantly the amount of
tax, which might otherwise have to be paid.
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The Revenue Reconciliation Act of 1990 revised the method by
which insurance companies claim deductions for policy
acquisition costs. Previously, insurance companies were
allowed to deduct actual policy acquisition costs as they were
incurred. Beginning in 1990, policy acquisition costs are
determined as a percentage of annual net premiums and are then
deductible on a straight-line basis over a ten-year period
rather than treated as an immediate deduction. This change in
treatment for acquisition costs has had a significant impact
on CICA's taxable income due to the relatively large amounts
of such deferrals caused by the increases in new business.
CICA files a consolidated Federal income tax return with
Citizens and its subsidiaries.
(iii) BUSINESS OF CILIC
CILIC is an Illinois domiciled life insurer admitted to do
business in four states. Dormant for several years, CILIC
services a closed block of life insurance policies. At
December 31, 2000, CILIC had assets of $2.9 million and annual
revenues of $187,000. All intercompany fees and expenses have
been eliminated in the consolidated financial statements.
(iv) BUSINESS OF INVESTORS
Investors is an Illinois holding company that owns Excalibur.
Management expects to consolidate Investors with Citizens
during 2001 to eliminate unnecessary expenses. All
intercompany fees and expenses have been eliminated in the
consolidated financial statements.
(v) BUSINESS OF EXCALIBUR
Excalibur is an Illinois-domiciled life insurer. It services a
small block of ordinary life insurance. Excalibur is 100%
owned by Investors. At December 31, 2000, Excalibur had assets
of $3.0 million and annual revenues of $196,000. All
intercompany fees and expenses have been eliminated in the
consolidated financial statements.
(vi) BUSINESS OF CTI
CTI is a wholly owned subsidiary of CICA and engages in the
business of providing data processing services and acquisition
and leasing of furniture and equipment for its parent as well
as data processing services and software to other companies.
Pursuant to an Information Systems Management and Services
Contract dated October 1, 1991, and subsequently amended, CTI
provides data processing services to the Company for a fixed
fee of $85,000 per month. As of and for the year ended
December 31, 2000, CTI's total assets were approximately
$570,000 and revenues were $1.1 million. All intercompany fees
and expenses have been eliminated in the consolidated
financial statements.
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(vii) BUSINESS OF III
As of and for the year ended December 31, 2000, III's total
assets were $1.2 million and revenues were $237,000. All
intercompany fees and expenses have been eliminated in the
consolidated financial statements.
(viii) BUSINESS OF FHA
FHA owns and operates a funeral home in Baker, Louisiana. At
December 31, 2000, FHA had total assets of $542,000 and total
annual revenues of $553,000. All intercompany fees and
expenses have been eliminated in the consolidated financial
statements.
ITEM 2. DESCRIPTION OF PROPERTIES
CICA owns its principal office in Austin, Texas, consisting of
an 80,000 square foot office building. Approximately 45,000
square feet is occupied or reserved for occupancy by CICA and
its affiliates with the remainder of the building being
leased.
The Company also owns a 6,324 square foot funeral home in
Baker, Louisiana with a total cost of $527,000. This facility,
acquired as a result of a 1995 acquisition, is owned and
operated by a subsidiary, FHA.
ITEM 3. LEGAL PROCEEDINGS
The Company from time to time may be a party to various legal
proceedings incidental to its business. Management does not
expect the ultimate resolution of these legal proceedings to
have a material adverse impact on the results of operations or
the financial condition of the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to shareholders of Citizens during
the fourth calendar quarter of 2000.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
Citizens' Class A common stock is traded on the American Stock
Exchange (AMEX) under the symbol CIA. The high and low prices
per share as supplied by the Amex Monthly Statistical Report
are as follows. These prices have been adjusted to reflect 7%
stock dividends paid in 1999 and 2000.
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2000 1999
---- ----
QUARTER ENDED HIGH LOW HIGH LOW
------------- ---- --- ---- ---
March 31 $6.72 $6.13 $5.08 $2.40
June 30 6.31 5.02 5.29 2.62
September 30 6.31 5.89 5.24 4.69
December 31 7.00 5.72 6.66 4.69
As of December 31, 2000, the approximate number of record
owners of Citizens' Class A common stock was 15,600.
Management estimates the number of beneficial owners to be
approximately 60,000.
On November 2, 1999, the Company's Board of Directors
declared a 7% stock dividend, payable on December 31, 1999 to
holders of record as of December 1, 1999. The dividend
resulted in the issuance of 1,763,805 Class A shares
(including 136,091 shares in treasury) and 43,474 Class B
shares.
On October 31, 2000, the Board declared a 7% stock dividend
payable on December 31, 2000 to holders of record as of
December 1, 2000. The dividend resulted in the issuance of
1,887,265 Class A shares (including 145,613 shares in
treasury) and 46,517 Class B shares.
Citizens has not paid cash dividends in any of the past five
years and does not expect to pay such in the immediate
future. For restrictions on the present and future ability to
pay dividends, see Note 6 of the "Notes to Consolidated
Financial Statements."
ITEM 6. SELECTED FINANCIAL DATA
The table below sets forth, in summary form, selective data of
the Company. This data, which is not covered in the report of
the independent auditors, should be read in conjunction with
the consolidated financial statements and notes which are
included elsewhere herein (amounts in thousands except per
share amounts). The per share amounts have been adjusted
retroactively for all periods presented to reflect the change
in capital structure resulting from 7% common stock dividends
paid on December 31, 1999 and December 31, 2000, respectively.
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YEAR ENDED DECEMBER 31,
(IN THOUSANDS EXCEPT PER SHARE DATA)
------------------------------------
2000 1999 1998 1997 1996
---- ---- ---- ---- ----
NET OPERATING REVENUES $ 66,678 $ 71,877 $ 72,685 $ 65,027 $ 63,822
NET INCOME (LOSS) $ 2,053 $ 1,271 $ (6,721) $ 3,426 $ 2,214
NET INCOME (LOSS) PER SHARE $ .08 $ .05 $ (.27) $ .14 $ .10
TOTAL ASSETS $ 267,842 $ 255,485 $ 253,384 $ 249,519 $ 218,277
NOTES PAYABLE $ - $ - $ 333 $ 937 $ 489
TOTAL LIABILITIES $ 190,529 $ 183,218 $ 178,480 $ 169,939 $ 151,394
TOTAL STOCKHOLDERS' EQUITY $ 77,313 $ 72,267 $ 74,904 $ 79,582 $ 66,883
BOOK VALUE PER SHARE $ 3.08 $ 2.88 $ 3.06 $ 3.33 $ 2.89
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
RESULTS OF OPERATIONS
Net income of $2,052,741 or $.08 per share was earned during
2000, compared to net income of $1,271,072 or $.05 per share
for the year ended December 31, 1999 and a net loss of
$6,720,693 or $.27 per share in 1998. Improved claims
experience and persistency, coupled with reductions in
expenses contributed to the increased earnings in 2000.
A charge of $9.5 million recorded in the third quarter of 1998
related to the non-recoverability of a portion of the excess
of cost over net assets acquired ("goodwill") on the Company's
books caused the 1998 loss. The writedown was related to the
goodwill recorded in the 1995 acquisition of American Liberty
Financial Corporation (ALFC) and was caused by a decline in
new production from insurance agents formerly associated with
American Liberty. Subsequent to the acquisition, management
implemented a 50% reduction in the amount of commission paid
to these agents. The commission reductions were necessary to
preserve the profitability of the accident and health business
which was negatively impacted by changes in state laws that
established minimum claims ratios that severely limited profit
margins, as well as mandated change in interest rates used to
compute reserves on this business. In order to ascertain the
recoverability of the goodwill balance, the Company performed
an analysis of the relevant cash flows based upon estimated
production, net of policy acquisition costs, policyholder
benefits and other general expenses. As a result of this
analysis, it was determined that the production of future
business did not support goodwill of $9.5 million that was
charged to earnings during third quarter 1998. Management's
estimate of future production was re-evaluated based upon
sales activity, the size of the active agency force, and the
anticipated future production
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to be achieved in subsequent years. Management has continued
to monitor production associated with these products. During
1998, management was successful in reviving production from
some of the largest producers of American Liberty. During 1999
and 2000, the assumed production levels were met. Should
production fall below such estimates, additional write-offs
could be necessary. Approximately $2.8 million of goodwill
related to ALFC remains at December 31, 2000.
Total revenues for the year ended December 31, 2000 were
$66,678,116 compared to $71,877,058 in 1999, a decrease of
7.2%. In 1998 revenues were $72,684,915. The decrease in 2000
revenues was related to a 33.5% decrease in accident and
health premiums (a decline from $10,886,317 in 1999 to
$7,235,685 in 2000) as a result of the termination of the
Company's book of individual major medical and group dental
business as well as decreased renewal life premiums resulting
from the lower persistency experienced in 1998 and 1999. The
decrease in 1999 revenues was related to an 80.7% decrease in
realized gains which were $310,890 for 1999 compared to
$1,614,388 in 1998.
Premium income decreased by 9.9% from $59,320,357 in 1999 to
$53,451,853 in 2000. The 1999 amounts were a 0.3% increase
over the previous year when premium income totaled
$59,154,329. The 2000 decrease is primarily attributable to a
$3,650,632 decrease in accident and health premiums that were
$7,235,685 for 2000 compared to $10,886,317 for 1999.
During the second half of 1998, the Company began to
experience a significant increase in the volume of accident
and health claims created by high early utilization by holders
of USLIC's group dental certificates. As a result of the
substantial increase in the volume of claims plus an increase
in the accident and health loss ratio, management moved to
cancel a large portion of the existing block of USLIC's group
dental business and NSLIC's individual major medical business
during the third quarter of 1999 in order to curtail both
claims and operating expenses. This action contributed to the
$3,650,632 decrease in accident and health premiums in 2000.
An additional decrease of approximately $1.5 million of annual
accident and health premium income in 2001 is expected as
policies terminate; however, due to the claims experience as
well as the overhead necessary to administer such, management
believes this change will enhance near and long-term
profitability. Because of the increase in the loss ratio,
management implemented significant rate increases beginning
April 2000 on several of the supplemental accident and health
products that are non-cancelable. These increases became
effective on policy anniversaries, many of which were late in
2000.
In January, 1998, CICA introduced a new line of international
products known as the Millennia 2000 series; however, in 1998
and 1999, CICA's international sales were hampered due to the
contraction of several Latin American economies, as well as
competition from new local companies, many of whom are
subsidiaries of
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large U.S. insurers. As a result, there was a decrease in the
Company's core book of ordinary life business.
Production of new life insurance premiums by the associates of
CICA measured in issued paid annualized premiums increased
21.4% from 1999 to 2000. In addition, management began
developing a domestic ordinary life sales program during 1999
for which it received regulatory approval in April of 2000.
Recruiting efforts for associates began in the State of Texas
for the new product in mid-2000 and sales began late in the
second quarter 2000. This program, targeting rural areas of
the United States, is expected to provide a new entree into
the domestic life market for the Company in future years. The
Company intends to expand sales efforts beyond Texas to other
states in which CICA is licensed. Because sales efforts have
just begun, management is unable to predict the success of
this new program.
Net investment income increased 7.9% during 2000 to
$12,550,754 from $11,636,940 during 1999. The 1999 results
were up 3.2% compared to the $11,279,125 earned in 1998. The
2000 and 1999 results reflect the continuing expansion of the
Company's asset base, investment in higher yielding
instruments and the actions taken in previous years to change
the mix and duration of the Company's invested assets.
Management terminated the Company's outside investment advisor
effective March 31, 2000. The Company feels it can more
effectively achieve its investment objectives by overseeing
the investment activities in-house. The increased returns in
2000 relate to more aggressive management of the Company's
excess cash balances and a shift in the mix of the portfolio
to place less emphasis on government guaranteed mortgage
pass-through instruments and more investments in callable
instruments issued by U.S. government agencies.
Policyholder dividends increased to $3,037,343 in 2000, up
6.8% over 1999 results of $2,843,681. The 1999 amounts
represented a decrease of 6.0% compared to $3,025,746 in 1998.
Virtually all CICA's policies that have been sold since 1989
are participating. Participating policies represent a large
majority (56.9%) of the Company's business in-force, although
the percentage of participating business has declined from
approximately 91% in 1995 due to acquisitions in recent years.
Additionally, due to the disruption in the Latin American
markets 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 persistency and future
sales.
Claims and surrenders decreased 12.6% from $34,747,480 in
1999, to $30,370,996 in 2000. In 1998 claims and surrenders
were $31,592,740. Increases in accident and health benefits
attributable to the respective blocks of business of National
Security Life and Accident (NSLIC) and United Security Life
(USLIC) were responsible for the 1999 increase. The decline in
claims on these blocks as a
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result of the termination in 1999 and 2000 contributed to the
improvement during the year.
Death benefits increased 2.8% from $5,135,808 in 1999, to
$5,277,284 in 2000. Death benefits were $5,150,647 in 1998.
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.
Beginning in 1996, management initiated a change to more
selective medical examinations in conjunction with dry spot
blood tests and extensive medical questions on the application
in order to lower the cost of new business without sacrificing
necessary information for the underwriter. Additionally,
X-rays and electrocardiograms are required depending on age
and face amount of the policy. On all policies of $150,000 or
more, inspection reports are required which detail the
background resources and lifestyle of the applicant. The
Company has developed numerous contacts throughout Latin
America with which its underwriters can validate information
contained in the application, medical or inspection report.
Accident and Health benefits decreased 39.1% from $8,686,218
in 1999 to $5,158,623 in 2000. Such claims were $5,912,411 in
1998. The 1999 increase reflected the volume of Accident and
Health business written in previous years. During the second
half of 1998, the Company began to experience a significant
increase in the volume accident and health claims created by
the high early utilization by holders of USLIC's group dental
certificates. As a result of the substantial increase in the
volume of claims plus an increase in the accident and health
loss ratio, management moved to cancel a large portion of the
existing blocks of USLIC's group dental and NSLIC's individual
major medical business during the third quarter of 1999 in
order to curtail both claims and operating expenses. Most of
the terminations were effective prior to January 1, 2000. This
action contributed to the decrease of $3,650,632 in accident
and health premiums and the $3,309,171 decrease in accident
and health claims in 2000. It is anticipated an additional
decrease of $1.5 million of annual premium income will occur
in 2001; however, due to the claims experience as well as the
overhead necessary to administer such, management believes
this action will enhance near and long-term profitability.
Endowment benefits decreased 3.0% from $5,048,973 in 1999 to
$4,895,492 in 2000. In 1998, such expenses were $5,027,937.
Beginning in late 1990, CICA introduced a new series of
international policies that carried an immediate endowment
benefit of an amount elected by the policyowner. This
endowment is factored into the premium of the policy and is
paid annually.
Policy surrenders decreased 5.3% from $14,920,985 in 1999 to
$14,124,514 in 2000. Surrenders were $14,481,335 in 1998. The
relative stability in 2000, 1999 and 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.
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Other claim expenses amounted to $915,083 in 2000, $955,496 in
1999 and, $1,020,410 in 1998. These expenses are comprised of
supplemental contract benefits, interest on policy funds and
assorted other miscellaneous policy benefits.
During 2000, commissions increased slightly to $12,411,053
from $12,234,053 in 1999. In 1998, commission expense was
$12,501,426. The increase in 2000 occurred because the
issuance of new life policies increased and offset the
reduction in accident and health commissions due to the
terminations discussed above.
Underwriting, acquisition and insurance expenses decreased
slightly to $10,139,539 in 2000 compared to $10,328,996 in
1999 and $11,079,065 in 1998. Because of the increased claims
volume mentioned above, management was forced to significantly
increase staff size in 1998 and 1999 and thus overhead on a
temporary basis. During 2000, overhead expenses were incurred
to develop the domestic ordinary life sales program which
offset reductions achieved following the termination of the
accident and health business described above and the
consolidation of NSLIC and USLIC. Due to the consolidation of
USLIC's and NSLIC's operations with CICA, management
anticipates continued reductions in expenses through economies
of scale.
In order to convert a majority of CICA's marketing overhead
from fixed to variable, management contracted in early 1997
with an independent international marketing company to serve
as managing agent for the Company's international marketing
activities. This firm receives an overriding commission on all
new business issued internationally in exchange for the
absorption of all marketing, management and promotion
activities. By taking such actions, management believes a
significant amount of fixed overhead has been converted to a
variable expense. Management has utilized firms such as this
in previous periods with success in obtaining increases in new
business and expense reductions.
Capitalized deferred policy acquisition costs increased 8.3%
from $9,287,457 in 1999 to $10,056,287 in 2000. These costs
were $7,941,829 in 1998. The increase in 2000 reflects
increased fourth quarter sales of traditional whole life
policies internationally. The 1999 increase reflects increased
fourth quarter sales activity. Amortization of these costs was
$8,521,972, $10,028,806 and $7,789,513, respectively in 2000,
1999 and 1998.
Amortization of cost of insurance acquired, excess of cost
over net assets acquired and other intangibles decreased from
$2,120,017 in 1999 to $1,995,660 in 2000. In 1998, such
amortization was $2,100,433. 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. Should production by the former agents of American
Liberty, now representing CICA, not meet expected amounts due
to the rate increases described above, additional write-offs
could result. There remains approximately $2.8 million of
goodwill related to American Liberty. New accounting rules
regarding amortization of goodwill were proposed by
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the FASB during 2000. If implemented, annual amortization of
such amounts would cease, and a change would occur only if
goodwill on the balance sheet became unrecoverable. The
Company has approximately $7.4 million of goodwill recorded at
December 31, 2000. During 2000, $658,390 was amortized.
LIQUIDITY AND CAPITAL RESOURCES
Stockholders' equity increased from $72,266,969 at December
31, 1999 to $77,313,031 at December 31, 2000. The increase was
attributable to net income of $2,052,741 earned in 2000 and
unrealized losses, net of tax decreasing by $2,993,321 during
2000. Increases in the market value of the Company's bond
portfolio caused by higher bond prices resulted in the change
in unrealized losses. The Company paid a 7% stock dividend on
December 31, 2000 to holders of record as of December 1, 2000.
A similar 7% dividend was paid on December 31, 1999 to record
holders on December 1, 1999. Both dividends were paid using
Class A and B shares that were previously authorized but
unissued. The dividends had the effect of transferring
$11,497,886 and $10,649,736 respectively in 2000 and 1999 from
retained earnings to Common Stock and Treasury Stock.
Invested assets increased to $194,203,327 in 2000 from
$174,338,561 in 1999, an increase of 11.4%. A 14.4% increase
in fixed maturities available-for-sale more than offset a 3.1%
decrease in policy loans. At December 31, 2000 and 1999, fixed
maturities have been categorized into two classifications:
fixed maturities held-to-maturity, which are valued at
amortized cost, and fixed maturities available-for-sale which
are valued at fair market. The Company disposed of a number of
bonds as it changed the mix of securities following the
termination of its outside investment advisor. Fixed
maturities held to maturity, amounting to $5,582,802 at
December 31, 2000 consist of U.S. Treasury securities.
Management has the intent and believes the Company has the
ability to hold the securities to maturity.
At December 31, 2000, decreases in interest rates of 100, 200
and 300 basis points, respectively, would result in increases
in market values of investments in fixed maturities of
approximately $2,505,000, $5,865,000 and $9,515,000,
respectively. Conversely, increases in rates of 100, 200 and
300 basis points would generate losses of $6,502,000,
$12,330,000 and $18,141,000, respectively. At December 31,
1999, decreases in interest rates of 100, 200 and 300 basis
points, respectively, would result in increases in market
values of approximately $385,000, $6,646,000 and $13,800,000,
respectively. Increases in rates of 100, 200 and 300 basis
points would generate decreases in market values of
$10,981,000, $20,232,000 and $26,096,000, respectively.
Policy loans comprise 10.8% of invested assets at December 31,
2000 compared to 12.4% at December 31, 1999. These loans,
which are secured by the underlying policy values, have yields
ranging from 5% to 10% percent and maturities that are related
to the maturity or termination of the applicable policies.
25
26
Management believes that the Company maintains more than
adequate liquidity despite the uncertain maturities of these
loans.
Cash balances of the Company in its primary depository, Chase
Bank, were significantly in excess of Federal Deposit
Insurance Corporation (FDIC) coverage at December 31, 2000 and
1999. Management monitors the solvency of all financial
institutions in which it has funds to minimize the exposure
for loss. At December 31, 2000, management does not believe
the Company is at significant risk for such a loss. During
2001, the Company intends to utilize callable securities
issued by Federal agencies as cash management tools to
minimize excess cash balances and enhance return.
CICA owned 2,085,244 shares (1,948,718 in 1999) of Citizens
Class A common stock at December 31, 2000. Statutory
accounting practices prescribed by the National Association of
Insurance Commissioners (NAIC) and the State of 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, 2000 and
1999, 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.
The NAIC has established minimum capital requirements in the
form of Risk-Based Capital ("RBC"). Risk-based capital factors
the type of business written by a company, the quality of its
assets, and various other factors into account to develop a
minimum level of capital called "authorized control level
risk-based capital" and compares this level to an adjusted
statutory capital that includes capital and surplus as
reported under Statutory Accounting Principles, plus certain
investment reserves. Should the ratio of adjusted statutory
capital to control level risk-based capital fall below 200%, a
series of actions by the Company would begin. At December 31,
2000, CICA, CILIC and Excalibur were above required minimum
levels.
Effective January 1, 2001, the NAIC has implemented codified
rules for statutory accounting. These rules are subject to
approval and implementation by each state. Colorado has
notified CICA that it has adopted the codified accounting
rules; however, certain state laws that differ from these
rules should be followed. The primary difference between the
Colorado statutes and the codified rules involve the
establishment of a liability for future policy dividends
payable. Under codification such reserve is mandated; however,
Colorado has an exception if the difference between the
premium charged and the maturity factor included in the
premium on participating policies exceeds the reserve that
would be established. Such is the case for CICA. As a result,
CICA will not establish the reserve of approximately $3
million in its statutory financial statements.
Overall, the implementation of codification is expected to
reduce the Company's surplus on a statutory accounting basis
by approximately 3%.
26
27
INFORMATION SYSTEMS AND THE YEAR 2000
The Company successfully addressed the impact of the Year 2000
on its systems, procedures, customers and business processes.
There was no adverse impact on any Company operations for the
calendar change from 1999 to 2000. The Company used internal
resources to modify, replace and test the Year 2000
modifications. The total cost for the project was negligible.
The work was performed with existing staff and the associated
costs were expensed as incurred until completion.
All critical suppliers or customers (external relationships)
resolved their own third party Year 2000 issues and were able
to interact with the Company. The Company encountered no loss
of data or functionality related to the Year 2000.
FINANCIAL ACCOUNTING STANDARDS
In December 1997, the American Institute of Certified Public
Accountants (AICPA) issued Statement of Position (SOP) 97-3
"Accounting by Insurance and Other Enterprises for
Insurance-Related Assessments." SOP 97-3 provides: 1) guidance
for determining when an entity should recognize a liability
for guaranty fund and other insurance-related assessments, 2)
guidance on how to measure a liability, 3) guidance on when an
asset may be recognized for a portion or all of the assessment
liability or paid assessment that can be recovered through
premium tax offsets or policy surcharges and 4) requirements
for disclosure of certain information. This SOP is effective
for financial statements for fiscal years beginning after
December 15, 1998. The Company adopted SOP 97-3 during 1999.
Implementation did not have a material impact on the Company's
financial statements.
In March 1998, the AICPA issued SOP 98-1, "Accounting for the
Costs of Computer Software Developed or Obtained for Internal
Use." This SOP provides guidance for determining whether costs
of software developed or obtained for internal use should be
capitalized or expensed when incurred. In the past, the
Company has expensed such costs as they were incurred. This
SOP is also effective for fiscal years beginning after
December 15, 1998. The Company adopted SOP 98-1 during 1999.
Implementation did not have a material impact on the Company's
financial statements.
Statement of Financial Accounting Standard (SFAS) No. 133,
"Accounting for Derivative Instruments and Hedging
Activities," as amended, is effective January 1, 2001.
Management does not believe that SFAS No. 133, as amended,
will have a significant effect on the financial position,
results of operations or liquidity of the Company.
SFAS No. 140, "Accounting for Transfers and Servicing of
Financial Assets and Extinguishments of Liabilities - A
Replacement of FASB Statement 125" revises
27
28
the rules to be followed when determining whether a special
purpose entity (SPE) is a qualifying SPE (QSPE). SFAS No. 140
requires that a QSPE have at least 10% of its beneficial
interests held by parties unrelated to the transferor and
limits the amount and type of derivative instruments that a
QSPE can hold. SFAS No. 140 requires that for a transfer to a
QSPE to be accounted for as a sale, the transferor must not
retain effective control over the transferred assets through a
removal-of-accounts provision that allows the transferor to
unilaterally reclaim specific transferred assets. SFAS No. 140
requires extensive disclosures about securitizations entered
into during the period and retained interests in securitized
financial assets at the balance sheet date, accounting
policies, sensitivity information related to retained
interests and cash flows distributed to the transferor. It is
effective for transfers occurring after March 31, 2001.
However, the expanded disclosures about securitizations and
collateral are effective for fiscal years ending after
December 15, 2000. Management does not believe that SFAS No.
140 will have a significant effect on the financial position,
results of operations or liquidity of the Company.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The unrealized gains (losses) that could be caused by
decreases and increases in the interest rates of 100, 200 and
300 basis points, respectively, on the Company's
available-for-sale fixed maturities is as follows at December
31, 2000 and 1999:
Decreases in Interest Rates Increases in Interest Rates
--------------------------- ---------------------------
300 BASIS 200 BASIS 100 BASIS 100 BASIS 200 BASIS 300 BASIS
POINTS POINTS POINTS POINTS POINTS POINTS
------ ------ ------ ------ ------ ------
December 31, 2000 $ 9,515,000 $5,865,000 $2,505,000 $ (6,502,000) $(12,330,000) $(18,141,000)
=========== ========== ========== ============= ============= =============
December 31, 1999 $13,800,000 $6,646,000 $ 385,000 $(10,981,000) $(20,232,000) $(10,981,000)
=========== ========== ========== ============= ============= =============
There are no fixed maturities or other investments that the
Company classifies as trading instruments. At December 31,2000
and 1999, there were no investments in derivative instruments.
The Company has minimal investment in equity securities. The
overall credit rating of the fixed maturity portfolio is
Agency. Approximately 73.4% of the fixed maturities owned by
the Company at December 31, 2000 are instruments of the United
States government or are backed by U.S. government agencies or
private corporations carrying the implied full faith and
credit backing of the U.S. government. See also Item 7.
Management's Discussion and Analysis of Financial Condition
and Results of Operations.
28
29
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND
FINANCIAL STATEMENT SCHEDULES
PAGE
REFERENCE
---------
Independent auditors' report 34
Consolidated statements of financial position at
December 31, 2000 and 1999 35-36
Consolidated statements of operations
- years ended December 31, 2000, 1999 and 1998 37-38
Consolidated statements of stockholders' equity and comprehensive
Income (loss)- years ended December 31, 2000, 1999 and 1998 39
Consolidated statements of cash flows
- years ended December 31, 2000, 1999 and 1998 40-41
Notes to consolidated financial statements 42-61
Schedules at December 31, 2000 and 1999:
Schedule II - Condensed Financial
Information of Registrant 62-64
Schedules for each of the years in the three-year
Period ended December 31, 2000:
Schedule IV - Reinsurance 65
All other schedules have been omitted as the required information is
inapplicable or the information required is presented in the financial
statements or the notes thereto filed elsewhere herein.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
During the 24 months preceding the date of the audited financial
statements of 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.
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, 2000.
29
30
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) 1 AND 2
FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES
The financial statements and schedules listed on the following
index to financial statements and financial statement
schedules are filed as part of this Form 10-K.
(a) 3 EXHIBITS
The following exhibits are incorporated by reference herein or
filed herewith as indicated.
EXHIBIT
EXHIBIT NO. DESCRIPTION PAGE NO.
----------- ----------- --------
(1) Underwriting Agreement N/A
(2) Plan of acquisition, reorganization, arrangement, liquidation or
succession (e)
(3) 3.1 Articles of Incorporation; as amended (d)
3.2 Bylaws N/A
(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)
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)
30
31
EXHIBIT
EXHIBIT NO. DESCRIPTION PAGE NO.
----------- ----------- --------
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 (i)
10.10 Plan and Agreement of Exchange dated October 28, 1996
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
(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
31
32
EXHIBIT
EXHIBIT NO. DESCRIPTION PAGE NO.
----------- ----------- --------
(22) Published report regarding matters submitted to a vote of security
holders N/A
(23) Consents of expert and counsel Filed
Herewith
(24) Power of Attorney See
signature
page
(25) Statement of eligibility of trustee N/A
(26) Invitations for competitive bids N/A
(27) (Removed and Reserved) N/A
(99) Additional Exhibits N/A
- ----------------------------
(a) Filed as a part of the Amendment No. 1 to Registration Statement on
Form S-4, SEC File No. 33--4753, filed on or about June 19, 1992.
(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 and incorporated herein by
reference.
(b) REPORTS ON FORM 8-K
A Report on Form 8-K was filed by Citizens on November 3, 2000 regarding the
promotion of Rick D. Riley to Chief Executive Officer.
32
33
CITIZENS, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND
FINANCIAL STATEMENT SCHEDULES
PAGE
REFERENCE
Independent auditors' report 34
Consolidated statements of financial position at
December 31, 2000 and 1999 35-36
Consolidated statements of operations
- years ended December 31, 2000, 1999 and 1998 37-38
Consolidated statements of stockholders' equity and comprehensive
income (loss)- years ended December 31, 2000, 1999 and 1998 39
Consolidated statements of cash flows
- years ended December 31, 2000, 1999 and 1998 40-41
Notes to consolidated financial statements 42-61
Schedules at December 31, 2000 and 1999:
Schedule II - Condensed Financial
Information of Registrant 62-64
Schedules for each of the years in the three-year period
ended December 31, 2000:
Schedule IV - Reinsurance 65
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.
33
34
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
Citizens, Inc.:
We have audited the consolidated financial statements of Citizens, Inc. and
consolidated subsidiaries as listed in the accompanying index. In connection
with our audits of the consolidated financial statements, we also have audited
the financial statement schedules as listed in the accompanying index. These
consolidated financial statements and financial statement schedules are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements and financial statement
schedules based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Citizens, Inc. and
subsidiaries as of December 31, 2000 and 1999, and the results of their
operations and their cash flows for each of the years in the three-year period
ended December 31, 2000, in conformity with accounting principles generally
accepted in the United States of America. Also in our opinion, the related
financial statement schedules, when considered in relation to the basic
consolidated financial statements taken as a whole, present fairly, in all
material respects, the information set forth therein.
KPMG LLP
Dallas, Texas
March 9, 2001
34
35
CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
DECEMBER 31, 2000 AND 1999
ASSETS 2000 1999
------ ------------ ------------
Investments:
Fixed maturities held-to-maturity, at amortized cost $ 5,582,802 $ 5,594,745
Fixed maturities available-for-sale, at fair value 164,945,698 144,214,555
Equity securities available-for-sale, at fair value 675,726 717,812
Mortgage loans on real estate 1,178,668 1,374,204
Policy loans 20,884,136 21,556,344
Other long-term investments 936,297 880,901
------------ ------------
Total investments 194,203,327 174,338,561
Cash and cash equivalents 4,064,035 11,149,084
Accrued investment income 2,222,583 1,761,071
Reinsurance recoverable 2,662,724 2,183,729
Deferred policy acquisition costs 38,052,352 36,518,037
Other intangible assets 1,675,325 1,982,525
Federal income tax recoverable 174,978 --
Deferred federal income tax 4,628,750 6,182,764
Cost of insurance acquired 6,156,424 7,186,494
Excess of cost over net assets acquired 7,362,654 8,021,044
Property, plant and equipment 5,469,583 5,071,735
Other assets 1,169,629 1,089,742
------------ ------------
Total assets $267,842,364 $255,484,786
============ ============
(Continued)
35
36
CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL POSITION, CONTINUED
DECEMBER 31, 2000 AND 1999
LIABILITIES AND STOCKHOLDERS' EQUITY 2000 1999
------------------------------------ ------------- -------------
Liabilities:
Future policy benefit reserves:
Life insurance $ 161,869,267 $ 154,352,032
Annuities 4,170,884 4,023,827
Accident and health 9,229,156 9,037,337
Dividend accumulations 4,749,321 4,854,835
Premium deposits 3,033,514 2,725,016
Policy claims payable 2,866,110 3,591,289
Other policyholders' funds 2,245,947 2,070,950
------------- -------------
Total policy liabilities 188,164,199 180,655,286
Other liabilities 1,355,718 901,636
Commissions payable 1,009,416 530,928
Federal income tax payable 1,129,967
------------- -------------
Total liabilities 190,529,333 183,217,817
------------- -------------
Stockholders' equity:
Common stock:
Class A, no par value, 50,000,000 shares authorized, 26,622,383 shares
issued in 2000 and 24,880,731 in 1999, including shares in
treasury of 2,225,819 in 2000 and 2,080,206 in 1999 79,701,590 67,510,026
Class B, no par value, 1,000,000 shares
authorized, 711,040 shares issued and
outstanding in 2000 and 664,523 in 1999 910,482 584,863
Retained earnings 1,311,655 10,756,800
Accumulated other comprehensive loss:
Unrealized investment loss, net of tax (718,135) (3,711,456)
------------- -------------
81,205,592 75,140,233
Treasury stock, at cost (3,892,561) (2,873,264)
------------- -------------
Total stockholders' equity 77,313,031 72,266,969
------------- -------------
$ 267,842,364 $ 255,484,786
============= =============
See accompanying notes to consolidated financial statements.
36
37
CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
2000 1999 1998
------------ ------------ ------------
Revenues:
Premiums:
Life insurance $ 45,987,689 $ 48,172,160 $ 49,032,491
Accident and health 7,235,685 10,886,317 9,857,844
Annuity and universal life
considerations 228,479 261,880 263,994
Net investment income 12,550,754 11,636,940 11,279,125
Realized gains 86,569 310,890 1,614,388
Other income 588,940 667,320 664,084
Interest expense -- (58,449) (27,011)
------------ ------------ ------------
Total revenues 66,678,116 71,877,058 72,684,915
------------ ------------ ------------
Benefits and expenses:
Insurance benefits paid or provided:
Increase in future
policy benefit reserves 7,265,347 7,371,214 8,279,056
Policyholders' dividends 3,037,343 2,843,681 3,025,746
Claims and surrenders 30,370,996 34,747,480 31,592,740
Annuity expenses 468,752 517,819 436,030
------------ ------------ ------------
Total insurance
benefits paid or provided 41,142,438 45,480,194 43,333,572
Commissions 12,411,053 12,234,053 12,501,426
Other underwriting, acquisition
and insurance expenses 10,139,539 10,328,996 11,079,065
Capitalization of deferred policy
acquisition costs (10,056,287) (9,287,457) (7,941,829)
Amortization of deferred policy
acquisition costs 8,521,972 10,028,806 7,789,513
Amortization of cost of insurance
acquired, excess of cost
over net assets acquired
and other intangibles 1,995,660 2,120,017 11,600,433
------------ ------------ ------------
Total benefits and expenses 64,154,375 70,904,609 78,362,180
------------ ------------ ------------
(Continued)
37
38
CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS, CONTINUED
YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
2000 1999 1998
---------- ---------- -----------
Income (loss) before Federal income
tax $2,523,741 $ 972,449 $(5,677,265)
Federal income tax expense (benefit) 471,000 (298,623) 1,043,428
---------- ---------- -----------
Net income (loss) $2,052,741 $1,271,072 $(6,720,693)
========== ========== ===========
Basic and diluted earnings (loss)
per share of common stock $ .08 $ .05 $ (.27)
========== ========== ===========
See accompanying notes to consolidated financial statements.
38
39
CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY AND COMPREHENSIVE INCOME (LOSS)
YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
ACCUMULATED
OTHER
COMMON STOCK COMPREHENSIVE TOTAL
---------------------------- RETAINED INCOME TREASURY STOCKHOLDERS'
CLASS A CLASS B EARNINGS (LOSS) STOCK EQUITY
------------ ------------ ------------ ------------- ------------ -------------
BALANCE AT DECEMBER 31, 1997 $ 52,790,643 $ 283,262 $ 26,856,157 $ 1,580,790 $ (1,929,154) $ 79,581,698
------------ ------------ ------------ ------------ ------------ ------------
Comprehensive loss:
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
------------ ------------ ------------ ------------ ------------ ------------
Comprehensive loss:
Net income -- -- 1,271,072 -- -- 1,271,072
Unrealized investment losses, net -- -- -- (7,334,920) -- (7,334,920)
------------ ------------ ------------ ------------ ------------ ------------
Comprehensive loss -- -- 1,271,072 (7,334,920) -- (6,063,848)
------------ ------------ ------------ ------------ ------------ ------------
Acquisition of Investors 3,427,138 -- -- -- 3,427,138
Stock dividend 11,292,245 301,601 (10,649,736) -- (944,110) --
------------ ------------ ------------ ------------ ------------ ------------
BALANCE AT DECEMBER 31, 1999 $ 67,510,026 $ 584,863 $ 10,756,800 $ (3,711,456) $ (2,873,264) $ 72,266,969
------------ ------------ ------------ ------------ ------------ ------------
Comprehensive income:
Net income -- -- 2,052,741 -- -- 2,052,741
Unrealized investment gains, net -- 2,993,321 2,993,321
------------ ------------ ------------ ------------ ------------ ------------
Comprehensive income -- -- 2,052,741 2,993,321 -- 5,046,062
Stock dividend 12,191,564 325,619 (11,497,886) -- (1,019,297) --
------------ ------------ ------------ ------------ ------------ ------------
BALANCE AT DECEMBER 31, 2000 $ 79,701,590 $ 910,482 $ 1,311,655 $ (718,135) $ (3,892,561) $ 77,313,031
============ ============ ============ ============ ============ ============
See accompanying notes to consolidated financial statements.
39
40
CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
2000 1999 1998
------------ ------------ ------------
Cash flows from operating activities:
Net income (loss) $ 2,052,741 $ 1,271,072 $ (6,720,693)
Adjustments to reconcile net income to
net cash provided by operating activities,
net of assets acquired:
Realized gains (86,569) (310,890) (1,614,388)
Accrued investment income (461,512) 79,319 204,447
Net deferred policy acquisition costs (1,534,315) 741,349 (152,316)
Amortization of cost of insurance
acquired, excess cost over
net assets acquired and other
intangibles 1,995,660 2,120,017 11,600,433
Depreciation 608,533 510,755 493,691
Change in:
Reinsurance recoverable (478,995) (427,811) 313,862
Future policy benefit reserves 7,856,111 7,169,153 8,057,287
Other policy liabilities (347,198) (25,336) 1,105,031
Deferred federal income tax 12,000 (1,704,321) (1,477,949)
Federal income tax (1,304,945) (404,302) 771,277
Commissions payable and other liabilities 932,570 (1,763,567) (682,884)
Other, net 157,828 376,787 1,237,829
------------ ------------ ------------
Net cash provided by operating activities 9,401,909 7,632,225 13,135,627
------------ ------------ ------------
Cash flows from investing activities:
Sale of fixed maturities, available-for-sale 10,325,965 1,630,775 28,476,347
Maturity of fixed maturities, available-for-sale 30,559,981 10,260,075 688,037
Purchase of fixed maturities, available-for-sale (57,178,261) (18,742,695) (39,392,056)
Sale of equity securities, available-for-sale 88 92,500 151,923
Principal payments on mortgage loans 195,536 186,553 391,538
Mortgage loans funded -- -- (665,000)
Guaranteed student loans funded -- (6,287) (32,338)
Guaranteed student loans sold -- 10,960 119,346
Sale of other long-term investments and property, plant
and equipment 10,949 13,799 2,702,877
(Continued)
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41
CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS, CONTINUED
YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
2000 1999 1998
------------ ------------ ------------
Cash and cash equivalents provided by
mergers and acquisitions $ -- $ 1,512,255 $ --
Increase (decrease) in policy loans, net 672,208 (559,425) (530,735)
Purchase of other long-term investments and property, plant
and equipment (1,073,424) (717,046) (1,027,697)
------------ ------------ ------------
Net cash used by investing activities (16,486,958) (6,318,536) (9,117,758)
------------ ------------ ------------
Cash flows used by financing activities:
Payments on notes payable -- (333,333) (604,097)
------------ ------------ ------------
Net increase (decrease) in cash and cash equivalents (7,085,049) 980,356 3,413,772
------------ ------------ ------------
Cash and cash equivalents at beginning of year 11,149,084 10,168,728 6,754,956
------------ ------------ ------------
Cash and cash equivalents at end of year $ 4,064,035 $ 11,149,084 $ 10,168,728
============ ============ ============
Supplemental:
2000 1999 1998
------------ ------------ ------------
Cash paid during the year for:
Interest $ -- $ 43,810 $ 41,650
============ ============ ============
Income taxes $ 1,763,945 $ 1,810,000 $ 1,750,100
============ ============ ============
Supplemental disclosures of non-cash investing and financing activities:
The Company issued Class A common stock and cash to purchase all of the capital
stock of Investors in 1999. In conjunction with the acquisition, cash and cash
equivalents were provided as follows:
1999
-----------
Fair value of capital stock issued $ 3,427,138
Fair value of tangible assets acquired
excluding cash and cash equivalents (1,658,547)
Fair value of intangible assets acquired (353,703)
Liabilities assumed 97,367
-----------
Cash and cash equivalents provided by
mergers and acquisitions $ 1,512,255
===========
Issuance of 609,269 Class A shares $ 3,427,138
===========
See accompanying notes to consolidated financial statements.
41
42
CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2000, 1999 AND 1998
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) NATURE OF BUSINESS
The consolidated financial statements include the accounts and
operations of Citizens, Inc. (Citizens), incorporated in the state
of Colorado on November 8, 1977 and its wholly-owned subsidiaries,
Citizens Insurance Company of America (CICA), Computing
Technology, Inc. (CTI), Funeral Homes of America, Inc. (FHA),
Insurance Investors, Inc. (III), Central Investors Life Insurance
Company of Illinois (CILIC), First Investors Group, Inc.
(Investors) and Excalibur Insurance Corporation (Excalibur).
Citizens and its consolidated subsidiaries are collectively
referred to as "the Company."
American Liberty Financial Corporation (ALFC) and its
subsidiaries, American Liberty Life Insurance Company (ALLIC),
First American Investment Corp. (FAIC) and American Liberty
Exploration Company (ALEC) were acquired by Citizens in September
1995. Effective January 1, 1997, ALFC was merged into Citizens and
ALLIC was merged into CICA. American Investment Network (AIN),
which was acquired in June 1997, owned United Security Life
Insurance Company (USLIC). During 1998, AIN was liquidated into
CICA. Insurance Investors and Holding Company (IIH), which was
acquired in March 1996, owned CILIC. During 1998, IIH was
liquidated and merged into CICA. National Security Life and
Accident Insurance Company (NSLIC) was merged into CICA effective
January 1, 2000 and USLIC was merged into CICA effective October
1, 2000.
Citizens provides life and health insurance policies through three
of its subsidiaries - CICA, CILIC and Excalibur. CICA sells
ordinary whole-life policies internationally and burial insurance,
pre-need policies, accident and health specified disease, hospital
indemnity and accidental death policies, throughout the southern
United States. Excalibur sells life insurance business throughout
the State of Illinois.
CILIC does not actively market insurance policies, but 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.
42
43
(b) BASIS OF PRESENTATION
The accompanying consolidated financial statements of the Company
and its wholly owned subsidiaries have been prepared in conformity
with accounting principles generally accepted in the United States
of America (U.S. GAAP). All significant intercompany accounts and
transactions have been eliminated.
(c) INVESTMENTS, OTHER THAN AFFILIATES
Fixed maturities consist primarily of bonds, which the Company has
the ability and intent to hold to maturity, and are carried at
amortized cost. Fixed maturities, which may be sold prior to
maturity to support the Company's investment strategies, are
considered held as available-for-sale and carried at fair value as
of the balance sheet date. Equity securities include
non-redeemable preferred stock and are reported at fair value.
Unrealized appreciation (depreciation) of equity securities and
fixed maturities held as available-for-sale is shown as a separate
component of stockholders' equity, net of tax, and is a separate
component of comprehensive income.
Mortgage loans on real estate, policy loans, and guaranteed
student loans are reported at unpaid principal balances less an
allowance for uncollectible amounts. Mortgage loans have an
allowance for uncollectible amounts of $50,000 at December 31,
2000 and 1999 which was estimated by the Company based upon
historical amounts that proved uncollectible.
Other long-term investments consist primarily of real estate that
is recorded at the lower of fair value, minus estimated costs to
sell, or cost. If the fair value of the real estate minus
estimated costs to sell is less than cost, a valuation allowance
is provided for the deficiency. Increases in the valuation
allowance are charged to income.
A decline in the fair value of any available-for-sale or
held-to-maturity security below cost that is deemed other than
temporary is charged to earnings resulting in the establishment of
a new cost basis for the security.
Premiums and discounts are amortized or accreted over the life of
the related security as an adjustment to yield using the effective
interest method. Dividend and interest income is recognized when
earned. Realized gains and losses for securities classified as
available-for-sale and held-to-maturity are included in earnings
and are derived using the specific identification method for
determining the cost of securities sold.
Policy loans and other investments are primarily reported at cost.
The Company has assets with a fair value of $9,420,063 at December
31, 2000 and $9,261,668 at December 31, 1999 on deposit with
various state regulatory authorities to fulfill statutory
requirements.
43
44
(d) PREMIUM REVENUE AND RELATED EXPENSES
Premiums on life and accident and health policies are reported as
earned when due or, for short duration contracts, over the
contract periods. Benefits and expenses are associated with earned
premiums so as to result in recognition of profits over the
estimated life of the contracts. This matching is accomplished by
means of provisions for future benefits and the capitalization and
amortization of deferred policy acquisition costs.
Annuities are accounted for in a manner consistent with accounting
for interest bearing financial instruments. Premium receipts are
not reported as revenues but rather as deposit liabilities to
annuity contracts.
(e) DEFERRED POLICY ACQUISITION COSTS AND COST OF INSURANCE ACQUIRED
Acquisition costs, consisting of commissions and policy issuance,
underwriting and agency expenses that relate to and vary with the
production of new business, are deferred. These deferred policy
acquisition costs are amortized primarily over the estimated
premium paying period of the related policies in proportion to the
ratio of the annual premium recognized to the total premium
revenue anticipated using the same assumptions as were used in
computing liabilities for future policy benefits.
The Company 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.
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.
44
45
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
ranging from 10 to 20 years.
The Company continually monitors long-lived assets and certain
intangible assets, such as excess of cost over net assets acquired
and cost of insurance acquired, for impairment. An impairment loss
is recorded in the period in which the carrying value of the
assets exceeds the fair value or expected future cash flows. Any
amounts deemed to be impaired are charged, in the period in which
such impairment was determined, as an expense against earnings.
(h) PARTICIPATING POLICIES
At December 31, 2000 and 1999, participating business approximated
57% and 59%, respectively, of life insurance in-force and premium
income. The amount of dividends to be paid is determined annually
by the Board of Directors.
(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, 2000, 1999 and 1998 were 25,107,604,
25,057,913 and 24,484,989, respectively. The per share amounts
have been adjusted retroactively for all periods presented to
reflect the change in capital structure resulting from a 7% stock
dividend declared on October 31, 2000, payable on December 31,
2000 to holders of record as of December 1, 2000 and a 7% stock
dividend declared on November 2, 1999, payable on December 31,
1999 to holders of record as of December 1, 1999. The 2000 stock
dividend resulted in the issuance of 1,887,265 Class A shares
(including 145,613 shares in treasury) and 46,517 Class B shares
and the 1999 stock dividend resulted in the issuance of 1,763,805
Class A shares (including 136,091 shares in treasury) and 43,474
Class B shares.
(j) INCOME TAXES
For the year ended December 31, 2000, the Company plans to file
three separate tax returns as follows: 1) Citizens, Inc., CICA and
all direct non-life subsidiaries, 2) Excalibur and 3) CILIC.
45
46
For the year ended December 31, 1999, the Company filed five
separate tax returns as follows: 1) Citizens, Inc., CICA and all
direct non-life subsidiaries, 2) Excalibur, 3) USLIC, 4) NSLIC and
5) CILIC.
For the year ended December 31, 1998, the Company filed six
separate tax returns as follows: 1) Citizens, Inc., CICA, and all
direct non-life subsidiaries, 2) Investors, 3) Excalibur, 4)USLIC,
5) NSLIC, and 6) CILIC.
Deferred tax asset and liabilities are recognized for the
estimated future tax consequences attributable to differences
between the financial statement carrying amounts of existing
assets and liabilities and their respective tax bases. Deferred
tax assets and liabilities are measured using enacted tax rates in
effect for the year in which those temporary differences are
expected to be recovered or settled. The effect on deferred tax
assets and liabilities of a change in tax rates is recognized in
income in the period that includes the enactment date.
(k) ACCOUNTING PRONOUNCEMENTS
In December 1997, the American Institute of Certified Public
Accountants (AICPA) issued Statement of Position (SOP) 97-3
"Accounting by Insurance and Other Enterprises for
Insurance-Related Assessments." SOP 97-3 provides: 1) guidance for
determining when an entity should recognize a liability for
guaranty fund and other insurance-related assessments, 2) guidance
on how to measure a liability, 3) guidance on when an asset may be
recognized for a portion or all of the assessment liability or
paid assessment that can be recovered through premium tax offsets
or policy surcharges and 4) requirements for disclosure of certain
information. This SOP is effective for financial statements for
fiscal years beginning after December 15, 1998. The Company
adopted SOP 97-3 during 1999. Implementation did not have a
material impact on the Company's financial statements.
In March 1998, the AICPA issued SOP 98-1, "Accounting for the
Costs of Computer Software Developed or Obtained for Internal
Use." This SOP provides guidance for determining whether costs of
software developed or obtained for internal use should be
capitalized or expensed when incurred. In the past, the Company
has expensed such costs as they were incurred. This SOP is also
effective for fiscal years beginning after December 15, 1998. The
Company adopted SOP 98-1 during 1999. Implementation did not have
a material impact on the Company's financial statements.
Statement of Financial Accounting Standard (SFAS) No. 133,
"Accounting for Derivative Instruments and Hedging Activities," as
amended, is effective January 1, 2001. Management does not believe
SFAS No. 133, as amended, will have a significant effect on the
financial position, results of operations or liquidity of the
Company.
SFAS No. 140, "Accounting for Transfers and Servicing of Financial
Assets and Extinguishments of Liabilities - A Replacement of FASB
Statement 125" revises the
46
47
rules to be followed when determining whether a special purpose
entity (SPE) is a qualifying SPE (QSPE). SFAS No. 140 requires
that a QSPE have at least 10% of its beneficial interests held by
parties unrelated to the transferor and limits the amount and type
of derivative instruments that a QSPE can hold. SFAS No. 140
requires that for a transfer to a QSPE to be accounted for as a
sale, the transferor must not retain effective control over the
transferred assets through a removal-of-accounts provision that
allows the transferor to unilaterally reclaim specific transferred
assets. SFAS No. 140 requires extensive disclosures about
securitizations entered into during the period and retained
interests in securitized financial assets at the balance sheet
date, accounting policies, sensitivity information related to
retained interests and cash flows distributed to the transferor.
It is effective for transfers occurring after March 31, 2001.
However, the expanded disclosures about securitizations and
collateral are effective for fiscal years ending after December
15, 2000. Management does not believe that SFAS No. 140 will have
a significant effect on the financial position, results of
operations or liquidity of the Company.
(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 U.S.
GAAP requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of 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 1999 and 1998
amounts to conform to the 2000 presentation.
(2) INVESTMENTS
The cost, gross unrealized gains and losses and fair value of
investments of fixed maturities and equity securities
available-for-sale, as of December 31, 2000 and 1999, are as
follows:
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48
2000
------------------------------------------------------------------------
GROSS GROSS
UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
------------ ------------ ------------ ------------
Fixed maturities held-to-maturity:
US Treasury securities $ 5,582,802 $ 6,198 $ -- $ 5,589,000
============ ============ ============ ============
Fixed maturities available-for-sale:
US Treasury securities and
obligations of US government
corporations and agencies 36,355,133 467,241 422,705 36,399,669
Public utilities 2,327,073 793 141,665 2,186,201
Debt securities issued by States
of the United States and political
Subdivisions of the States 3,583,666 17,216 28,583 3,572,299
Corporate securities 17,235,989 135,458 869,857 16,501,590
Mortgage-backed securities 106,494,411 946,837 1,155,309 106,285,939
------------ ------------ ------------ ------------
Total fixed maturities
available-for-sale $165,996,272 $ 1,567,545 $ 2,618,119 $164,945,698
============ ============ ============ ============
Total equity securities
available-for-sale $ 713,235 $ 15,872 $ 53,381 $ 675,726
============ ============ ============ ============
1999
------------------------------------------------------------------------
GROSS GROSS
UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
------------ ------------ ------------ ------------
Fixed maturities held-to-maturity:
US Treasury securities $ 5,594,745 $ -- $ 388,495 $ 5,206,250
============ ============ ============ ============
Fixed maturities available-for-sale:
US Treasury securities and
obligations of US government
corporations and agencies 43,573,934 139,888 1,435,222 42,278,600
Public utilities 2,258,495 745 182,048 2,077,192
Debt securities issued by States
of the United States and political
Subdivisions of the States 5,847,282 35,582 129,039 5,753,825
Corporate securities 22,243,158 228,217 551,430 21,919,945
Mortgage-backed securities 75,916,624 62,503 3,794,134 72,184,993
------------ ------------ ------------ ------------
Total fixed maturities
available-for-sale $149,839,493 $ 466,935 $ 6,091,873 $144,214,555
============ ============ ============ ============
Total equity securities
available-for-sale $ 716,293 $ 50,994 $ 49,475 $ 717,812
============ ============ ============ ============
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49
The amortized cost and fair value of fixed maturities at December 31,
2000 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 $5,582,802 $5,589,000
========== ==========
FIXED MATURITIES AVAILABLE-FOR-SALE
AMORTIZED
COST FAIR VALUE
------------ ------------
Due in one year or less $ 1,431,065 $ 1,434,993
Due after one year through five years 9,650,824 9,555,249
Due after five years through ten years 22,997,012 22,757,793
Due after ten years 25,422,960 24,911,724
------------ ------------
59,501,861 58,659,759
Mortgage-backed securities 106,494,411 106,285,939
------------ ------------
Totals $165,996,272 $164,945,698
============ ============
The Company had no investments in any one entity that exceeded 10% of
stockholders' equity at December 31, 2000 other than investments
guaranteed by the U.S. Government.
The Company's investment in mortgage loans is concentrated 28% in
Colorado, 41% in Texas and 31% in Mississippi as of December 31, 2000.
Major categories of net investment income are summarized as follows:
YEAR ENDED DECEMBER 31,
------------------------------------------------------
2000 1999 1998
------------ ------------ ------------
Investment income on:
Fixed maturities $ 10,885,567 $ 9,795,297 $ 9,070,636
Equity securities 51,401 52,252 61,623
Mortgage loans on real estate 124,092 121,818 145,325
Policy loans 1,532,238 1,571,863 1,492,733
Long-term investments 852,117 829,599 900,276
Other 191,354 451,411 616,958
------------ ------------ ------------
13,636,739 12,822,240 12,287,551
Investment expenses (1,086,015) (1,185,300) (1,008,426)
------------ ------------ ------------
Net investment income $ 12,550,754 $ 11,636,940 $ 11,279,125
============ ============ ============
Equity securities of $23,328 as of December 31, 2000, did not produce income
during the preceding 12 months.
49
50
Proceeds and gross realized gains (losses) from sales and maturities of fixed
maturities available-for-sale for 2000, 1999 and 1998 are summarized as follows:
YEAR ENDED DECEMBER 31,
----------------------------------------------
2000 1999 1998
------------ ------------ ------------
Proceeds $ 40,885,946 $ 11,890,850 $ 29,164,384
============ ============ ============
Gross realized gains $ 284,038 $ 344,002 $ 452,105
============ ============ ============
Gross realized (losses) $ (193,801) $ (36,325) $ (45,268)
============ ============ ============
Proceeds and gross realized gains (losses) from sales of equity securities
available-for-sale for 2000, 1999 and 1998 are summarized as follows:
YEAR ENDED DECEMBER 31,
----------------------------------
2000 1999 1998
-------- -------- --------
Proceeds $ 88 $ 92,500 $151,923
======== ======== ========
Gross realized gains $ -- $ -- $ --
======== ======== ========
Gross realized (losses) $ (2,970) $ (6,477) $(16,319)
======== ======== ========
Realized gains (losses) are as follows:
YEAR ENDED DECEMBER 31,
-------------------------------------------
2000 1999 1998
----------- ----------- -----------
Realized gains (losses):
Fixed maturities $ 90,237 $ 307,677 $ 406,837
Equity securities (2,970) (6,477) (16,319)
Other (698) 9,690 1,223,870
----------- ----------- -----------
Net realized gains $ 86,569 $ 310,890 $ 1,614,388
=========== =========== ===========
(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,
--------------------------------------------
2000 1999 1998
------------ ------------ ------------
Balance at beginning of period $ 7,186,494 $ 8,290,853 $ 10,639,667
Increase (decrease) related to
Acquisitions -- 50,000 (877,904)
Interest 538,988 625,251 797,975
Amortization (1,569,058) (1,779,610) (2,268,885)
------------ ------------ ------------
Balance at end of period $ 6,156,424 $ 7,186,494 $ 8,290,853
============ ============ ============
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51
Accretion of interest on cost of insurance acquired is calculated based on the
rates of interest used in setting the related policy reserves. These rates range
from 6.5% to 8.5%. Estimated amortization in each of the next five years is as
follows. These amounts are equal to the carrying value due and exclude interest
accretion at rates ranging from 6.5% to 8.5%. Actual future amortization will
differ from these estimates due to variances from estimated future withdrawal
assumptions.
YEAR AMOUNT
---- ----------
2001 $1,254,416
2002 917,660
2003 811,552
2004 718,515
2005 664,301
Thereafter 1,789,980
Excess of cost over net assets acquired is summarized as follows:
YEAR ENDED DECEMBER 31,
------------------------------------------
ACCUMULATED
GROSS AMORTIZATION NET
------------ ------------ ------------
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
Increase related to acquisitions 303,703 -- 303,703
Amortization -- (658,458) (658,458)
------------ ------------ ------------
Balance at December 31, 1999 $ 11,835,543 $ (3,814,499) $ 8,021,044
Amortization -- (658,390) (658,390)
------------ ------------ ------------
Balance at December 31, 2000 $ 11,835,543 $ (4,472,889) $ 7,362,654
============ ============ ============
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.
(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.
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52
The following table presents information on changes in the liability for
accident and health policy and contract claims for the years ended December 31,
2000 and 1999.
2000 1999
---- ----
Policy and contract claims payable at January 1 $ 2,009,144 $2,390,618
Add claims incurred, related to:
Current year 5,176,481 8,673,369
Prior years (17,858) 12,849
----------- ----------
5,158,623 8,686,218
Deduct claims paid, related to:
Current year 4,080,331 5,450,160
Prior years 1,717,017 3,617,532
----------- ----------
5,797,348 9,067,692
----------- ----------
Policy and contract claims payable, December 31 $ 1,370,419 $2,009,144
=========== ==========
The development of prior year claim reserves reflects normal changes in
actuarial estimates.
(5) REINSURANCE
In the normal course of business, the Company reinsures portions of
certain policies that it underwrites to limit disproportionate risks.
During 2000, the Company retained varying amounts of individual insurance
up to a maximum retention of $75,000 on any life. On health policies
there are varying retention limits ranging from $25,000 to $35,000
depending on the product with some of the supplemental hospital and
surgical policies reinsured on a quota share basis. The Company's share
of risk on the quota share reinsurance ranges from 25% to 50%. The
Company remains contingently liable to the extent that the reinsuring
companies cannot meet their obligations under these reinsurance treaties.
Assumed and ceded reinsurance activity for 2000 and 1999 is summarized as
follows:
2000 1999
---- ----
Aggregate assumed life insurance in-force $ 326,267,000 $ 273,146,000
=============== ===============
Aggregate ceded life insurance in-force $ (272,150,000) $ (278,689,000)
=============== ===============
Total life insurance in-force $ 2,294,640,000 $ 2,192,301,000
=============== ===============
Premiums and claims and surrenders assumed and ceded for the years ended
December 31, 2000, 1999 and 1998:
2000 1999 1998
---- ---- ----
Premiums assumed $ 95,068 $ 484,746 $ 231,410
=========== =========== ===========
Premiums ceded $(2,494,798) $(2,539,155) $(3,368,690)
=========== =========== ===========
Claims and surrenders assumed $ 87,025 $ 481,899 $ 234,037
=========== =========== ===========
Claims and surrenders ceded $(1,710,160) $(1,762,195) $(1,690,643)
=========== =========== ===========
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53
Amounts paid or deemed to have been paid for reinsurance contracts are
recorded as reinsurance receivables. The cost of reinsurance related to
long duration contracts is accounted for over the life of the underlying
reinsured policies using assumptions consistent with those used to
account for the underlying policies.
(6) STOCKHOLDERS' EQUITY AND RESTRICTIONS
The two classes of stock of Citizens are equal in all respects, except
(a) each Class A share receives twice the cash dividends paid on a per
share basis to the Class B common stock; and (b) the Class B common stock
elects a simple majority of the Board of Directors of Citizens and the
Class A common stock elects the remaining directors.
Generally, the net assets of the insurance subsidiaries available for
transfer to Citizens are limited to the greater of the subsidiary net
gain from operations during the preceding year or 10% of the subsidiary
net statutory surplus as of the end of the preceding year as determined
in accordance with accounting practices prescribed or permitted by
insurance regulatory authorities. Payments of dividends in excess of such
amounts would generally require approval by the regulatory authorities.
Based upon statutory net gain from operations and surplus of the
individual insurance companies as of and for the year ended December 31,
2000 approximately $3,400,000 of dividends could be paid to Citizens
without prior regulatory approval.
CICA, CILIC and Excalibur have calculated their risk based capital (RBC)
in accordance with the National Association of Insurance Commissioners'
Model Rule and the RBC rules as adopted by their respective state of
domicile. The RBC as calculated for CICA, CILIC and Excalibur exceeded
levels requiring company or regulatory action.
(7) MERGERS AND ACQUISITIONS
In March 1997, the Company acquired the remaining 5.2% 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) and is being amortized
over 10 years. 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 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 would
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 shares in connection with the transaction, which was
accounted for as a purchase and was consummated on June 19, 1997. The
excess of cost over net assets acquired amounted to
53
54
$875,000 and is being amortized over 20 years. During 1998, AIN was
liquidated and USLIC became a wholly-owned subsidiary of 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. The
excess of cost over net assets acquired amounted to $625,567 and is being
amortized over 10 years. In conjunction with the acquisition, the Company
and two executives of NSLIC executed employment agreements that 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 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 Central 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. The excess of cost
over net assets acquired amounted to $419,878 and is being amortized over
5 years. During 1998, IIH was liquidated and CILIC became a wholly-owned
subsidiary of CICA.
On September 15, 1998, Citizens announced that a definitive agreement had
been reached between Citizens and Investors of Springfield, Illinois
whereby Citizens would acquire 100% of the outstanding shares of
Investors for shares of Citizens Class A Common stock. Investors is the
parent of Excalibur, also of Springfield, Illinois. 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. The transaction closed on January 26, 1999.
Citizens issued 609,269 shares of its Class A Common stock to consummate
the transaction, which was accounted for as a purchase. The excess of
cost over net assets acquired amounted to $303,703 and is being amortized
over 10 years.
Effective January 1, 2000, NSLIC was merged with and into CICA.
Additionally, effective October 1, 2000, USLIC was merged with and into
CICA.
(8) CONTINGENCIES
The Company is a party to various legal proceedings incidental to its
business. The Company has been named as a defendant in various legal
actions seeking payments for claims denied by the Company and other
monetary damages. In the opinion of management and its legal counsel, the
ultimate liability, if any, resulting from any contingent liabilities
that might arise from litigation are not considered material in relation
to the financial position or results of operations of the Company.
54
55
Reserves for claims payable are based on the expected claim amount to be
paid after a case by case review of the facts and circumstances relating
to each claim. A contingency exists with regard to these reserves until
such time as the claims are adjudicated and paid.
(9) SEGMENT INFORMATION
The Company has two reportable segments identified by geographic area:
International Business and Domestic Business. International Business
consisting of ordinary whole-life business is sold throughout Central and
South America. The Company has no assets, offices or employees outside of
the United States of America (U.S.) and requires that all transactions be
in U.S. dollars paid in the U.S. Domestic Business consisting of
traditional life and burial insurance, pre-need policies, accident and
health specified disease, hospital indemnity and accidental death
policies are sold throughout the southern U.S. The accounting policies of
the segments are in accordance with U.S. GAAP and are the same as those
described in the summary of significant accounting policies. The Company
evaluates performance based on U.S. GAAP net income (loss) before federal
income taxes for its two reportable segments.
Geographic Areas - The following summary represents financial data of the
Company's continuing operations based on their location.
2000 1999 1998
---- ---- ----
REVENUES
U.S $14,340,251 $19,844,710 $20,674,694
Non-U.S 52,337,865 52,032,348 52,010,221
----------- ----------- -----------
Total Revenues $66,678,116 $71,877,058 $72,684,915
=========== =========== ===========
The following summary, representing revenues and pre-tax income from
continuing operations and identifiable assets for the Company's
reportable segments as of and for the years ended December 31, 2000, 1999
and 1998, is as follows:
YEARS ENDED DECEMBER 31 2000 1999 1998
---- ---- ----
Revenue, excluding net investment income
and realized gains
Domestic $11,622,382 $16,546,005 $17,007,228
International 42,418,411 43,383,223 42,784,174
----------- ----------- -----------
Total consolidated revenue $54,040,793 $59,929,228 $59,791,402
=========== =========== ===========
Net investment income:
Domestic $ 2,699,251 $ 3,212,871 $ 3,208,265
International 9,851,503 8,424,069 8,070,860
----------- ----------- -----------
Total consolidated net investment
income $12,550,754 $11,636,940 $11,279,125
=========== =========== ===========
55
56
Amortization expense:
Domestic $ 1,922,308 $ 1,766,439 $ 12,177,194
International 8,595,324 10,382,384 7,212,752
----------- ----------- ------------
Total consolidated amortization
expense $10,517,632 $12,148,823 $ 19,389,946
=========== =========== ============
Realized gains
Domestic $ 18,618 $ 85,834 $ 459,201
International 67,951 225,056 1,155,187
----------- ----------- ------------
Total consolidated realized gains $ 86,569 $ 310,890 $ 1,614,388
=========== =========== ============
Income (loss) before federal Income tax:
Domestic $ 290,577 $ 67,571 $ (7,767,586)
International 2,233,164 904,878 2,090,321
----------- ----------- ------------
Total consolidated net income (loss) before
federal income taxes $ 2,523,741 $ 972,449 $ (5,677,265)
=========== =========== ============
December 31 2000 1999
---- ----
Assets:
Domestic $ 93,476,985 $ 94,273,886
International 174,365,379 161,210,900
------------ ------------
Total $267,842,364 $255,484,786
============ ============
(10) INCOME TAXES
A reconciliation of Federal income tax expense computed by applying the
Federal income tax rate of 34% to income before Federal income tax
expense is as follows:
2000 1999 1998
---- ---- ----
Computed normal tax
expense (benefit) $ 858,072 $ 330,633 $(1,930,270)
Small life insurance company
deduction (573,000) (597,755) (447,690)
Change in valuation allowance -- (173,350) (24,479)
Amortization of excess of costs
over net assets acquired 224,000 223,876 3,444,038
Other (38,072) (82,027) 1,829
--------- --------- -----------
Federal income tax
expense (benefit) $ 471,000 $(298,623) $ 1,043,428
========= ========= ===========
56
57
Income tax expense (benefit) for the years ended December 31, 2000, 1999
and 1998 consists of:
2000 1999 1998
---- ---- ----
Current $ 459,000 $ 1,405,698 $ 2,521,377
Deferred 12,000 (1,704,321) (1,477,949)
--------- ----------- -----------
$ 471,000 $ (298,623) $ 1,043,428
========= =========== ===========
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at
December 31, 2000 and 1999 are presented below.
2000 1999
---- ----
Deferred tax assets:
Future policy benefit reserves $15,472,000 $15,182,304
Net operating loss carryforwards 760,000 904,717
Investments available for sale 369,948 1,911,962
Other 836,802 715,649
----------- -----------
Total gross deferred tax assets 17,438,750 18,714,632
Less valuation allowance -- --
----------- -----------
Net deferred tax assets $17,438,750 $18,714,632
----------- -----------
Deferred tax liabilities:
Deferred policy acquisition costs
and cost of insurance acquired $11,847,000 $11,526,363
Other 963,000 1,005,505
----------- -----------
Total gross deferred tax liabilities 12,810,000 12,531,868
----------- -----------
Net deferred tax asset $ 4,628,750 $ 6,182,764
=========== ===========
During 1999 and 1998, the Company released the valuation allowance
associated with NSLIC and ALFC net operating losses, respectively, as
these losses can be utilized in the future by the Company and CICA.
The Company and its subsidiaries have net operating losses at December
31, 2000 available to offset future taxable income of approximately
$760,000 for Federal income tax substantially all of which expire through
2020. A portion of the net operating loss carryforward is subject to
limitations under Section 382 of the Internal Revenue Code.
At December 31, 2000, 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
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58
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, 2000 become taxable, the tax computed
at present rates would be approximately $1,119,000.
(11) FAIR VALUE OF FINANCIAL INSTRUMENTS
Estimates of fair values are made at a specific point in time, based on
relevant market prices and information about the financial instrument.
The estimated fair values of financial instruments presented below are
not necessarily indicative of the amounts the Company might realize in
actual market transactions. The carrying amount and fair value for the
financial assets and liabilities on the consolidated balance sheets at
each year-end were.
2000 1999
---- ----
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
------ ----- ------ -----
Financial assets:
Fixed maturities $170,528,500 $170,534,698 $149,809,300 $149,420,805
Equity securities 675,726 675,726 717,812 717,812
Cash and
cash equivalents 4,064,035 4,064,035 11,149,084 11,149,084
Mortgage Loans 1,178,668 1,178,668 1,374,204 1,374,204
Financial
Liabilities:
Annuities 4,170,884 4,170,884 4,023,827 4,023,827
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, 2000
and 1999, were approximately 8.6% and 8.7% respectively, with maturities
ranging from one to fifteen years. Management believes that reported
amounts approximate fair value.
The carrying value and fair values for the Company's liabilities under
annuity contract policies are the same as the interest rates credited to
these products and are periodically adjusted by the Company to reflect
market conditions. The fair value of liabilities under all insurance
contracts are taken into consideration in the overall management of
interest rate risk, which minimizes exposure to changing interest rates
through the matching of investment maturities with amounts due under
insurance contracts.
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59
Policy loans have a weighted average interest rate of 7.5% and 7.2% as of
December 31, 2000 and 1999, respectively, and have no specified maturity
dates. The aggregate fair value of policy loans approximates the carrying
value reflected on the consolidated balance sheet. These loans typically
carry an interest rate that is tied to the crediting rate applied to the
related policy and contract reserves. Policy loans are an integral part
of the life insurance policies which the Company has in-force and cannot
be valued separately.
For cash, accrued investment income, amounts recoverable from reinsurers,
other assets, federal income tax payable and receivable, dividend
accumulations, commissions payable, amounts held on deposit, and other
liabilities, the carrying amounts approximate fair value because of the
short maturity of such financial instruments.
(12) OTHER COMPREHENSIVE INCOME (LOSS)
The changes in the components of other comprehensive income (loss) are
reported net of income taxes of 34% for the periods indicated as follows:
YEAR ENDED DECEMBER 31, 2000
----------------------------
PRE-TAX TAX NET
AMOUNT EFFECT AMOUNT
------ ------ ------
Unrealized gain on securities:
Unrealized holding gain
arising during the period $ 4,622,602 $(1,571,685) $3,050,917
Less: reclassification adjustment
for gains included in net income (87,267) 29,671 (57,596)
----------- ----------- ----------
Other comprehensive income $ 4,535,335 $(1,542,014) $2,993,321
=========== =========== ==========
YEAR ENDED DECEMBER 31, 1999
----------------------------
PRE-TAX TAX NET
AMOUNT EFFECT AMOUNT
------ ------ ------
Unrealized loss on securities:
Unrealized holding loss
arising during the period $(10,812,316) $3,676,186 $(7,136,130)
Add: reclassification adjustment
for gains included in net income (301,200) 102,410 (198,790)
------------ ---------- -----------
Other comprehensive loss $(11,113,516) $3,778,596 $(7,334,920)
============ ========== ===========
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60
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
=========== =========== ===========
(13) QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
The following table contains selected unaudited consolidated financial
data for each calendar quarter.
2000
----
FOURTH THIRD SECOND FIRST
QUARTER QUARTER QUARTER QUARTER
------- ------- ------- -------
Revenues $ 17,621,342 $ 17,010,084 $ 16,468,250 $ 15,578,440
Expenses 15,224,838 17,631,964 15,298,624 15,998,949
Federal income tax expense
(benefit) 705,398 (335,073) 220,512 (119,837)
Net income (loss) 1,691,106 (286,807) 949,114 (300,672)
Basic and diluted earnings
(loss) per share
.07 (.01) .03 (.01)
1999
----
FOURTH THIRD SECOND FIRST
QUARTER QUARTER QUARTER QUARTER
------- ------- ------- -------
Revenues $ 18,883,005 $ 17,946,816 $ 18,229,167 $16,818,070
Expenses 19,150,093 16,816,910 18,455,771 16,481,835
Federal income tax expense
(benefit) (481,050) 239,427 (115,484) 58,484
Net income (loss) 213,962 890,479 (111,120) 277,751
Basic and diluted earnings
(loss) per share
.01 .04 (.01) .01
60
61
1998
----
FOURTH THIRD SECOND FIRST
QUARTER QUARTER QUARTER QUARTER
------- ------- ------- -------
Revenues $ 19,013,057 $ 19,049,196 $18,162,381 $16,460,281
Expenses 16,673,560 27,487,836 17,890,009 16,310,775
Federal income tax expense
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
(loss) per share
.07 (.35) .01 .01
(14) YEAR 2000 ISSUES (UNAUDITED)
The Company successfully addressed the impact of the Year 2000 on its
systems, procedures, customers and business processes. There was no
adverse impact on any Company operations for the calendar change from
1999 to 2000.
The Company used internal resources to modify, replace and test the Year
2000 modifications. The total cost for the project was negligible, was
performed with existing staff and the associated costs were expensed as
incurred.
All critical suppliers or customers (external relationships) resolved
their own third party Year 2000 issues and were able to interact with the
Company. The Company encountered no loss of data or functionality related
to the Year 2000.
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62
SCHEDULE II
CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
CITIZENS, INC. (PARENT COMPANY)
STATEMENTS OF FINANCIAL POSITION
DECEMBER 31, 2000 AND 1999
2000 1999
---- ----
Assets
Investment in subsidiaries (1) $ 72,435,637 $ 68,043,909
Fixed maturities available-for-sale, at fair value 2,583,419 --
Accrued investment income 44,683 14,410
Real estate 800,114 741,834
Cash 220,273 1,667,050
Notes receivable (1) 200,000 266,667
Other assets 1,449,198 1,701,898
------------ ------------
$ 77,733,324 $ 72,435,768
============ ============
Liabilities and Stockholders' Equity
Liabilities -
Accrued expense and other $ 420,293 $ 168,799
------------ ------------
Stockholders' equity:
Common stock:
Class A 79,701,590 67,510,026
Class B 910,482 584,863
Retained earnings 1,311,655 10,756,800
Accumulated other comprehensive income:
Unrealized investment gain (loss) of
securities held by subsidiaries, net of tax (718,135) (3,711,456)
Treasury stock (3,892,561) (2,873,264)
------------ ------------
77,313,031 72,266,969
------------ ------------
$ 77,733,324 $ 72,435,768
============ ============
(1) Eliminated in consolidation.
See accompanying independent auditors' report.
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63
SCHEDULE II, CONTINUED
CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
CITIZENS, INC. (PARENT COMPANY)
STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 2000 AND 1999 AND 1998
2000 1999 1998
---- ---- ----
Revenues:
Management service fees (1) $12,252,079 $ 13,333,733 $ 13,033,492
Investment income 129,515 79,872 79,882
Other 35,174 6,437 4,425
Realized loss -- (7,281)
----------- ------------ ------------
12,416,768 13,412,761 13,117,799
----------- ------------ ------------
Expenses:
General 11,047,326 12,126,181 12,019,676
Interest -- 18,537 27,011
Taxes 806,657 812,896 533,098
----------- ------------ ------------
11,853,983 12,957,614 12,579,785
----------- ------------ ------------
Income before equity in income of unconsolidated
subsidiaries 562,785 455,147 538,014
Equity in income (loss) of unconsolidated
subsidiaries 1,489,956 815,925 (7,258,707)
----------- ------------ ------------
Net income (loss) $ 2,052,741 $ 1,271,072 $ (6,720,693)
=========== ============ ============
- ----------
(1) Eliminated in consolidation.
See accompanying independent auditors' report.
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64
SCHEDULE II, CONTINUED
CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
CITIZENS, INC. (PARENT COMPANY)
STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
2000 1999 1998
---- ---- ----
Cash flows from operating activities:
Net income (loss) $ 2,052,741 $ 1,271,072 $(6,720,693)
Adjustments to reconcile net income (loss) to net cash
used by operating activities:
Realized losses on sales -- 7,281 --
Equity in net (income) loss of unconsolidated
subsidiaries (1,489,956) (815,925) 7,258,707
Accrued expenses and other liabilities 251,494 104,018 (11,777)
Accrued investment income (30,273) -- 2,844
Other 300,896 (138,184) 536,295
----------- ----------- -----------
Net cash provided by operating activities
1,084,902 428,262 1,065,376
----------- ----------- -----------
Cash flows from investing activities:
Purchase of fixed maturities, available-for-sale (2,540,066) -- --
Payments on notes receivable 66,667 66,666 66,667
Investment in real estate (58,280) (284,153) (28,675)
----------- ----------- -----------
Net cash provided (used) by investing
activities (2,531,679) (217,487) 37,992
----------- ----------- -----------
Cash flows from financing activities:
Payment on notes payable -- (333,333) (66,667)
----------- ----------- -----------
Net cash used by financing activities -- (333,333) (66,667)
----------- ----------- -----------
Net increase (decrease) in cash 1,446,777 (122,558) 1,036,701
Cash at beginning of year 1,667,050 1,789,608 752,907
----------- ----------- -----------
Cash at end of year $ 220,273 $ 1,667,050 $ 1,789,608
=========== =========== ===========
See accompanying independent auditors' report.
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65
SCHEDULE IV
CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
REINSURANCE
YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
CEDED ASSUMED PERCENTAGE
GROSS TO OTHER FROM OTHER NET OF AMOUNT
AMOUNT COMPANIES COMPANIES AMOUNT ASSUMED TO NET
------ --------- --------- ------ --------------
Year ended December 31, 2000:
Life insurance in-force $2,240,523,000 $272,150,000 $326,267,000 $2,294,640,000 14.2%
============== ============ ============ ============== ====
Premiums:
Life insurance 48,046,655 2,154,034 95,068 45,987,689 .2%
Accident and health insurance 7,576,449 340,764 -- 7,235,685 --
-------------- ------------ ------------ -------------- ----
Total premiums $ 55,623,104 $ 2,494,798 $ 95,068 $ 53,223,374 .2%
============== ============ ============ ============== ====
Year ended December 31, 1999
Life insurance in-force $2,197,844,000 $278,689,000 $273,146,000 $2,192,301,000 12.5%
============== ============ ============ ============== ====
Premiums:
Life insurance 49,654,207 1,966,793 484,746 48,172,160 1.0%
Accident and health insurance 11,458,679 572,362 -- 10,886,317 --
-------------- ------------ ------------ -------------- ----
Total premiums $ 61,112,886 $ 2,539,155 $ 484,746 $ 59,058,477 .8%
============== ============ ============ ============== ====
Year ended December 31, 1998
Life insurance in-force $2,340,744,000 $306,070,000 $333,719,000 $2,368,393,000 14.1%
============== ============ ============ ============== ====
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%
============== ============ ============ ============== ====
See accompanying independent auditors' report.
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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 27, 2001 By: /s/ Mark A. Oliver
------------------------------------------------
Mark A. Oliver, President
By: /s/ Jeffrey J. Wood
------------------------------------------------
Jeffrey J. Wood, Executive Vice President, Chief
Financial Officer and Secretary / Treasurer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
Each individual whose signature appears below hereby designates and appoints
Harold E. Riley and Mark A. Oliver, and each of them, as such person's true and
lawful attorney's-in-fact and agents (the "Attorneys-in-Fact") with full power
of substitution and resubstitution, for each person and in such person's name,
place, and stead, in any and all capacities, to sign any and all amendments
(including post-effective amendments) to this Annual Report on Form 10-K, which
amendments may make such changes in this Annual Report on Form 10-K as either
Attorney-in-Fact deems appropriate and to file therewith, with the Securities
and Exchange Commission, granting unto such Attorneys-in-Fact and each of them,
full power and authority to do and perform each and every act and think
requisite and necessary to be done in and about the premises, as fully to all
intents and purposes as such person might or could do in person, hereby
ratifying and confirming all that such Attorneys-in-Fact or either of them, in
their substitute or substitutes, may lawfully do or cause to be done by virtue
hereof.
/s/ Mark A. Oliver March 27, 2001 /s/ Harold E. Riley March 27, 2001
- ------------------------------ --------------------------------
Mark A. Oliver, Director Harold E. Riley, Chairman of the
Board and Director
/s/ Ralph M. Smith March 27, 2001 /s/ Joe R. Reneau March 27, 2001
- ------------------------------ --------------------------------
Ralph M. Smith, Director Joe R. Reneau, Director
/s/ Dr. Richard C. Scott March 27, 2001 /s/ Timothy T. Timmerman March 27, 2001
- ------------------------------ --------------------------------
Dr. Richard C. Scott, Director Timothy T. Timmerman, Director
/s/ Rick D. Riley March 27, 2001 /s/ Steve Shelton March 27, 2001
- ------------------------------ --------------------------------
Rick D. Riley, Director Steve Shelton, Director
/s/ Dr. E. Dean Gage March 27, 2001
- ------------------------------
Dr. E. Dean Gage, Director
66
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INDEX TO EXHIBITS
EXHIBIT PAGE
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Exhibit 21 68
Exhibit 23 69
67