1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON D.C. 20549
FORM 10-K
[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997
--------------------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
--------------------------
For the transition period from to
--------------------------
Commission file number 1-13004
CITIZENS, INC.
--------------
(Exact name of registrant as specified in its charter)
Colorado 84-0755371
------------------------ ---------------------------------
(State of incorporation) (IRS Employer Identification No.)
400 East Anderson Lane, Austin, Texas 78752
- ---------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (512) 837-7100
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
Class A Common Stock American Stock Exchange
-------------------- -----------------------
Securities registered pursuant to Section 12(g) of the Act:
None
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirement for the past 90 days. Yes X No .
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
As of March 15, 1998, aggregate market value of the Class A voting stock held by
non-affiliates of the Registrant was approximately $90,107,000.
DOCUMENTS INCORPORATED BY REFERENCE
Part III of this Report incorporates certain portions of the definitive proxy
material of the Registrant in respect of its 1998 Annual Meeting of
Shareholders.
Number of shares of common stock outstanding as of March 15, 1998
Class A: 20,765,088
Class B: 621,049
2
PART I
ITEM 1. BUSINESS
(A) GENERAL DEVELOPMENT OF BUSINESS
Citizens, Inc. ("Citizens") operates primarily as an insurance
holding company. It was incorporated in 1977. Citizens is the
parent holding company that directly or indirectly owns 100% of
Citizens Insurance Company of America ("CICA"), Computing
Technology, Inc. ("CTI"), Insurance Investors, Inc. ("III"),
Funeral Homes of America ("FHA") (formerly Funeral Homes of
Louisiana), Central Investors Life Insurance Company of Illinois
("CILIC"), American Investment Network, Inc. ("AIN"), United
Security Life Insurance Co. ("USLIC"), and National Security Life
and Accident Insurance Company ("NSLIC"). Collectively, Citizens
and its subsidiaries are referred to herein as the "Company."
Pertinent information relating to Citizens' subsidiary companies
is set forth below:
YEAR STATE OF BUSINESS
SUBSIDIARY INCORPORATED INCORPORATION ACTIVITY
---------- ------------ ------------- --------
CICA 1968 Colorado Life insurance
CTI 1986 Colorado Data processing
III 1965 Texas Aircraft transportation
AIN 1987 Mississippi Financial holding co.
USLIC 1967 Mississippi Life insurance
FHA 1989 Louisiana Funeral home
CILIC 1965 Illinois Life insurance
NSLIC 1954 Texas Life insurance
On October 28, 1996, CICA announced that it had signed a definitive
written agreement for the acquisition of American Investment
Network, Inc. (AIN), a life insurance holding company headquartered
in Jackson, Mississippi with $7.5 million in assets, $3.4 million
of stockholders' equity, revenues of $3.2 million and $67 million
of life insurance in-force. Following the acquisition by CICA, AIN
shareholders received 1 share of Citizens, Inc. Class A Common
Stock for each 7.2 shares of AIN Common Stock owned. The
transaction closed on June 19, 1997. Citizens issued approximately
700,000 Class A shares in connection with the transaction, which
was accounted for as a purchase. The companies operate in their
respective locations under a combined management team with
consolidation of computer data processing on the Citizens' system.
On October 31, 1996, CICA, CICA Acquisition, Inc. (a subsidiary
organized for purposes of the transaction) and First American
Investment Corporation ("FAIC"), a holding company, entered into a
merger agreement for the merger of CICA Acquisition, Inc. into
FAIC. Prior thereto, Citizens had indirectly owned approximately
94.5% of FAIC. As part of this merger, CICA acquired the
approximately 5.5% of FAIC shares owned by minority investors at an
exchange rate
2
3
of 0.1111 shares of Class A Common Stock for each 1 share of FAIC
owned by minority investors. The merger became effective March 7,
1997, and Citizens issued approximately 134,000 shares of Class A
Common Stock in this transaction which was accounted for as a
purchase. Subsequently, FAIC was liquidated.
To streamline its corporate structure, Citizens and American
Liberty Financial Corporation ("ALFC"), a wholly-owned subsidiary
holding company, entered into a merger agreement dated November 22,
1996 for the merger of ALFC into Citizens. No shares of Citizens
were issued in the merger which became effective in January 1997.
Also on November 22, 1996, CICA and American Liberty Life Insurance
Company ("ALLIC"), a subsidiary of ALFC, entered into a merger
agreement for the merger of ALLIC into CICA. The agreements closed
in June, 1997.
Pursuant to a Stock Purchase Agreement, the Company purchased from
Jansen Enterprises, Inc., a Texas corporation, 100% of the issued
and outstanding shares of National Security Life and Accident
Insurance Company (NSLIC) for $1,700,000, consisting of $1,000,000
cash and restricted shares of Applicant's Class A Common Stock
valued at $700,000 in a transaction that closed on November 20,
1997. NSLIC is a Texas-domiciled life and A&H insurer with assets
of approximately $5 million and annual revenues of approximately $5
million.
Certain statements contained in this Annual Report on Form 10-K are
not statements of historical fact and constitute forward-looking
statements within the meaning of the Private Securities Litigation
Reform Act (the "Act"), including, without limitation, the
italicized statements and the statements specifically identified as
forward-looking statements within this document. In addition,
certain statements in future filings by the Company with the
Securities and Exchange Commission, in press releases, and in oral
and written statements made by or with the approval of the Company
which are not statements of historical fact constitute
forward-looking statements within the meaning of the Act. Examples
of forward-looking statements, include, but are not limited to: (i)
projections of revenues, income or loss, earnings or loss per
share, the payment or non-payment of dividends, capital structure,
and other financial items, (ii) statements of plans and objectives
of the Company or its management or Board of Directors including
those relating to products or services, (iii) statements of future
economic performance and (iv) statements of assumptions underlying
such statements. Words such as "believes", "anticipates",
"expects", "intends", "targeted", "may", "will" and similar
expressions are intended to identify forward-looking statements but
are not the exclusive means of identifying such statements.
Forward-looking statements involve risks and uncertainties which
may cause actual results to differ materially from those in such
statements. Factors that could cause 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
3
4
and acceptance of new products and services and perceived overall
value of these products and services by existing and potential
customers; (v) changes in consumer spending, borrowing and saving
habits; (vi) concentrations of business from persons residing in
third world countries; (vii) acquisitions; (viii) the persistency of
existing and future insurance policies sold by the Company and its
subsidiaries; (ix) the dependence of the Company on its Chairman of
the Board; (x) the ability to control expenses; (xi) the effect of
changes in laws and regulations (including laws and regulations
concerning insurance) with which the Company and its subsidiaries
must comply, (xii) the effect of changes in accounting policies and
practices, as may be adopted by the regulatory agencies as well as
the Financial Accounting Standards Board, (xiii) changes in the
Company's organization and compensation plans; (xiv) the costs and
effects of litigation and of unexpected or adverse outcomes in such
litigation; and (xv) the success of the Company at managing the
risks involved in the foregoing.
Such forward-looking statements speak only as of the date on which
such statements are made, and the Company undertakes no obligation
to update any forward-looking statement to reflect events or
circumstances after the date on which such statement is made to
reflect the occurrence of unanticipated events.
(B) FINANCIAL INFORMATION REGARDING THE INSURANCE BUSINESS
Citizens, through CICA, USLIC, NSLIC and CILIC, operates principally
in one business segment, that of selling selected lines of
individual life and accident and health ("A&H") insurance policies.
Except for certain insignificant operations, Citizens has no present
intention to engage in any non-insurance related business. The
following tables set forth certain statistical information
concerning the operations of the Company for each of the five years
ended December 31, 1997. The information is presented in accordance
with generally accepted accounting principles.
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)
------------------ ------------------ -------------------
1997 $ 2,231,017 $ 2,250,197 $ 2,240,607
1996 2,151,955 2,231,017 2,191,486
1995 2,144,709 2,151,955 2,148,332
1994 2,030,615 2,144,709 2,087,662
1993 1,696,606 2,030,615 1,863,611
- ----------------
(a) In thousands (000s)
(b) Before ceding reinsurance to reinsurers.
4
5
The increases in insurance in-force as shown above reflect the volumes of new
business written by the Company over the past five years. Approximately
$40,243,000 of the 1995 increase relates to the acquisition of ALLIC in 1995,
while $96,803,000 of the 1997 increases resulted from the acquisitions of USLIC
and NSLIC.
TABLE II
The following table sets forth (i) the ratio of lapses and surrenders to
mean life insurance in-force and (ii) life reinsurance ceded.
RATIO OF REINSURANCE CEDED(B)
LAPSES AND ------------------------------------------------
SURRENDERS AMOUNT REINSURANCE
LAPSES AND TO MEAN OF PREMIUM
SURRENDERS (A) IN-FORCE REINSURANCE (A) CEDED
--------------------- ----------------- ----------------------- -------------------
1997 $ 95,684 4.3% $ 318,630 $ 1,952,316
1996 101,860 4.6 296,378 2,511,318
1995 87,273 4.1 290,677 2,241,111
1994 84,390 4.0 285,104 2,309,672
1993 98,712 5.3 303,727 1,939,425
- ----------------------
(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.
The increased lapsation during 1996 reflects the
inclusion of the ALLIC insurance business.
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
-------- -------------- ---------- ------------ -----
1997 $ 49,412,066 $ 366,135 $ 284,632 $5,299,783 $ 55,362,616
1996 49,563,720 389,084 309,953 4,040,688 54,303,445
1995 45,120,631 119,335 306,256 698,206 46,244,428
1994 42,984,741 75,564 541,370 259,250 43,860,925
1993 36,491,961 106,955 1,106,590 284,510 37,990,016
- ------------------
(a) After deduction for reinsurance ceded.
Premium income has grown substantially due to the volume of new business written
each year, as well as the acquisitions. However, new sales of life insurance
decreased in 1995, and remained at similar levels in 1996 and 1997; therefore,
the overall increase since 1995 is less than for previous years. The acquisition
of ALLIC mitigated the total decline in new life insurance sales, although only
three months of ALLIC's premiums are reflected in the above table for 1995.
5
6
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
------------ ------ -------- ------ --------
1997 $ 55,362,616 $ 18,910,594 34.2% $ 58,865,744 106.3%
1996 54,303,445 21,948,637 40.4 59,113,575 108.9
1995 46,244,428 17,375,574 37.6 50,767,435 109.8
1994 43,860,925 17,461,910 39.8 48,763,076 111.2
1993 37,990,017 15,918,491 41.9 43,644,554 114.9
- ---------------------
(a) After premiums ceded to reinsurers.
Prior to 1996, the ratios of expenses to premiums had declined each year since
1989. These declines are the result of three factors: 1) underwriting and
operating expenses have generally not increased at the same rate as premium
income due to the Company's efficient method of operation; 2) sales commissions
as a percentage of total premium income are declining annually as the business
enters renewal stages and commissions are paid at a lower rate than the first
year; and 3) the amount of new insurance written annually represents a smaller
percentage of the Company's total premium income. However, in 1996, with the
addition of ALLIC and the considerable expense associated with its marketing
operation start-up, the ratio reached its highest level since 1993. Following
the merger of ALLIC in 1997, significant reductions in operating expenses were
realized.
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
------------ ---------- ------- ---------- -------
1997 $ 286,698 $ 245,547 85.6% $ 41,151 14.4%
1996 337,051 294,408 87.3 42,643 12.7
1995 296,811 271,108 91.3 25,703 8.7
1994 380,281 352,542 92.7 27,739 7.3
1993 376,460 345,882 91.9 30,578 8.1
- ------------------
(a) In thousands (000s)
The percentage of the new business produced that is participating has increased
steadily due to the fact that the Ultra Expansion products were all
participating and represent the majority of new business. The decline in new
business during 1995 was caused in part by disruptions in the
6
7
international market. See Management's Discussion and Analysis. The decrease in
non-participating business in 1997 results from sales by USLIC and NSLIC, which
sell only non-participating policies.
TABLE VI
The following table sets forth changes in new business issued
according to policy types.
WHOLE LIFE
AND ENDOWMENT TERM UNIVERSAL LIFE
TOTAL NEW ----------------------- ---------------------- -----------------------
BUSINESS (A) AMOUNT (A) PERCENT AMOUNT (A) PERCENT AMOUNT (A) PERCENT
------------ ---------- ------- ---------- ------- ---------- -------
1997 $ 286,698 $ 245,637 85.7% $ 41,062 14.3% $ 0 -
1996 337,051 296,985 88.1 40,066 11.9 0 -
1995 296,811 270,963 91.3 25,848 8.7 0 -
1994 380,281 352,357 92.7 27,924 7.3 0 -
1993 376,460 345,683 91.8 30,777 8.2 0 -
(a) In thousands (000s)
This table illustrates that virtually all of the new business written is whole
life. The 1995 results reflect a decrease in new business during the year, as
does 1997.
TABLE VII
The following table sets forth deferred policy acquisition costs
capitalized and amortized compared to new business issued.
DEFERRED POLICY
TOTAL NEW ACQUISITION COSTS
BUSINESS -----------------------------------------
ISSUED CAPITALIZED AMORTIZED
------ ----------- ---------
1997 $ 286,698,000 $ 9,804,022 $ 9,630,705
1996 337,051,000 10,531,222 10,221,917
1995 296,811,000 10,579,704 8,511,876
1994 380,281,000 13,128,049 7,203,593
1993 376,460,000 13,472,064 6,455,401
Capitalized policy acquisition expenses increased steadily until 1994, such
increases reflecting the growing amount of new business issued. In 1994, the
rate of capitalization was affected by an adjustment due to the lower interest
environment. The amortization of these costs has grown as the aggregate deferred
acquisition cost asset has increased. In 1996, this amortization increased due
to the increase in surrender activity. The decrease in costs capitalized for
1995 and 1997 reflects the reduction in the amount of new business produced and
lower commission expenses incurred as a result thereof. In 1996, new business
increased; however the increase in capitalized costs was not as high due to
changes in the commission structure of the Company.
7
8
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)
------------------- ---------- ----------------------
1997 $ 150,481,414 $ 10,038,736 6.7%
1996 134,167,938 9,185,506 6.8
1995 111,926,695 7,026,909 6.3
1994 90,419,823 5,295,784 5.9
1993 82,598,407 4,771,079 5.8
- --------------------
(a) The year 1995 includes assets acquired from ALLIC on September 14, 1995.
The year 1996 includes assets acquired from CILIC on March 12, 1996. The
year 1997 includes assets acquired from NSLIC and USLIC.
(b) Does not include realized and unrealized gains and losses on investments.
Available yields began to increase in mid-1994 and the Company was able to
obtain a slight growth in the return on invested assets. This growth continued
throughout most of 1995, and continued through 1996. The Company hired an
investment advisor in 1995, and this action contributed to the increased yield
in 1996. Significant decreases in yields in the bond market caused the yield on
invested assets to drop slightly in 1997.
(C) NARRATIVE DESCRIPTION OF BUSINESS
(i) BUSINESS OF CITIZENS
Citizens' principal business is ownership of CICA and NSLIC
and their affiliates. Additionally, it provides management
services to these companies under management services
agreements. At December 31, 1997, Citizens had approximately
75 full and part-time employees.
(ii)BUSINESS OF CICA
Historically, CICA's revenues have been derived from insurance
premiums and revenues from investments. CICA is a
Colorado-domiciled life insurance company marketing primarily
ordinary whole-life products on an international basis through
marketing companies. Additionally, it offers specialty life
and individual accident and health policies to United States
residents. During the fiscal year ended December 31, 1997,
92.5% of CICA's premium income was attributable to life,
endowment and term insurance; 0.5% to individual annuities;
and 7.1% to accident and health insurance. Of the life
policies in force at December 31, 1997 and 1996, 34.4% and
13.0%, were nonparticipating and 65.6% and 87.0%, respectively
were participating. The change in participating
8
9
policies as a percentage of total results from the ALLIC
merger in 1997 into CICA described above.
From 1987 to 1997, CICA offered its Ultra Expansion products,
a series of participating whole life policies targeted for
international markets. All of the Ultra products were
participating with dividends ranging from 2% of the premium in
the first year to 123% in the 20th year. Beginning January 1,
1998, CICA introduced its Millennia 2000 series of policies as
a replacement for the Ultra Expansion plans. The ten plans
that make up the Millennia Series are, like the Ultra
Expansion plans, designed for the international market and
maintain many of the features of the Ultra series, with
several new enhancements. These enhancements include terminal
illness protection as well as dismemberment provisions.
Management believes the Millennia products should increase new
sales significantly.
Additionally, following the merger with ALLIC, CICA began
offering specialty individual Accident and Health products as
well as ordinary whole life policies to residents of the
United States. The sale of these products is focused in
Oklahoma, Louisiana and Mississippi.
The CICA underwriting policy requires a medical examination of
applicants for ordinary insurance in excess of certain
prescribed limits. These limits are graduated according to the
age of the applicant and the amount of insurance. Generally,
the maximum amount of ordinary life insurance issued
domestically without a medical examination is $200,000 for
ages 0 through 35; $100,000 for ages 36 through 45; $50,000
for ages 46 through 50; $15,000 for ages 51 through 55; and
$10,000 for ages 56 and over. Limits for insuring non-United
States applicants without a medical examination are: $150,000
for ages 0 through 39; $50,000 for ages 40 through 65; and all
amounts over age 65. The accident and health policies sold in
the U.S. have only minimal, field underwriting.
On life policies, CICA's maximum coverage on any one life is
not limited by company policy. However, CICA reinsures the
amount of coverage which is in excess of its retention policy.
See "Business of CICA - Reinsurance." CICA does not accept
substandard risks above Table 6 (generally policyholders who
cannot qualify for standard ordinary insurance because of past
medical history) in exchange for which CICA would charge
higher premiums.
CICA has $22.2 million of insurance in-force on individuals
that are classified as substandard risks, the majority of such
business having been acquired in the purchase of other
companies. Management believes the exposure to loss as a
result of insuring these individuals is minimal, since the
premiums are increased to cover the nature of the risk,
additional reserves are established, and the amount of
insurance represents less than 1.0% of the total insurance
in-force.
9
10
GEOGRAPHICAL DISTRIBUTION OF BUSINESS
For the year ended December 31, 1997, insurance policies held
by residents of the State of Oklahoma accounted for 6.2% of
CICA's total premium income from direct business, policies
held by residents of the State of Texas accounted for 2.7% of
premium income from direct business, policies held by
residents of the State of Louisiana accounted for 1.5% of
premium income and policies held by residents of Colorado
represented 1% of premium income from direct business for the
same period. All other states of the United States totaled
7.2% of the premium income from direct business with no single
state, except as set forth above, accounting for as much as 1%
of premium income. Business on foreign residents accounted for
the remaining 82.9%. For the year ended December 31, 1996,
residents of the State of Oklahoma accounted for 7.0% of
CICA's total premium income, residents of Texas accounted for
3.0%, Mississippi, 2.3%, Louisiana, 1.6% and Georgia, 1.1%. No
other state in the U.S. amounted to 1% of total premium income
during the period. Business on foreign citizens represented
81.0% of 1996 premium income. For the year ended December 31,
1995, residents of the State of Texas accounted for 2.7% of
CICA's total premium income and residents of Colorado
accounted for 2.1%. No other state in the U.S. amounted to 1%
of total premium income during the period. Business on foreign
citizens represented 91.8% of 1995 premium income. The
increase in domestic business as a percentage of total premium
income in 1997 results from the above-described merger of
ALLIC into CICA during the year.
The participating whole life policies accepted by CICA on high
net worth residents of foreign countries have an average face
amount of approximately $70,000 and are marketed primarily to
the top 5% of the population in terms of household income.
CICA accepts applications for international insurance policies
marketed by several independent international marketing firms
with whom CICA has nonexclusive marketing contracts. These
firms market life insurance products to citizens of foreign
countries, with a present emphasis in Latin America. Such life
products are specially designed by CICA to be compatible with
marketing methods and commission requirements.
The international marketing firms have many years experience
marketing life insurance products for CICA. The contract with
the marketers provides that they have the responsibility for
recruiting and training salesmen. They are responsible for all
of their overhead costs and bear the expense of awards. These
firms guarantee any advances against future commissions made
by CICA to marketers and their agents. In consideration for
the services rendered, the marketing contractors receive an
override commission on all new policies sold by them or their
salesmen. See "Business of CICA - Commissions." The marketing
contracts may be terminated for various causes, at any time by
mutual consent of the parties or upon 30 days' notice by
either party.
10
11
These firms provide recruitment, training and supervision of
their managers and salesmen in the sale of dollar-denominated
life insurance products; however, all managers and salesmen
contract directly with CICA and receive their commission from
CICA. Accordingly, should the marketing arrangement between
any firm and CICA be canceled for any reason, CICA believes it
could continue suitable marketing arrangements with the
individuals of the marketing firms without appreciable loss of
present and future sales, as it has done in the past. There
is, however, always a risk that sales could decrease.
At present, CICA is dependent on the non-U.S. markets for
virtually all of its new life insurance business. This
subjects CICA to potential risks with regard to the continued
ability to write such business should adverse events occur in
the countries from which CICA receives applications. These
potential risks include lapses of policies if funds that flow
out of such countries were to become restricted and the
improbable necessity that incorporating an insurance
subsidiary in such countries would become required. Based on
more than 30 years experience in the marketplace in which CICA
competes, management believes such risks are not probable or
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. Further, management does not believe that the
flow of funds will be restricted in the future, because almost
all of the insureds are in the upper percentiles of incomes in
their country. Such insureds are actively involved in business
leadership roles in their communities and would be vehemently
opposed to funds flow restriction. 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 from numerous foreign countries. Additionally,
CICA has applications for admission pending in two states.
CICA's operations are conducted on the independent contractor
basis, with a sales force at December 31, 1997 of 777
individuals, 1,319 individuals at December 31, 1996 and 1,308
individuals at December 31, 1995. The decrease in marketing
consultants in 1997 reflects the termination of all
individuals who had not produced in the last twelve months, a
practice that had not been enforced in several years.
COMMISSIONS
CICA's marketing managers are independent contractors,
responsible for their respective expenses, and are compensated
on a percentage of premium basis. The
11
12
maximum amount of commission expense which may be incurred by
CICA on an individual life insurance policy is 120% of the
first year premium, 10% of the premium for each of the next
nine years and 2% of the premium for the eleventh and
subsequent years as a continuing service fee. Percentage
amounts paid to salesmen on individual term, annuity and
accident and health insurance are substantially less than the
levels paid for individual ordinary life insurance. The
marketing managers receive overriding first year and renewal
commissions on business written by individuals under their
supervision and all marketing expenses related thereto are
included in the above percentages.
RESERVES
CICA establishes actuarial reserves as liabilities to meet
obligations on all outstanding policies. Reserves and deferred
acquisition costs are prepared in conformity with the American
Academy of Actuaries Committee on Financial Reporting
Principles and generally accepted accounting principles. In
determining such reserves CICA used the 1955 to 1960, 1965 to
1970, and 1975 to 1980 Select and Ultimate Mortality Tables
with interest rates at 4% or in a range graded from 9% to 5%
with recent issues reserved at 7% graded to 6 1/2%. Withdrawal
assumptions are based primarily on actual historical
experience. Statutory reserves are used for paid-up life
business. Claims reserves include an amount equal to the
expected benefit to be paid on reported claims in addition to
an estimate of claims that are incurred but not reported,
based on actual historical experience. CICA receives an
independent actuarial certification of its reserves prepared
in accordance with both Generally Accepted Accounting
Principles and Statutory Accounting Principles. The
certifications have noted no deficiencies for the years
presented herein.
REINSURANCE
CICA assumes and cedes insurance with other insurers,
reinsurers and members of various reinsurance pools.
Reinsurance arrangements are utilized to provide greater
diversification of risk and minimize exposure on larger risks.
INSURANCE CEDED
CICA generally retains $75,000 of risk on any one person. As
of December 31, 1997, the aggregate amount of life insurance
ceded amounted to $281,400,000 or 13.1% of total direct and
assumed life insurance in force, and $293,864,000 or 13.5% in
1996. CICA is contingently liable with respect to ceded
insurance should any reinsurer be unable to meet the
obligations reinsured.
As of December 31, 1997, CICA had in effect automatic
reinsurance agreements that provide for cessions of ordinary
insurance from CICA. Additionally, CICA has reinsurance
treaties in force with several reinsurers of life and accident
and health insurance. These treaties provide for both
automatic and facultative
12
13
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 vehicle
utilized by CICA for its international business. The treaties
are structured in such a way as to allow CICA to "self
administer" the cessions on a reduced cost basis. During 1995,
a third carrier was added as a principal reinsurer, Riunione
Adriatica di Sicurta, of Italy (RAS).
The ERC and BMA agreements provide that for risks reinsured in
specified countries, 70% of each risk in excess of CICA's
retention will be ceded to ERC and 30% to BMA. The RAS
agreement provides that on risks reinsured in specified
countries, 100% of the risk in excess of CICA's retention will
be ceded to RAS. CICA pays premiums to ERC, BMA and RAS on an
annual basis and is responsible for the production of the
reporting monthly and annually to ERC, BMA and RAS to allow
proper accounting for the treaties.
The cessions are on a yearly renewable term basis and are
automatic up to $333,333 for ERC, $500,000 for RAS and
$166,667 for BMA at which point the reinsurance is subject to
a facultative review by the reinsurers. At December 31, 1997,
CICA had ceded $166,969,000 in face amount of insurance to
ERC, $24,800,000 to BMA and $62,265,000 to RAS under these
agreements.
RAS is an unauthorized reinsurer in the state of Colorado;
however, RAS has agreed to comply with Colorado statutes
regarding such companies. Under these statutes, RAS will
provide a letter of credit, issued by a U.S. bank meeting the
Colorado requirements, equal to any liabilities it incurs
under its agreement with CICA.
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, 1997, CICA had ceded $1,285,000,000 in face
amount of business to CG under this treaty.
CICA monitors the solvency of its reinsurers to minimize the
risk of loss in the event of a failure by one of the parties.
The primary reinsurers of CICA are large, well capitalized
entities which have no current or prior history of financial
difficulty.
13
14
(b) INSURANCE ASSUMED. At December 31, 1997, 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 $224,953,000
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.
CICA has also entered into a Serviceman's Group Life Insurance
Conversion Pool Agreement with Prudential, under the above
described agreement, whereby CICA assumed a portion of the
risk of Prudential under the group policy due to excess
mortality under the conversion pool agreement resulting from
issuing conversion policies as prescribed for membership in
the conversion pool.
INVESTMENTS
State insurance statutes prescribe the quality and percentage
of the various types of investments which may be made by
insurance companies and generally permit investment in
qualified state, municipal, federal and foreign government
obligations, high quality corporate bonds, preferred and
common stock, real estate and mortgage loans by certain
specified percentages. CICA's invested assets at December 31,
1997 were distributed as follows: fixed maturities - 85.39%,
equity securities - 0%, mortgage loans - 0.86%, policy loans -
13.4%, government insured student loans - 0.05%, short-term
investments - 0% and other long-term investments - 0.30% (see
Note 2 of the "Notes to Consolidated Financial Statements").
CICA did not foreclose on any mortgage loans in 1997. All
mortgage loans are supported by independently appraised real
estate. The investment policy of CICA with regard to mortgage
loans is consistent with the provisions of the Colorado
Insurance Code.
At December 31, 1997, 85.7% 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 95.9% at December 31, 1996. 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. The
decline in
14
15
1997 reflects the ALLIC merger into CICA, as ALLIC had a
number of corporate bonds in its portfolio.
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. CICA's most recent examination
which was completed during 1992, was for the six years ended
December 31, 1991, and was conducted by a public accounting
firm representing the Colorado Division of Insurance. An
examination was begun in late 1997 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. CICA is subject to such regulation and has
registered under such statutes as a member of an "insurance
holding company system." The legislation typically requires
periodic disclosure concerning the transactions between the
registered insurer, the ultimate controlling party, and all
affiliates and subsidiaries of the ultimate controlling party,
and in many instances requires prior approval of
intercorporate transfers of assets (including in some
instances payment of dividends by the insurance subsidiary)
within the holding company system.
Since CICA does not physically conduct business in countries
outside the U.S. but rather accepts applications from overseas
marketers, it is not subject to regulation in countries where
most of its insureds are residents. The prospect of such
regulation is viewed as remote by management of CICA because
obtaining insurance through application by mail outside of
one's country is a common practice in many foreign countries,
particularly those where CICA's insureds reside.
15
16
COMPETITION
The life insurance business is highly competitive, and CICA
competes with a large number of stock and mutual companies.
CICA believes that its premium rates and its policies are
generally competitive with those of other life insurance
companies, many of which are larger than CICA, selling similar
types of insurance.
CICA's marketing plan stresses the sale of dollar-denominated
life insurance products to high net worth individuals residing
in foreign countries, with present emphasis in Latin America
and the sale of individual, supplemental accident and health
products and whole life products to United States residents.
Virtually all of CICA's total first year and renewal life
insurance premium income during 1997 came from the
international market. See "Business of CICA - Geographical
Distribution of Business." Management believes that CICA is a
significant competitor in the international market and
attributes its success in penetrating that market to the
expertise of management, the uniqueness of its life insurance
products and competitiveness of its pricing methods.
CICA faces competition from several other 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 the
Ultra Expansion policies, as well as the new, enhanced
Millennia series of policies, allows CICA to compete
effectively in maintaining and pursuing new business.
Management believes that CICA competes indirectly with
non-U.S. companies in its business, particularly with respect
to Latin American companies. CICA, as a U.S. domestic insurer
paying claims in U.S. dollars in the U.S., has a different
clientele and product than foreign-domiciled companies. CICA's
product is usually acquired by persons in the top 5% of income
of their respective countries. The policies sold by foreign
companies are sold broadly and are priced based on the
mortality of the entire populace of the respective geographic
region. Because of the predominance of lower incomes in most
of these countries, the mortality experience tends to be very
high on the average, causing mortality charges which are
considered unreasonable based on the life mortality experience
of the upper five percent of income of the population.
Additionally, the assets that back up the policies issued by
foreign companies are invested in the respective countries,
and thus, are exposed to the inflationary risks and economic
crises that historically have impacted many foreign countries.
Another reason that CICA experiences an advantage is that many
of its policyholders desire to transfer capital out of their
countries due to the perceived financial strength and security
of the United States by foreigners. Also, CICA
16
17
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 several countries in
Latin America, management believes that CICA receives a
substantial share of such business. However, CICA does not
have market share data to confirm management's belief.
In CICA's block of accident and health insurance, (7% of total
premium income), it is in competition with many insurance
companies as well as with voluntary and government-sponsored
plans for meeting hospitalization and medical expenses such as
Blue Cross/Blue Shield, "Medicare" and "Medicaid." Future
expansion of such programs or the establishment of additional
government health programs could adversely affect the future
of accident and health insurance on CICA's books, most of
which has been acquired in the acquisition of other companies.
FEDERAL INCOME TAXATION
CICA is a "small company" as that term is defined in the
Internal Revenue Code (the "Code"), section 806. As such, CICA
qualified for a special small company deduction (presently
equal to 60% of "tentative life insurance company taxable
income") which serves to decrease significantly the amount of
tax which might otherwise have to be paid.
The Omnibus Reconciliation Act of 1993 (the "1993 Act") was
signed into law on August 10, 1993. Among its provisions was
an increase to corporate tax rates to 35% on taxable income
between $10,000,000 and $15,000,000 and to 38% on taxable
income between $15,000,000 and $18,300,000. This legislation
had no material impact on the financial position of the
Company.
The Revenue Reconciliation Act of 1990 revised the method in
which insurance companies claim deductions for policy
acquisition costs. Previously, insurance companies were
allowed to deduct actual policy acquisition costs as they were
incurred. Beginning in 1990, policy acquisition costs are
determined as a percentage of annual net premiums and are then
deductible on a straight-line basis over a ten-year period
rather than treated as an immediate deduction. This change in
treatment for acquisition costs has had a significant impact
on CICA's taxable income due to the relatively large amounts
of such deferrals caused by the increases in new business.
CICA files a consolidated Federal income tax return with
Citizens and its subsidiaries.
17
18
(iii) BUSINESS OF CTI
CTI is a wholly-owned subsidiary of CICA and engages in the
business of providing data processing services and acquisition
and leasing of furniture and equipment for its parent as well
as data processing services and software to other companies.
Pursuant to an Information Systems Management and Services
Contract dated October 1, 1991, CTI provides data processing
services to the Company for a fixed fee of $53,000 per month.
In August, 1997, this fee was increased to $85,000 per month
to reflect the growth in the Company's business. As of and for
the year ended December 31, 1997, CTI's total assets were
$767,000 and revenues were $832,000. All intercompany fees and
expenses have been eliminated in the consolidated financial
statements.
(iv) BUSINESS OF III
In August, 1993, Citizens sold the stock of III to CICA for
its book value. CICA subsequently contributed debit balances
receivable of approximately $169,000 to III. III collected
such receivables and, as additional consideration, received an
airplane which it operates for Citizens and CICA. During 1994,
CICA made an additional capital contribution of $200,000 to
III. Also, during 1994, III acquired a different airplane for
use in providing aviation transportation and services to
Citizens and the airplane previously owned by III was sold. As
of and for the year ended December 31, 1997, III's total
assets were $751,000 and revenues were $170,700. All
intercompany fees and expenses have been eliminated in the
consolidated financial statements.
(v) BUSINESS OF AIN
AIN is a financial holding company whose principal business is
the ownership of USLIC. Additionally, AIN owns the building
that is the primary office facility for USLIC (See Item 2.
Description of Properties). At December 31, 1997, total assets
were $2.9 million and annual revenues were $201,000. All
intercompany fees and expenses have been eliminated in the
consolidated financial statements.
18
19
(vi) BUSINESS OF USLIC
USLIC is a Mississippi-domiciled life and accident and health
insurer offering whole life products and specialty accident
and health products to residents of the Southeastern United
States. USLIC is licensed in the states of Alabama, Arizona,
Arkansas, Georgia, Indiana, Louisiana, Mississippi, New
Mexico, Oklahoma, Tennessee and Texas.
As of December 31, 1997, USLIC had $45,058,000 of life
insurance in force, of which $30,478,000 was reinsured and
$14,580,000 retained. The maximum retention by USLIC on any
one life for life insurance policies is $20,000. All of the
accidental death benefit coverage is reinsured.
USLIC offers customary forms of life insurance, including
non-participating whole life, decreasing term, level term
policies, supplementary health policies and a participating
whole life policy. Its leading life policy in the past has
been the "Lifetime Accumulator," a participating whole life
insurance policy. This policy differs from the usual offering
of life insurance in that the premium is uniform but the
amount of insurance varies by the age of the proposed insured.
The product is sold, therefore, in premium units rather than
in face amount units. While this policy is written only on
persons at ages 0 - 40, other life insurance products are
offered at ages 0 - 70.
The Lifetime Accumulator, by being sold at ages less than 40
and in small insurance amounts, does not usually require a
medical examination of the proposed insured. Examinations are
obtained if the amounts exceed the usual published guidelines
of USLIC. Electrocardiograms, x-rays, blood profiles and
urinalysis are obtained. USLIC can, and does, request records
from the proposed insured's attending physician and it obtains
investigative consumer reports as well. Applications must be
submitted on every proposed insured. Also questions regarding
driving, habits, hazardous sports and flying are asked.
Supplementary questionnaires are also obtained where required
on aviation and hazardous avocations. Additional information
of this nature may be requested when indicated by responses on
the application.
Through 1993, USLIC had written primarily the Lifetime
Accumulator, which accounted for approximately 98% of premium
income. During latter 1993, USLIC shifted its marketing thrust
to non-participating ordinary life products and supplementary
accident and health products. For 1997, 22.8% of premium
income was from life policies and 77.2% was from accident and
health policies, and in 1996, 36% of premium income was from
life products, and 64% from accident and health. The
persistency of the products has followed USLIC's actuarial
projection for the products and lapses have not exceeded the
assumptions.
As mentioned above, USLIC writes various forms of life
insurance, and since early 1994 it has developed several new
supplementary health insurance products,
19
20
i.e., cancer, hospital indemnity, mental illness, outpatient
sickness, catastrophic illness, emergency accident, intensive
care and disability income and Medicare supplement. In 1998,
USLIC plans to actively mass market these products through
various companies' employee groups. Premiums will be employer
paid or paid through payroll deduction. USLIC can issue life
insurance on a rated premium substandard basis up through
Table 16 (400% extra mortality), but in so doing it will
reinsure all of the risk. USLIC only issues through Table 4
(100% extra mortality) on its Lifetime Accumulator policy to
improve the mortality and potential profitability on that
product line. The substandard risks are those that by reason
of health, occupation or avocation fall outside the normal
anticipated mortality levels of the general population as
developed by the actuarial sciences. It reinsures all of its
accidental death risk. USLIC also has a reinsurance agreement
on its cancer policy which limits its claim risk to $25,000 in
any calendar year on any one claim. It also reinsures various
amounts on several other health products.
USLIC's selling efforts are not usually concentrated on any
one economic, occupational, hazard or age group other than
for. The Lifetime Accumulator as indicated above. The
marketing territory is Alabama, Arizona, Arkansas, Indiana,
Louisiana, Mississippi, Oklahoma, Tennessee and Texas. USLIC's
products are generally competitive with those of other
insurers in those states.
USLIC's policies are being sold by direct licensed
representatives and licensed general agents. None of these
agents has underwriting authority. The commissions paid are
believed by management to be competitive with commissions paid
by other life insurance companies in the states in which USLIC
is licensed to operate. USLIC is aware that there is
considerable competition for obtaining qualified agents and
that it will be competing with well-established life insurance
companies for agents to sell its policies. USLIC will also
recruit agents from among persons who are not now engaged in
the selling of life and accident and health insurance, and
USLIC expects to train such agents. USLIC presently has
approximately 300 licensed agents. The agents recruited and
licensed by USLIC hold licenses with other companies and
possibly could sell other companies' policies that are similar
in some respects to USLIC's policies. This arrangement is
quite common with companies that recruit and license general
agents.
INVESTMENTS
USLIC invests and reinvests certain of its reserves and other
funds. A part of its income will be derived from this source.
The investments of USLIC are limited as to type and amount by
the Mississippi insurance laws which are designed to insure
prudent investment policies.
The investment of capital, paid-in and operating surplus and
other funds of insurers organized under the laws of the State
of Mississippi is specified by the
20
21
Mississippi Insurance Code. This statute includes general and
specific limitations on investments, records of investments
and other matters. The Mississippi insurance law regulating
investments and other aspects of the management of insurance
companies is designed primarily for the protection of
policyholders rather than investors.
The administration of USLIC's investment portfolio is handled
by the same outside investment manager as CICA's, with all
trades approved by a committee of the Board of Directors. The
guidelines used require that bonds, both government and
corporate, are of high quality and comprise a majority of the
investment portfolio. The assets selected are intended to
mature in accordance with the average maturity of the
insurance products and to provide the cash flow for USLIC to
meet its policyholder obligations. The type, quality and mix
should enable USLIC to compete in the life insurance
marketplace and to provide appropriate interest margins.
USLIC has classified all its investments as securities
available-for-sale which are carried at fair value.
REINSURANCE
As is customary among insurance companies, USLIC will reinsure
with other companies portions of the life insurance risks it
will underwrite. The primary purpose of reinsurance agreements
is to enable the company to reduce the amount of its risk on
any particular policy and, by reinsuring the amount exceeding
the maximum amount the insurance company is willing to retain,
to write policies in amounts larger than it could without such
agreements. Even though a portion of the risk may be
reinsured, USLIC will remain liable to perform all obligations
imposed by the policies issued by it and is liable if its
reinsurer should be unable to meet its obligation under the
reinsurance agreements. USLIC's general policy is to reinsure
business with insurance companies with an A.M. Best and
Company rating of "A" or better.
USLIC's life reinsurance is being ceded through automatic and
facultative treaties with two unaffiliated insurance
companies, Business Men's Assurance Company, Kansas City,
Missouri, and Optimum Re, Dallas, Texas. At December 31, 1997,
USLIC had ceded to BMA, $16,273,000 in face amount, and
$14,205,000 to Optimum Re. It is the practice of USLIC to
reinsure all accidental death benefit risks that are written
with the Lifetime Accumulator product of USLIC or with other
forms of insurance. USLIC has a reinsurance agreement with
Reliastar Financial Corporation, Minneapolis, Minnesota,
providing coverage of claims in excess of various amounts on
several of USLIC's accident and health policies.
RESERVES
21
22
USLIC has set up actuarially computed reserves as liabilities
to meet the obligations on the policies it writes. These
reserves are the amounts which, with additions from premiums
to be received and with interest in such reserves, compounded
annually at certain assumed rates, are calculated to be
sufficient according to accepted actuarial principles to meet
policy obligations as they mature. The various actuarial
factors are determined from mortality tables and interest
rates in effect when the policies are issued. The reserves to
be included in statutory filings will be valued on a basis
that meets the requirements of law in Mississippi. USLIC
receives an independent actuarial certification of its
reserves prepared in accordance with both GAAP and Statutory
principles.
REGULATION
Mississippi insurance laws and regulations generally govern
the accounting practices and prescribe the procedures and
forms for financial reports of insurance companies prepared on
a Statutory accounting basis and filed with the Insurance
Department. Reports prepared in accordance with the prescribed
statutory accounting practices are primarily intended to
insure the ability of an insurance company to meet its
obligations to policyholders and do not necessarily reflect
going concern value. Balance sheets prepared in accordance
with statutory accounting practices are designed primarily to
reflect the financial position of insurance companies from the
standpoint of solvency. Certain of the prescribed or permitted
accounting practices differ in some respects from generally
accepted accounting principles followed by other business
enterprises in determining financial position and results of
operations.
The insurance laws of the State of Mississippi also provide
that a life insurance company will be assessed a lower premium
tax if up to 25% of the life company's investments are in
Mississippi securities. The management of USLIC has invested
its assets in a manner to incur the lower tax rate.
In common with other insurance companies operating in
Mississippi, USLIC is subject to the regulation and
supervision of the Mississippi Insurance Commissioner. After
making application for admission and receiving proper license,
USLIC may operate in other states and, at that time, will be
subject to regulation and supervision in any other state where
it may be permitted to transact business. Such regulation is
primarily for the benefit and protection of insurance
policyholders rather than shareholders of insurance companies.
Broad administrative powers are possessed by the Mississippi
Department of Insurance and other supervising agencies.
Although the powers differ from state to state, in general
they include authority to grant and revoke licenses to
transact business, to be an agent, to supervise premium rates,
to approve the form of insurance contracts, to supervise the
form of financial statements filed with such agency, to
regulate capital requirements, to regulate insurable interest
on one life and to require the filing of detailed annual
reports. USLIC's business and accounts will be subject to
examination by the Mississippi Department of Insurance. Such
22
23
regulation includes the filing of financial statements by
USLIC, periodic reporting and examination by the insurance
regulatory authorities, and review of transactions between
members of the holding company group.
(vii) BUSINESS OF FHA
Formed in 1989, FHA, formerly Funeral Homes of Louisiana, owns
and operates a funeral home in Baker, Louisiana. Constructed
in 1992, the Baker Funeral Home constitutes the primary
business function of FHA. At December 31, 1997, FHL had total
assets of $666,000 and total revenues of $341,000.
(viii) BUSINESS OF CILIC
CILIC is an Illinois domiciled life insurer admitted to do
business in four states. Dormant for several years, the
Company services a closed block of life insurance policies. At
December 31, 1997, CILIC had assets of $3.1 million and yearly
revenues of $200,000.
(ix) BUSINESS OF NSLIC
NSLIC was acquired in November, 1997 by Citizens. Domiciled in
Arlington, Texas, NSLIC's revenues have historically been
derived from revenues generated by the sale of ordinary whole
life insurance, individual supplemental and major medical
health insurance and credit insurance and investment income.
During the year ended December 31, 1997, 11.6% of premium
revenue was attributable to life, endowment and term
insurance; 15.9% to credit insurance; and 72.5.% to accident
and health insurance. All of the life insurance in force is
non-participating.
In recent years, NSLIC's sales efforts have centered on a
major medical supplemental hospitalization policy and its
credit business. The claims incurred on the accident and
health policy to date are below the level anticipated in the
development and pricing of the product. The credit business is
sold primarily through a chain of furniture stores in Texas.
As a result, the average contract size is relatively small,
and the average duration is approximately three years.
GEOGRAPHICAL DISTRIBUTION OF BUSINESS
For the year ended December 31, 1997, 96.6% of NSLIC's total
premium income was derived from residents of Texas; 3.3% from
Louisiana residents and 0.1% from Oklahoma residents.
23
24
MARKETING OPERATIONS
NSLIC holds licenses to do business in three states - Texas,
Oklahoma and Louisiana. NSLIC's operations are conducted
through independent contractors, with a sales force of 218
representatives at December 31, 1997.
COMMISSION
The maximum amount of commission expense which may be incurred
by NSLIC on an individual life sale is 75% in the first year,
and 20% in years 2-10. On individual supplemental accident and
health, the first year commission ranges up to 65%, with up to
17% being incurred in years 2-10. On the supplemental
hospitalization plan, first year commissions amount to 32.5%,
while years 2 and thereafter are 12.5%. Commissions on the
credit business, which is all single premium, are 85%.
RESERVES
NSLIC establishes actuarial reserves as liabilities to meet
obligations on all outstanding policies. Reserves and deferred
acquisition costs are prepared in conformity with the American
Academy of Actuaries Committee on Financial Reporting
Principles and generally accepted accounting principles.
Claims reserves include an amount equal to the expected
benefit to be paid on reported claims in addition to an
estimate of claims that are incurred but not reported, based
on actual historical experience. NSLIC receives an independent
actuarial certification of its reserves. The certifications
have noted no deficiencies for the years presented herein.
REINSURANCE
NSLIC cedes insurance with other insurers, reinsurers and
members of various reinsurance pools. Reinsurance arrangements
are utilized to provide greater diversification of risk and
minimize exposure on larger risks.
INSURANCE CEDED
NSLIC generally retains $20,000 of risk on any one person. As
of December 31, 1997, the aggregate amount of life insurance
ceded amounted to $5,432,000 or 10.5% of total direct life
insurance in force. Additionally, NSLIC ceded $92,000 of
Accident and Health premium (approximately 27.7% of total A &
H premium). NSLIC is contingently liable with respect to ceded
insurance should any reinsurer be unable to meet the
obligations reinsured.
As of December 31, 1997, NSLIC had in effect automatic
reinsurance agreements that provide for cessions of ordinary
insurance from NSLIC. Additionally, NSLIC has reinsurance
treaties in force with several reinsurers of life and accident
and health insurance. These treaties provide for both
automatic and facultative
24
25
reinsurance of standard and substandard risks ceded to them by
NSLIC for life, accident and health and supplemental benefits
above NSLIC's retention limit on a yearly renewable term
basis.
A treaty with Employers Reassurance (ERC) has historically
been the primary vehicle utilized by NSLIC for its life
business. A reinsurance treaty with Continental Assurance
Company covers virtually all of NSLIC's accident and health
business.
NSLIC closely monitors the solvency of its reinsurers to
minimize the risk of loss in the event of a failure by one of
the parties. The primary reinsurers are large, well
capitalized entities which have no history of financial
difficulty.
INVESTMENTS
State insurance statutes prescribe the quality and percentage
of the various types of investments which may be made by
insurance companies and generally permit investment in
qualified state, municipal, federal and foreign government
obligations, high quality corporate bonds, preferred and
common stock, real estate and mortgage loans by certain
specified percentages. NSLIC's invested assets at December 31,
1997 were distributed as follows: fixed maturities - 96.66%,
equity securities - 0.36%, mortgage loans - 0%, policy loans -
0.26%, short-term investments - 2.72%.
REGULATION
NSLIC is subject to regulation and supervision by the
insurance department of each state or other jurisdiction in
which it is licensed to do business. These departments have
broad administrative powers relating to the granting and
revocation of licenses to transact business, the licensing of
marketing persons, the approval of policy forms, the
advertising and solicitation of insurance, the form and
content of mandatory financial statements, the reserve
requirements, and the type of investments which may be made.
NSLIC is required to file detailed annual reports with each
such insurance department, and its books and records are
subject to examination at any time. In accordance with state
laws and the rules and practices of the National Association
of Insurance Commissioners, NSLIC is examined periodically by
examiners of its domiciliary state and by representatives (on
an "association" or "zone" basis) of the other states in which
it is licensed to do business. NSLIC's most recent examination
which was completed during 1994, was for the three years ended
December 31, 1993, by the Texas Insurance Department. NSLIC is
audited annually by an independent public accounting firm.
25
26
Various states, including Texas, have enacted "Insurance
Holding Company" legislation which requires the registration
and periodic reporting by insurance companies which control,
or are controlled by, other corporations or persons. Under
most of such legislation, control is presumed to exist with
the ownership of ten percent or more of an insurance company's
voting securities. NSLIC is subject to such regulation and has
registered under such statutes as a member of an "insurance
holding company system." The legislation typically requires
periodic disclosure concerning the transactions between the
registered insurer, the ultimate controlling party, and all
affiliates and subsidiaries of the ultimate controlling party,
and in many instances requires prior approval of
intercorporate transfers of assets (including in some
instances payment of dividends by the insurance subsidiary)
within the holding company system.
COMPETITION
The life insurance business is highly competitive, and NSLIC
competes with a large number of stock and mutual companies.
NSLIC believes that its premium rates and its policies are
generally competitive with those of other life insurance
companies, many of which are larger than NSLIC, selling
similar types of insurance.
In NSLIC's block of accident and health insurance, it is in
competition with many life insurance companies as well as with
voluntary and government-sponsored plans for meeting
hospitalization and medical expenses such as Blue Cross/Blue
Shield, "Medicare" and "Medicaid." Future expansion of such
programs or the establishment of additional government health
programs could adversely affect the future of accident and
health insurance on NSLIC's books.
ITEM 2. DESCRIPTION OF PROPERTIES
CICA owns its principal office in Austin, Texas, consisting of
an 80,000 square foot office building. Approximately 33,000
square feet is occupied by CICA and its affiliates with the
remainder of the building being leased or for lease. At
December 31, 1997, the occupancy rate of the property was
100%.
CICA also owns 1.10 acres of land with a 13,000 square foot
office building which previously served as the Company's
executive offices. The property has a book value of $104,000.
A triple-net lease was executed during 1995 on the building
for a term of three years, with a purchase option at a price
of $850,000 during the period. The purchase option was not
exercised, and in March, 1998, a purchase contract was
executed with a third party for $840,000.
26
27
During 1995, CICA acquired through foreclosure, a 7,500 square
foot office property in Wheatridge, Colorado for $116,000.
Subsequently, the Company renovated the property, bringing its
investment to $230,000. The property was listed for sale in
December 1996. Management expects the ultimate realized value
of the property to be $250,000 to $300,000.
Through the acquisition of American Liberty Financial
Corporation described above, the Company also owns a 6,324
square foot funeral home in Baker, Louisiana with a total cost
of $473,000. This facility is owned and operated by a
subsidiary, FHA.
AIN owns a 13,000 square foot building in a suburb of Jackson,
Mississippi. In March, 1998, this building was under a
contract for sale at $537,000.
ITEM 3. LEGAL PROCEEDINGS
On September 25, 1997, the Company was notified that class
action certification was granted September 15, 1997 to
plaintiffs in a lawsuit (Dwain Kirkham et al. v. American
Liberty Life Insurance Company et al., No. 25,954, 2nd
Judicial District, Jackson Parish, Louisiana) filed against
American Liberty Life Insurance Company "ALLIC") on August 19,
1996 and against Citizens, Inc. on December 20, 1996
(collectively "Defendants"). In the same ruling Defendants'
motion for summary judgment and exception of prescription
(statute of limitations) were denied. Defendants believe that
these rulings are significantly in error. Defendants will
appeal these rulings, during which time, the trial court
proceedings will be stayed. Defendants intend to vigorously
defend against these claims
The lawsuit was filed by four individuals who purchased from
ALLIC, prior to August 1, 1986, life insurance policies on
their children and grandchildren. In the complaint, plaintiffs
allege that the insurance policies were fraudulently
misrepresented to be "retirement" and "insured savings" plans
in which, after six or seven years, additional premiums would
be unnecessary and monthly retirement income would be
generated for plaintiffs. Plaintiffs also allege other causes
of action including breach of contract and are seeking
rescission, unspecified damages, interest and attorneys' fees.
Prior to the class certification ruling, rescission of the
insurance policies purchased by the four plaintiffs would have
resulted in a total payment of $31,000 (including 33% for
contingent attorneys fees). The activities described in
plaintiffs' complaint allegedly occurred over 10 years ago
with respect to certain types of insurance policies sold by an
independent general agent. Prior to its recent merger into
CICA, ALLIC had been a separate subsidiary of Citizens since
September 1995.
27
28
As part of the acquisition, not all historical records of
ALLIC were loaded on the computer system currently used.
Further, no officers or managers of ALLIC are currently
employed by the Company or any of its affiliates. Due to the
unexpected nature of this ruling, the historical records have
not been examined to determine if such an estimate can be
developed.
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 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 1997.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
Citizens' Class A common stock is traded on the American Stock
Exchange (Amex) under the symbol CIA. The high and low prices
per share as supplied by the Amex Monthly Statistical Report
are as follows.
1997 1996
------------------------- ------------------------
QUARTER ENDED HIGH LOW HIGH LOW
- --------------------- ---------- ---------- --------- ----------
March 31 $ 8.81 7.63 9.13 8.50
June 30 8.13 7.25 7.50 5.13
September 30 7.88 7.19 8.13 7.38
December 31 7.56 6.38 9.75 7.69
As of December 31, 1997, the approximate number of record
owners of Citizens' Class A common stock was 15,000.
Management estimates the number of beneficial owners to be
approximately 57,000.
Citizens has not paid dividends in any of the past four years
and does not intend to pay cash dividends in the immediate
future. For restrictions on the present and future ability to
pay dividends, see Note 7 of the "Notes to Consolidated
Financial Statements."
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
28
29
read in conjunction with the consolidated financial statements
and notes which are included elsewhere herein (amounts in
thousands except per share amounts).
YEAR ENDED DECEMBER 31,
(IN THOUSANDS EXCEPT PER SHARE DATA)
----------------------------------------------------------------------------
1993
1997 1996 1995 1994 (AS RESTATED)
---- ---- ---- ---- -------------
NET OPERATING REVENUES $ 65,027 $ 63,822 $ 53,130 $ 49,212 $ 42,761
NET INCOME $ 3,426 $ 2,214 $ 2,750 $ 4,175 $ 5,526
NET INCOME PER SHARE $ .16 $ .11 $ .16 $ .25 $ .34
TOTAL ASSETS $249,519 $ 218,277 $ 209,308 $ 149,798 $ 134,105
NOTES PAYABLE $ 937 $ 489 $ 773 $ 712 $ 1,101
TOTAL LIABILITIES $169,938 $ 151,394 $ 144,595 $ 114,742 $ 106,090
TOTAL STOCKHOLDERS' EQUITY $ 79,581 $ 66,883 $ 64,713 $ 35,056 $ 28,015
BOOK VALUE PER SHARE $ 3.83 $ 3.29 $ 3.24 $ 1.99 $ 1.68
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
Citizens, Inc. pursuant to a Stock Purchase Agreement,
purchased from Jansen Enterprises, Inc., a Texas corporation,
100% of the issued and outstanding shares of National Security
Life and Accident Insurance Company (NSLIC) for $1,700,000,
consisting of $1,000,000 cash, and restricted shares of Class
A Common Stock valued at $700,000 in a transaction that closed
on November 20, 1997. NSLIC is a Texas-domiciled life and A&H
insurer with assets of approximately $5 million and annual
revenues of approximately $5 million.
In June 1997 Citizens acquired American Investment Network,
Inc. (AIN), a life insurance holding company that was the
parent of United Security Life Insurance Company,
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.
Citizens issued approximately 700,000 Class A shares in
connection with the transaction, which was accounted for as a
purchase. The companies operate in their respective locations
under a combined management team with consolidation of
computer data processing on the Citizens' system.
In March 1997 CICA acquired the remaining 5.5% of FAIC not
owned by ALLIC. CICA issued approximately 134,000 shares of
Citizens Class A Common Stock to the minority holders of FAIC.
Upon consummation of the acquisition of the minority interest,
Citizens incurred a non-recurring charge to earnings of
approximately $400,000. This charge is based upon the fair
market value of the shares to be issued, less the minority
interest acquired, and approximately $670,000 of goodwill.
Subsequently, FAIC was liquidated.
29
30
To streamline its corporate structure, ALFC was merged into
Citizens in June 1997. Also ALLIC was merged into CICA in June
1997.
RESULTS OF OPERATIONS
Net income for the year ended December 31, 1997 was $3,425,523
or $.16 per share compared to $2,213,726 or $.11 per share in
1996 and $2,750,212 or $.16 per share in 1995. Decreases in
acquisition related expenses associated with ALLIC and
economies of scale created by the combination of companies
contributed to the increase in 1997 income. Increases in
expense associated with the expansion of ALLIC's marketing
activities was the primary factor of the decrease in earnings
from 1995 to 1996.
Total revenues for the year ended December 31, 1997 were
$65,027,298 compared to $63,822,160 in 1996, an increase of
1.9%. Revenues increased from $53,130,172 in 1995 to the
$63,822,160 in 1996. Decreased writing of new business by CICA
in the international market and by ALLIC domestically was
offset by the premium revenues of USLIC and NSLIC, which
contributed to the increase in revenue in 1997. Additionally,
only six months of revenues of USLIC and only one month of
NSLIC's revenues are included in the 1997 results. The
substantial revenue growth in 1996 is attributable to the
inclusion of ALLIC for the entire year, which contributed
approximately $9,200,000 to revenues.
Premium income reached $55,362,616 in 1997, a 1.9% increase
over the previous year when premium income totaled
$54,303,445. The 1996 amount represented a 17.4% increase over
1995 when premiums amounted to $46,244,428. Declines in the
production of international premium by CICA and domestically
by ALLIC's former marketing operations during 1997 contributed
to the nominal increase. Additionally, as stated above, the
results for USLIC and NSLIC were not included for the entire
year. In January, 1998, CICA introduced a new line of
international products known as the Millennia 2000 series.
Based on the early reception of these products by the
Company's marketing consultants, management believes the
production of new premium from this market, which has been
flat for the past few years, should experience significant
growth, although this result cannot be assured. Additionally,
the products previously sold by ALLIC in the United States
were not available following the merger of ALLIC into CICA
until late in 1997 because of delays in obtaining requisite
approval from state insurance regulatory authorities..
Management has been successful in returning the largest
producing marketing organization of ALLIC to production and
anticipates significant new production in 1998, compared to
virtually none in 1997. Premiums for 1996 were boosted by the
inclusion of ALLIC, which contributed $3.8 million of accident
and health premium and an additional $4.1 million of life
premiums.
30
31
It is management's belief that CICA, utilizing the marketing
representatives who previously represented ALLIC, is better
served to continue to exploit its niche selling specialty
accident and health life products through existing
distribution channels. The acquisition of USLIC and NSLIC also
bring capable sales forces that have historically sold similar
products; therefore management believes that the ability to
"cross-sell" products between companies is high.
Net investment income increased 9.29% during 1997 to
$10,038,736 from $9,185,506 in 1996. In 1995, such income was
$7,026,909. The 1997 results reflect the continuing expansion
of the Company's asset base as well as the actions taken in
previous years to change the mix and duration of the Company's
invested assets. The 1996 results reflect actions taken during
late 1994 and early 1995 to extend the duration of the
Company's portfolio slightly to take advantage of higher
yields. Overall, the duration was increased to approximately 6
years from 4 to 5 years. Additionally, the acquisition of
ALLIC which increased the Company's invested assets by
approximately $17.8 million, contributed, along with the
Company's own internal growth. ALLIC represented $550,000 of
1995's investment income; however, this amount represented
only slightly more than three months of earnings on that asset
base. In 1996, the contribution was $1.2 million.
The low yields available in the bond market during the
Company's growth period have made it difficult to increase the
return on the Company's invested assets without exposing the
portfolio to undue risk; however, management believes that as
yields change, the Company is positioned to take advantage of
the investment opportunities that will present themselves and,
thus, enhance future returns. Management hired the investment
advisory firm of Asset Allocation and Management, Inc. of
Chicago ("AAM"), Illinois in late 1995 to manage the Company's
fixed maturity portfolio. It is the belief of management that
an overall increase in returns can be achieved by implementing
the plans of AAM to provide more diversity in the portfolio
without significantly increasing risk. During 1996, a nominal
reconfiguration was begun. In lieu of purchasing U.S. Treasury
instruments, the Company began to purchase U.S. Government
guaranteed mortgage pass-through securities. This program
continued throughout 1997. Additionally, approximately $3
million of A to AA rated private placement bonds were
acquired. Management expects to continue this strategy
throughout 1998 as opportunities present themselves.
Future policy benefit reserves increased $8,958,166 in 1997,
compared to $8,198,243 in 1996 and $11,033,763 in 1995.
Increased surrender activity was the primary reason for the
lower reserve increases in 1997 and 1996. Additionally, in the
early years of a policy, the net reserves (benefit reserve
less deferred acquisition costs) are small due to the large
capitalized costs in the first and second policy years. As the
policy matures, the reserve increases. The Company's reserves
are certified annually by an independent actuary. Such
certification noted no deficiencies for the years presented.
31
32
Overall policyholder dividends increased 18% in 1997 amounting
to $2,782,215, compared to $2,363,201 in 1996 and $2,422,168
in 1995. The 1997 growth is primarily due to the acquisition
of USLIC, which increased the current year results by
approximately $397,000. In late 1993, management reduced the
dividends paid on various plans to reflect the lower levels of
return that were available in the bond market. As a result,
the dividends paid in recent years have not been growing as
rapidly. Virtually all CICA's policies that have been sold
since 1989 are participating. Participating policies represent
a large majority (82%) of the Company's business in-force. As
a result, management expects continued growth in this item
subject to factors such as persistency and future sales;
however, dividends are factored into the policies' premiums
and thus management does not believe continued increases in
dividend expense should impair or dilute future profitability.
Claims and surrenders increased 7.5% in 1997, reaching
$27,852,907 from $25,919,054 in 1996. In 1995, such expenses
were $19,282,954. Death benefits increased to $4,475,083 in
1997, compared to $3,667,159 in 1996. In 1995, such benefits
were $2,923,339. The increase in such claims in 1997 does not
appear to be due to any trend. Rather, it is the result of the
growing block of business written by the Company.
Additionally, the pre-need and burial policies formerly sold
by ALLIC were marketed to an older clientele and as such,
higher claims are anticipated and factored into the product.
The Company has historically adhered to a strict underwriting
policy which requires complete medical examinations on all
applicants who are foreign residents, except children,
regardless of age or face amount of the policy applied for.
For 1996 and future years, management initiated a change to
more selective medical examinations in conjunction with dry
spot blood tests and extensive medical questions on the
application in order to lower the cost of new business without
sacrificing necessary information for the underwriter.
Additionally, X-rays and electrocardiograms are required
depending on age and face amount of the policy. On all
policies of $150,000 or more, inspection reports are required
which detail the background resources and lifestyle of the
applicant. The Company has developed numerous contacts
throughout Latin America with which its underwriters can
validate information contained in the application, medical or
inspection report.
Accident and Health benefits grew to $2,948,257 in 1997,
compared to $1,719,244 in 1996, and $304,704 in 1995. The
increase reflects the growing block of accident and health
premium on the Company's books. Additionally, in 1997, the
addition of USLIC contributed approximately $740,000 to the
benefit amounts. In 1996, the acquisition of ALLIC caused such
benefits to increase sharply because of the volume of A&H
premium on ALLIC's books compared to the amount on CICA's
books. In 1995, only three months of activity for ALLIC are
included.
32
33
Endowment expense grew to $5,258,881 in 1997 from $5,192,607
in 1996. In 1995, such expenses were $4,631,261. Beginning in
late 1990, Citizens introduced a new series of plans called
"Ultra Expansion Plus" which carried an immediate endowment
benefit of an amount elected by the policyowner. This
endowment is factored into the premium of the policy and is
paid annually. The relatively small increase from 1996 to 1997
reflects the decreased production of new business over the
last three years. Management does not expect this benefit to
adversely impact profitability since it is factored into the
cost of the policy.
Policy surrenders were $14,322,593 in 1997, compared to
$14,421,683 in 1996 and $10,611,335 in 1995. The increase in
surrenders in 1996 and 1995 is, in the opinion of management,
due to acquisitions and the growing block of business
in-force, as well as representative of the economic problems
seen in Argentina during 1995 and early 1996. The decrease in
1997 is, in the opinion of management, the result of a
campaign begun in mid-1997 to inform policyowners about the
benefits of their policy.
Other claim expenses amounted to $848,093 in 1997, $918,361 in
1996 and $812,315 in 1995. These expenses are comprised of
supplemental contract benefits, interest on policy funds and
assorted other miscellaneous policy benefits.
During 1997, commissions decreased to $11,918,192 from
$12,447,664 in 1996. In 1995 commissions were $10,273,173. The
majority of such amounts paid relates to first year
commissions which were $8,120,748, $8,677,297 and $7,292,264,
respectively, in 1997, 1996, and 1995. The 1996 increases
relate to improved sales activity in CICA and approximately
$1.5 million associated with ALLIC. The decline in first year
commissions during 1997 relates to the slowdown in new sales
discussed earlier.
Underwriting, acquisition and insurance expenses decreased to
$6,992,402 in 1997 from $9,500,973 in 1996 and $7,102,401 in
1995. The 1996 expenses include approximately $3.2 million
associated with ALLIC. Due to the consolidation of ALLIC's
operations with CICA, management believes significant
reductions have been achieved through economies of scale which
are reflected in the 1997 results. It should be noted that
only six months of expense associated with USLIC and one month
from NSLIC are included. Management believes that through
economies of scale which can be achieved in the future after
conversion of systems of these companies, additional expense
reductions can be made.
In order to convert a majority of CICA's marketing overhead
from fixed to variable, management began discussions in early
1997 with an independent international marketing company to
serve as managing agent for the Company's international
marketing activities. This firm will receive an overriding
commission on all new business sold internationally in
exchange for the absorption of all marketing management and
promotion activities. By taking such
33
34
actions, management believes a significant amount of fixed
overhead can be converted to a variable expense in 1998 and
thereafter. Management has utilized firms such as this in
previous periods with great success at obtaining increases in
sales and expense reductions. Additionally, management
undertook the expense reductions associated with ALLIC's
marketing operations discussed previously. These actions
should result in additional annual overhead reduction in
future periods based upon the 1996 level of expenditures.
Capitalized deferred policy acquisition costs were $9,804,022
in 1997, compared to $10,531,222 in 1996 and $10,579,704 in
1995. The decline in amounts in 1997 reflects the lower level
of new sales experienced during the year, as well as the lower
interest rate environment. There was an adjustment of
capitalization for 1994 and after issued policies to reflect
the lower interest rates available to be earned on the
Company's investment portfolio compared to earlier years.
Amortization of these costs was $9,630,705, $10,221,917 and
$8,511,876 respectively in 1997, 1996, and 1995. The increased
surrender activity discussed above contributed to the
increased amortization in 1996.
Amortization of cost of insurance acquired and excess of cost
over net assets acquired increased to $2,305,127 in 1997 from
$1,398,859 in 1996 and $678,997 in 1995. The increase is
attributable to the goodwill and cost of insurance recorded on
the acquisitions of USLIC, NSLIC, ALLIC and IIH. Because of
the slowdown in sales activity on the part of the agency
operations previously associated with ALLIC, management is
monitoring the goodwill associated with the acquisition of
ALLIC in 1995. Should actual production levels be less than
anticipated production, the potential exists that the Company
would have to charge-off the goodwill associated with such
decline. Management, in conjunction with its independent
actuaries is monitoring this recoverability on a quarterly
basis. At December 31, 1997, all goodwill on the Company's
balance sheet was recoverable within the period of
amortization. Because of the production by former ALLIC agents
discussed above, management believes that there should not be
future issues associated with such goodwill recovery; however,
in the event any such amount proved unrecoverable, a charge in
the appropriate period will be booked.
LIQUIDITY AND CAPITAL RESOURCES
Stockholders' equity increased to $79,581,698 at December 31,
1997 from $66,883,016 in 1996. The acquisition of USLIC and
NSLIC and the income earned during the period were the primary
reasons for the growth in equity during 1997. The increase in
equity during the year was enhanced by the improvement in the
market value (approximately $2.3 million, net of tax) on the
Company's available-for-sale bond portfolio. This unrealized
gain was attributable to increases in prices in the bond
market in 1997.
34
35
The Company's second offering of Class A common stock pursuant
to Regulation S was initiated in May 1995. The second
offering, to the Company's international policyholders,
originally was planned to expire on October 31, 1997. Shares
were priced at $7.50 and purchasers were required to agree to
a three-year holding period. The offering was terminated in
June, 1997. Approximately $1 million of additional capital was
raised through the offering.
Invested assets grew to $162,651,692 in 1997 from $138,311,136
at December 31, 1996, an increase of 17.6%. The acquisition of
USLIC and NSLIC contributed to said increase. The balance of
the growth is attributable to the internal growth achieved by
the Company. At December 31, 1997, fixed maturities have been
categorized into two classifications: Fixed maturities held to
maturity, which are valued at amortized cost, and fixed
maturities available for sale which are valued at market. The
Company does not have a plan to make material dispositions of
fixed maturities during 1998; however, because of continued
uncertainty regarding long-term interest rates, management
cannot rule out sales during 1998. Fixed maturities held to
maturity, amounting to $5,617,131 consist of U.S. Treasury
securities. Management has the intent and believes the Company
has the ability to hold the securities to maturity.
The Company's mortgage loan portfolio, which constitutes 0.8%
of invested assets at December 31, 1997, (1.2% at December 31,
1996) has historically been composed of small residential
loans in Texas. At December 31, 1997, one mortgage loan with a
principal balance of approximately $38,400 was in default. At
December 31, 1996, no loans were in default. Management has
established a reserve of $50,000 at December 31, 1997 and 1996
(approximately 3% of the mortgage portfolio's balance) to
cover potential unforeseen losses in the Company's mortgage
portfolio.
Policy loans comprise 12.6% of invested assets at December 31,
1997 compared to 14.3% at December 31, 1996. These loans,
which are secured by the underlying policy values, have yields
ranging from 5% to 10% percent and maturities that are related
to the maturity or termination of the applicable policies.
Management believes that the Company maintains more than
adequate liquidity despite the uncertain maturities of these
loans.
Cash balances of the Company in its primary depository, Chase
Bank of Texas, Austin, Texas, were significantly in excess of
Federal Deposit Insurance Corporation (FDIC) coverage at
December 31, 1997 and 1996. Management monitors the solvency
of all financial institutions in which it has funds to
minimize the exposure for loss. Management does not believe
the Company is at risk for such a loss. During 1998, the
Company intends to utilize highly-rated commercial paper as a
cash management tool to minimize excess cash balances and
enhance return.
35
36
In February 1992, the Company paid cash for an 80,000 square
foot office building in Austin, Texas to serve as its primary
office. This building will, in the opinion of management,
provide adequate space for the Company's operations for many
years. Renovation and remodeling of the property began in the
third quarter of 1992 and the Company relocated to the
building in September 1993. The Company occupies approximately
33,000 square feet of space in the building. The Company's
former office property, consisting of approximately 13,000
square feet in Austin, with a carrying value of $104,000 was
leased to a third party on a triple-net basis for three years
during 1995. The lease provided that the party could purchase
the building during the first 18 months of the lease for
$850,000 cash, with no lease payments applying to the purchase
price. The option period expired in 1996. The property was
placed under a contract of sale in March 1998 for $840,000.
CICA owned 1,821,332 and 1,955,457 shares of Citizens Class A
common stock at December 31, 1997 and 1996, respectively. For
statutory accounting purposes, CICA received written approval
from the Colorado Insurance Department to carry its investment
in Citizens in 1996 at 50% of the fair market value limited to
7% of admitted assets, which differs from prescribed statutory
accounting practices. Statutory accounting practices
prescribed by Colorado require that the Company carry its
investment at market value reduced by the percentage ownership
of Citizens by CICA, limited to 2% of admitted assets. As of
December 31, 1997, the Company valued the shares in accordance
with prescribed statutory accounting practices. In the
Citizens' consolidated financial statements, this stock is
shown as treasury stock.
CICA had outstanding at December 31, 1997, a $400,000 surplus
debenture payable to Citizens. For statutory accounting
purposes, this debenture is a component of surplus, while for
GAAP it is eliminated in consolidation. Citizens has
recognized a liability for its related obligation to a bank in
a like amount.
The NAIC has established minimum capital requirements in the
form of Risk-Based Capital ("RBC"). Risk-based capital factors
the type of business written by a company, the quality of its
assets, and various other factors into account to develop a
minimum level of capital called "authorized control level
risk-based capital" and compares this level to an adjusted
statutory capital that includes capital and surplus as
reported under Statutory Accounting 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,
1997, CICA, NSLIC, USLIC and CILIC were well above required
minimum levels.
INFORMATION SYSTEMS AND THE YEAR 2000
36
37
The inability of computers, software and other equipment
utilizing microprocessors to recognize and properly process
data fields containing a two-digit year is generally referred
to as the Year 2000 compliance issue. As the year 2000
approaches, such systems may be unable to accurately process
certain date-based or date-sensitive information.
The Company is in the process of identifying all significant
applications that will require modification to ensure Year
2000 compliance. Internal resources will be used as necessary
to make the required modifications and to test and verify Year
2000 compliance. Due to the nature of the programming of the
Company's core processing systems, such date oriented issues
are not a problem since the dates are stored as the number of
days since the year 1900, rather than as a two-digit field.
Accordingly a significant part of the Company's efforts to
ensure Year 2000 compliance will be to obtain assurances from
vendors that timely upgrades will be made available to make
third party software Year 2000 compliant. Additionally, the
Company will contact companies with whom it does business and
upon whose systems the Company may indirectly rely, to obtain
assurances that such systems will be timely modified. The
Company anticipates that it will complete this process in
early 1999, leaving adequate time to assess and resolve any
significant remaining issues. The cost of Year 2000 compliance
is not expected to be material to the Company's financial
position or results of operations in any one year.
37
38
FINANCIAL ACCOUNTING STANDARDS
In February 1997, the FASB issued Statement 128 "Earnings per
Share" ("Statement 128"). Statement 128 establishes the
standards for computing and presenting earnings per share
("EPS"). This statement replaces the presentation of primary
EPS with a presentation of basic EPS and requires dual
presentation of basic and diluted EPS. Statement 128 is
effective for fiscal years ending after December 15, 1997.
Implementation did not have a material impact on the Company's
earnings per share.
In June 1997, the FASB issued Statement 130 "Reporting
Comprehensive Income" ("Statement 130"). Statement 130
establishes the standards for reporting and display of
comprehensive income and its components in a full set of
general-purpose financial statements. Statement 130 is
effective for fiscal periods beginning after December 15,
1997. The Company does not believe that this statement will
have an impact on future operations or liquidity.
38
39
ITEM 8. FINANCIAL STATEMENTS
CITIZENS, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND
FINANCIAL STATEMENT SCHEDULES
PAGE
REFERENCE
---------
Independent auditor's report 44
Consolidated balance sheets at
December 31, 1997 and 1996 45-46
Consolidated statements of operations
- years ended December 31, 1997, 1996 and 1995 47-48
Consolidated statements of stockholders' equity
- years ended December 31, 1997, 1996 and 1995 49
Consolidated statements of cash flows
- years ended December 31, 1997, 1996 and 1995 50-52
Notes to consolidated financial statements 53-71
Schedules at December 31, 1997 and 1996:
Schedule II - Condensed Financial
Information of Registrant 72-74
Schedules for each of the years in the three-year
period ended December 31, 1997:
Schedule IV - Reinsurance 75
All other schedules have been omitted as the required information is
inapplicable or the information required is presented in the financial
statements or the notes thereto filed elsewhere herein.
ITEM 9. DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
During the 24 months preceding the date of the audited
financial statements of Citizens included herein, there has
been no change of accountants made by Citizens, nor has it
reported on Form 8-K any disagreements between the Company and
its independent accountants.
39
40
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, 1997.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON
FORM 8-K
(a) 1 AND 2
FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES
The financial statements and schedules listed on the following
index to financial statements and financial statement
schedules are filed as part of this Form 10-K.
(a) 3 EXHIBITS
EXHIBIT
EXHIBIT NO. DESCRIPTION PAGE NO.
----------- ----------- --------
(1) Underwriting Agreement N/A
(2) Plan of acquisition, reorganization, arrangement, liquidation or
succession (e)
(3) 3.1 Articles of Incorporation; as amended (d)
3.2 Bylaws (b)
(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)
40
41
10.3 Plan and Agreement of Merger and Exchange
by and among Insurance Investors &
Holding Co., Central Investors Life
Insurance Company of Illinois, Citizens,
Inc. and Citizens Acquisition, Inc. (g)
10.4 Self-Administered Automatic Reinsurance
Agreement - Citizens Insurance Company of
America and Riunione Adriatica di
Sicurta, S.p.A. (h)
10.5 Plan and Agreement of Exchange dated
October 28, 1996 between Citizens, Inc.
and American Investment Network, Inc. (h)
10.6 Agreement and Plan of Merger dated
October 31, 1996 between Citizens
Insurance Company of America, CICA
Acquisition, Inc., and First American
Investment Corporation (h)
10.7 Plan and Agreement of Merger dated
November 22, 1996 between Citizens, Inc.
and American Liberty Financial
Corporation, as amended (i)
10.8 Plan and Agreement of Merger dated
November 22, 1996 between Citizens
Insurance Company of America and American
Liberty Life Insurance Company, as
amended (i)
10.9 Bulk Accidental Death Benefit Reinsurance
Agreement between Connecticut General
Life Insurance Company and Citizens
Insurance Company of America, as amended
Plan and Agreement of Exchange dated
October 28, 1996 (i)
10.10 Plan and Agreement of Exchange between
American Investment Network, Inc., and
Citizens Insurance Company of America filed
dated October 28, 1996 herewith
10.11 Stock Purchase Agreement dated August
13, 1997 between Jansen Enterprises, Inc.,
Joe T. Bailey D. Steven Hansen, filed
and Citizens Inc. herewith
(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
41
42
(21) Subsidiaries of the registrant Filed
herewith
(22) Published report regarding matters submitted to a vote of security
holders N/A
(23) Independent Auditor's consent Filed
herewith
(24) Power of Attorney See
signature
page
(25) Statement of eligibility of trustee N/A
(26) Invitations for competitive bids N/A
(27) Financial Data Schedule Filed
herewith
(28) (Removed and Reserved) N/A
(99) Additional Exhibits N/A
- ----------------
(a) Filed as a part of the Amendment No. 1 to Registration Statement on Form
S-4, SEC File No. 33--4753, filed on or about June 19, 1992.
(b) Filed with or referenced in the Registrant's Annual Report on Form 10-K
for the year ended December 31, 1991 and incorporated herein by
reference.
(c) Filed with or referenced in the Registrant's Annual Report on Form 10-K
for the year ended December 31, 1992 and incorporated herein by
reference.
(d) Filed with or referenced in the Registrant's Annual Report on Form 10-K
for the year ended December 31, 1993 and incorporated herein by
reference.
(e) Filed with or referenced in the Registrant's Current Report on Form 8-K
dated December 9, 1994 and incorporated herein by reference.
(f) Filed as a part of the Registration Statement on Form S-4, SEC File No.
33--59039, filed on or about May 2, 1995.
(g) Filed as a part of the Registration Statement on Form S-4, SEC File No.
33--63275, filed on or about October 6, 1995.
(h) Filed as a part of the Registration Statement on Form S-4, SEC File No.
333--16163, filed on or about November 14, 1996.
(i) Filed with or referenced in the Registrant's Annual Report on Form 10-K
for the year ended December 31, 1996 and incorporated herein by
reference.
(b) REPORTS ON FORM 8-K
No Reports on Form 8-K were filed by Citizens during the fourth quarter of 1997.
42
43
CITIZENS, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND
FINANCIAL STATEMENT SCHEDULES
PAGE
REFERENCE
---------
Independent auditors' report 44
Consolidated balance sheets at
December 31, 1997 and 1996 45-46
Consolidated statements of operations
- years ended December 31, 1997, 1996 and 1995 47-48
Consolidated statements of stockholders' equity
- years ended December 31, 1997, 1996 and 1995 49
Consolidated statements of cash flows
- years ended December 31, 1997, 1996 and 1995 50-52
Notes to consolidated financial statements 53-71
Schedules at December 31, 1997 and 1996:
Schedule II - Condensed Financial
Information of Registrant 72-74
Schedules for each of the years in the three-year period ended December 31,
1997:
Schedule IV - Reinsurance 75
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.
43
44
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
Citizens, Inc.:
We have audited the consolidated financial statements of Citizens, Inc. and
subsidiaries as listed in the accompanying index. In connection with our audits
of the consolidated financial statements, we also have audited the financial
statement schedules as listed in the accompanying index. These consolidated
financial statements and financial statement schedules are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
consolidated financial statements and financial statement schedules based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits 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, 1997 and 1996, and the results of their
operations and their cash flows for each of the years in the three-year period
ended December 31, 1997, in conformity with generally accepted accounting
principles. Also in our opinion, the related financial statement schedules, when
considered in relation to the basic consolidated financial statements taken as a
whole, present fairly, in all material respects, the information set forth
therein.
KPMG PEAT MARWICK LLP
Dallas, Texas
March 18, 1998
44
45
CITIZENS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1997 AND 1996
ASSETS 1997 1996
----- ----
Investments (note 2):
Fixed maturities held to maturity,
at amortized cost (market $5,704,000
in 1997 and $5,217,000 in 1996) $ 5,617,131 $ 5,627,256
Fixed maturities available for sale at market
(cost $130,621,420 in 1997 and
$110,759,634 in 1996) 133,021,681 109,723,050
Equity securities, at market (cost $983,513
in 1997 and $89,580 in 1996) 978,391 50,155
Mortgage loans on real estate (net of reserve
of $50,000 in 1997 and 1996) 1,287,295 1,672,522
Policy loans 20,466,184 19,819,125
Guaranteed student loans (net of reserve of
$10,000 in 1997 and 1996) 81,681 298,683
Other long-term investments 899,329 920,345
Short-term investments 300,000 200,000
------------ ------------
Total investments 162,651,692 138,311,136
Cash 6,454,956 6,085,383
Other receivables 1,007,878 594,088
Accrued investment income 2,010,512 1,682,084
Reinsurance recoverable 2,069,423 1,773,541
Deferred policy acquisition costs 37,107,070 36,933,753
Other intangible assets 2,596,925 1,633,625
Federal income tax receivable -- 357,608
Deferred federal income tax (note 12) 572,430 743,712
Cost of insurance acquired (note 3) 10,639,667 7,219,594
Excess of cost over net assets acquired (note 3) 17,466,123 16,756,433
Property, plant and equipment 5,795,573 5,442,578
Other assets 1,147,186 743,636
------------ ------------
$249,519,435 $218,277,171
============ ============
45
46
CITIZENS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS, CONTINUED
DECEMBER 31, 1997 AND 1996
LIABILITIES AND STOCKHOLDERS' EQUITY 1997 1996
---- ----
Liabilities:
Future policy benefit reserves (notes 4 and 5):
Life insurance $ 140,003,642 $ 126,910,222
Annuities 3,819,861 3,936,178
Accident and health 8,295,539 6,219,274
Dividend accumulations 4,789,194 3,961,603
Premium deposits 2,010,102 1,803,358
Policy claims payable (notes 4, 5 and 10) 3,488,484 2,966,818
Other policyholders' funds 1,873,588 1,958,992
------------- -------------
Total policy liabilities 164,280,410 147,756,445
Other liabilities 2,703,346 2,052,001
Commissions payable 880,811 928,288
Notes payable (note 6) 937,430 489,166
Federal income tax payable 762,992 --
Amounts held on deposit 372,748 168,255
------------- -------------
Total liabilities 169,937,737 151,394,155
------------- -------------
Stockholders' equity (notes 7, 8, and 9): Common stock:
ClassA, no par value, 50,000,000 shares
authorized 22,708,910 shares issued
in 1997 and 21,761,894 shares issued
in 1996, including shares in treasury of
1,943,822 in 1997 and 2,077,947 in 1996 52,790,643 45,941,552
Class B, no par value, 1,000,000 shares
authorized, 621,049 shares issued and
outstanding in 1997 and 1996 283,262 283,262
Unrealized investment gain (loss) (note 2) 1,580,790 (710,166)
Retained earnings 26,856,157 23,430,634
------------- -------------
81,510,852 68,945,282
Treasury stock, at cost (1,929,154) (2,062,266)
------------- -------------
Total stockholders' equity 79,581,698 66,883,016
------------- -------------
Commitments and contingencies (notes 5, 8, and 10)
$ 249,519,435 $ 218,277,171
============= =============
See accompanying notes to consolidated financial statements.
46
47
CITIZENS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
DECEMBER 31, 1997 AND 1996
1997 1996 1995
---- ---- ----
Revenues:
Premiums (notes 5 and 11):
Life insurance $ 49,696,698 $ 49,873,673 $ 45,426,887
Accident and health 5,299,783 4,040,688 698,206
Annuity and universal life
considerations 366,135 389,084 119,335
Net investment income (note 2) 10,038,736 9,185,506 7,026,909
Realized gains (losses) on
investments (note 2) (320,125) 226,212 (109,096)
Other income 23,945 136,566 75,062
Interest expense (77,874) (29,569) (107,131)
------------ ------------ ------------
Total revenues 65,027,298 63,822,160 53,130,172
------------ ------------ ------------
Benefits and expenses:
Insurance benefits paid or provided:
Increase in future
policy benefit reserves 8,958,166 8,198,243 11,033,763
Policyholders' dividends 2,782,215 2,363,201 2,422,168
Claims and surrenders (note 5) 27,852,907 25,919,054 19,282,954
Annuity expenses 361,862 684,440 652,976
------------ ------------ ------------
Total insurance benefits
paid or provided 39,955,150 37,164,938 33,391,861
Commissions 11,918,192 12,447,664 10,273,173
Other underwriting, acquisition
and insurance expenses 6,992,402 9,500,973 7,102,401
Capitalization of deferred policy
acquisition costs (9,804,022) (10,531,222) (10,579,704)
Amortization of deferred policy
acquisition costs 9,630,705 10,221,917 8,511,876
Amortization of cost of insurance
acquired and excess of cost
over net assets acquired (note 3) 2,305,127 1,398,859 678,997
------------ ------------ ------------
Total benefits and expenses 60,997,554 60,203,129 49,378,604
------------ ------------ ------------
(Continued)
47
48
CITIZENS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS, CONTINUED
YEARS ENDED DECEMBER 31, 1997, 1996, AND 1995
1997 1996 1995
---- ---- ----
Income before Federal income
taxes $4,029,744 $3,619,031 $3,751,568
Federal income tax expense 604,221 1,405,305 1,001,356
---------- ---------- ----------
(note 12)
Net income $3,425,523 $2,213,726 $2,750,212
========== ========== ==========
Basic and diluted earnings per share
of common stock (notes 1 and 8) $ .16 $ .11 $ .16
========== ========== ==========
See accompanying notes to consolidated financial statements.
48
49
CITIZENS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
COMMON STOCK UNREALIZED TOTAL
--------------------------- INVESTMENT RETAINED TREASURY STOCKHOLDERS'
CLASS A CLASS B GAINS (LOSSES) EARNINGS STOCK EQUITY
------- ------- -------------- -------- ----- ------
BALANCE AT DECEMBER 31, 1994 $ 21,457,303 $ 283,262 $ (2,970,597) $ 18,466,696 $(2,181,291) $ 35,055,373
Net income -- -- -- 2,750,212 -- 2,750,212
Unrealized investment gains, net -- -- 4,238,344 -- -- 4,238,344
Acquisition of ALFC (note 9) 22,246,163 -- -- -- -- 22,246,163
Sale of stock 638,980 -- -- -- -- 638,980
Stock issuance costs (257,495) -- -- -- -- (257,495)
Retire shares held in treasury stock (114,782) -- -- -- 114,782 --
Sale of treasury stock 37,170 -- -- -- 4,243 41,413
------------ ---------- ------------ ------------ ----------- ------------
BALANCE AT DECEMBER 31, 1995 $ 44,007,339 $ 283,262 $ 1,267,747 $ 21,216,908 $(2,062,266) $ 64,712,990
============ ========== ============ ============ =========== ============
Net income -- -- -- 2,213,726 -- 2,213,726
Unrealized investment gains, net -- -- (1,977,913) -- -- (1,977,913)
Acquisition of IIH (note 9) 1,542,501 -- -- -- -- 1,542,501
Sale of stock 445,462 -- -- -- -- 445,462
Stock issuance costs (157,500) -- -- -- -- (157,500)
Exercise of options (note 8) 103,750 -- -- -- -- 103,750
------------ ---------- ------------ ------------ ----------- ------------
BALANCE AT DECEMBER 31, 1996 $ 45,941,552 $ 283,262 $ (710,166) $ 23,430,634 $(2,062,266) $ 66,883,016
============ ========== ============ ============ =========== ============
Net income -- -- 3,425,523 -- 3,425,523
Unrealized investment gains, net -- 2,290,956 -- -- 2,290,956
Acquisition of minority interest in --
FAIC (Note 9) 932,584 -- -- -- 133,112 1,065,696
Acquisition of AIN (Note 9) 5,320,895 -- -- -- -- 5,320,895
Acquisition of NSLIC (Note 9) 700,000 -- -- -- 700,000
Stock options exercised (Note 8) 130,500 -- -- -- -- 130,500
Stock issuance costs (234,888) -- -- -- -- (234,888)
------------ ---------- ------------ ------------ ----------- ------------
BALANCE AT DECEMBER 31, 1997 $ 52,790,643 $ 283,262 $ 1,580,790 $ 26,856,157 $(1,929,154) $ 79,581,698
============ ========== ============ ============ =========== ============
See accompanying notes to consolidated financial statements.
49
50
CITIZENS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1997, 1996, AND 1995
1997 1996 1995
---- ---- ----
Cash flows from operating activities:
Net income $ 3,425,523 $ 2,213,726 $ 2,750,212
Adjustments to reconcile net income to
net cash provided by operating activities,
net of assets acquired:
Realized gains (losses) on sale of
investments and other assets (320,125) 226,212 (109,096)
Accrued investment income (236,828) 372,781 (131,835)
Net deferred policy acquisition costs (173,317) (309,305) (2,086,984)
Amortization of cost of insurance
acquired and excess cost over
net assets acquired 2,305,127 1,398,859 678,997
Change in:
Other receivables (134,853) 626,300 602,662
Future policy benefit reserves 9,511,158 8,357,859 9,929,505
Other policy liabilities (291,121) 34,343 1,527,695
Deferred Federal income tax (1,008,907) (407,226) (981,068)
Federal income tax 1,120,600 (1,368,629) (104,424)
Commissions payable and other liabilities (569,763) 226,675 (224,308)
Amounts held on deposit 204,491 (99,348) (42,829)
Other, net 95,349 672,085 613,198
------------ ------------ ------------
Net cash provided by
operating activities 13,927,334 11,944,332 12,421,725
------------ ------------ ------------
Cash flows from investing activities:
Maturity of fixed maturities held to maturity -- -- 2,600,000
Sale of fixed maturities available for sale 19,967,749 16,403,929 28,419,387
Maturity of fixed maturities available for sale 3,596,134 5,811,179 --
Purchase of fixed maturities available for sale (36,553,342) (33,759,945) (38,614,148)
Sale of equity securities 619,277 66,251 1,892
Purchase of equities securities (511,231) -- --
Principal payments on mortgage loans 510,561 391,804 652,819
Mortgage loans funded (125,334) (203,718) (54,875)
Guaranteed student loans funded (60,131) (100,902) (272,635)
Guaranteed student loans sold 277,133 135,606 179,491
Sale of other long-term investments
and property, plant and equipment 21,291 (303,567) 474,257
(Continued)
50
51
CITIZENS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS, CONTINUED
YEARS ENDED DECEMBER 31, 1997, 1996, AND 1995
1997 1996 1995
---- ---- ----
Cash and short-term investments
provided by mergers 834,290 355,654 $ 1,178,600
Acquisition of NSLIC (1,000,000) -- --
Increase in policy loans (net) (638,141) (801,105) (3,491,760)
Purchase of other long-term investments and property,
plant and equipment (197,286) (691,632) (947,733)
------------ ------------ ------------
Net cash used by investing activities (13,259,030) (12,696,446) (9,874,705)
------------ ------------ ------------
Cash flows from financing activities:
Additional borrowings on notes payable -- -- 60,461
Payments on notes payable (94,343) (603,068) --
Sale of stock, net (104,388) 391,712 381,485
------------ ------------ ------------
Net cash provided (used) by
financing activities (198,731) (211,356) 441,946
------------ ------------ ------------
Net increase (decrease) in cash and
cash equivalents 469,573 (963,470) 2,988,966
------------ ------------ ------------
Cash and cash equivalents at
beginning of year 6,285,383 7,248,853 4,259,887
------------ ------------ ------------
Cash and cash equivalents
at end of year 6,754,956 6,285,383 7,248,853
============ ============ ============
Supplemental disclosures of cash flow information:
1997 1996 1995
---- ---- ----
Cash paid during the year for:
Interest $ 77,874 $ 38,826 $ 53,030
============ ============ ============
Income taxes $ 800,000 $ 3,195,245 $ 2,000,000
============ ============ ============
(Continued)
51
52
CITIZENS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS, CONTINUED
YEARS ENDED DECEMBER 31, 1997, 1996, AND 1995
Supplemental disclosures of non-cash investing and financing activities (see
also Note 9):
The Company issued Class A stock and cash to purchase all of the
capital stock of AIN, NSLIC, and the minority ownership in FAIC in 1997, IIH in
1996 and ALFC in 1995. In conjunction with the acquisitions, liabilities
were assumed as follows:
1997 1996 1995
---- ---- ----
Fair value of tangible assets acquired $ 9,726,825 $ 2,381,252 $ 20,330,059
Fair value of intangible assets acquired,
gross 6,795,488 614,665 21,653,585
------------ ------------ ------------
Net assets acquired 16,522,313 2,995,917 41,983,644
Capital stock issued and cash paid (8,086,591) (1,542,501) (22,246,163)
------------ ------------ ------------
Liabilities assumed $ 8,435,722 $ 1,453,416 $ 19,737481
============ ============ ============
Issuance of 134,125 treasury shares in 1997 and
and 4,248 treasury shares in 1995 $ 133,112 $ -- $ 41,413
============ ============ ============
See accompanying notes to consolidated financial statements.
52
53
CITIZENS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997, 1996 AND 1995
(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), formerly Continental Leasing Company,
Insurance Investors, Inc. (III), American Liberty Financial Corp.
(ALFC), Insurance Investors and Holding Company (IIH), American
Investment Network (AIN) and National Security Life and Accident
Insurance Company (NSLIC). 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. IIH, which was acquired in
March 1996, owns Central Investors Life Insurance Company of
Illinois (CILIC). Effective January 1, 1997, ALFC was merged into
Citizens and ALLIC and FAIC were merged into CICA. Citizens and
its subsidiaries are collectively referred to as "the Company."
All significant intercompany accounts and transactions have been
eliminated.
Citizens provides life and health insurance policies through four
of its subsidiaries - CICA, United Security Life Insurance Company
(USLIC), NSLIC and CILIC. CICA sells ordinary whole-life policies
internationally, burial insurance, pre-need policies, accident and
health specified disease, hospital indemnity, and accidental death
policies, throughout the southern United States and USLIC and
NSLIC sell participating whole life policies and specialty
individual accident and health policies.
CILIC does not actively market insurance policies, but does
administer an in-force block of life insurance.
(b) INVESTMENTS, OTHER THAN AFFILIATES
Investments are shown on the following basis:
1. Fixed maturities, primarily consisting of bonds which the
Company has the ability and intent to hold to maturity are
carried at amortized cost. Fixed maturities which may be
sold prior to maturity to support the Company's investment
strategies are considered held as available for sale and
carried at fair
53
54
value as of the balance sheet date. The unrealized holding
gains or losses included in the separate component of equity
for securities transferred from available-for-sale to
held-to-maturity are maintained and amortized into earnings
over the remaining life of the security as an adjustment to
yield in a manner consistent with the amortization or
accretion of premium or discount on the associated security.
2. Equity securities include non-redeemable preferred stock and
are reported at fair value.
3. Mortgage loans on real estate, policy loans, and guaranteed
student loans are reported at unpaid principal balances less
an allowance for uncollectible amounts, if any.
4. Other long-term investments consist primarily of real estate
which is recorded at the lower of fair value minus estimated
costs to sell, or cost. If the fair value of the real estate
minus estimated costs to sell is less than cost, a valuation
allowance is provided for the deficiency. Increases in the
valuation allowance are charged to income.
5. Short-term investments consist of treasury bills and
commercial paper with maturities of ninety days or less, or
commercial paper, and are carried at cost, which
approximates market.
Unrealized appreciation (depreciation) of equity securities and
fixed maturities held for sale is shown as a separate component of
stockholders' equity, net of tax, and is not included in the
determination of net income.
Costs of investments sold are determined using the specific
identification method. Net realized gains and losses are included
in other income and expenses as incurred.
The Company has assets with a fair value of $10,652,298 at
December 31, 1997 and $8,382,149 at December 31, 1996 on deposit
with various state regulatory authorities to fulfill statutory
requirements.
(c) 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
54
55
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 deposits to annuity
contracts.
(d) DEFERRED POLICY ACQUISITION COSTS AND COST OF INSURANCE ACQUIRED
Acquisition costs, consisting of commissions and policy issuance
and underwriting expenses which relate to and vary with the
production of new business, are deferred. These deferred policy
acquisition costs are amortized primarily over the estimated
premium paying period of the related policies in proportion to the
ratio of the annual premium recognized to the total premium
revenue anticipated using the same assumptions as were used in
computing liabilities for future policy benefits.
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.
(e) POLICY LIABILITIES AND ACCRUALS
Future policy benefit reserves have been computed by the net level
premium method with assumptions as to investment yields, dividends
on participating business, mortality and withdrawals based upon
the Company's and industry experience, which provide for possible
unfavorable deviation (see note 4).
Annuity benefits are carried at accumulated contract values based
on premiums paid by participants, annuity rates of return ranging
from 3.0% to 7.0% (primarily at 4.0% - 5.5%) and annuity
withdrawals.
Premium deposits accrue interest at rates ranging from 3.5% to
8.25% per annum. Cost of insurance is included in premium when
collected and interest is credited annually to the deposit
account.
Policy and contract claims are based on case-basis estimates for
reported claims, and on estimates, based on experience, for
incurred but unreported claims and loss expenses.
55
56
(f) EXCESS OF COST OVER NET ASSETS ACQUIRED AND OTHER INTANGIBLE
ASSETS
The excess of cost over the fair value of net assets acquired in
mergers and acquisitions is amortized on a straight-line basis
ranging from 5 to 20 years.
Other intangible assets, primarily the value of state licenses,
are amortized on a straight-line basis over 10 years.
The Company continually monitors long-lived assets and certain
intangible assets, such as excess of cost over net assets acquired
and cost of insurance acquired, for impairment. An impairment loss
is recorded in the period in which the carrying value of the
assets exceeds the fair value or expected future cash flows. Any
amounts deemed to be impaired are charged, in the period in which
such impairment was determined, as an expense against earnings.
(g) PARTICIPATING POLICIES
At December 31, 1997 and 1996, participating business approximated
82% and 86%, respectively, of life insurance in-force and premium
income. The amount of dividends to be paid is determined annually
by the Board of Directors.
(h) 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, 1997, 1996 and 1995 were 20,868,921,
20,236,469, and 17,668,047, respectively.
(i) INCOME TAXES
For the year ended December 31, 1997 the Company will file six
separate tax returns as follows: 1) Citizens, Inc., CICA and all
direct non-life subsidiaries, excluding FAIC and AIN 2) FAIC and
its subsidiaries 3) AIN 4) USLIC 5) NSLIC and 6) CILIC.
For the year ended December 31, 1996 the Company filed three
separate tax returns as follows: 1) Citizens, Inc., CICA, and all
direct non-life subsidiaries, excluding FAIC 2) CILIC 3) FAIC and
its subsidiaries.
For the year ended December 31, 1995 the Company filed one
consolidated return which included Citizens, Inc., CICA, and all
direct non-life subsidiaries, excluding FAIC. Two additional
returns were filed at December 31, 1995 which included FAIC and
its subsidiaries and ALLIC.
56
57
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.
(j) ACCOUNTING PRONOUNCEMENTS
In February 1997, the FASB issued Statement 128 "Earnings per
Share" ("Statement 128"). Statement 128 establishes the standards
for computing and presenting earnings per share ("EPS"). This
statement replaces the presentation of primary EPS with a
presentation of basic EPS and requires dual presentation of basic
and diluted EPS. Statement 128 is effective for fiscal years
ending after December 15, 1997. Implementation did not have a
material impact on the Company's earnings per share.
In June 1997, the FASB issued Statement 130 "Reporting
Comprehensive Income" ("Statement 130"). Statement 130 establishes
the standards for reporting and display of comprehensive income
and its components in a full set of general-purpose financial
statements. Statement 130 is effective for fiscal periods
beginning after December 15, 1997. The Company does not believe
that this statement will have an impact on future operations or
liquidity.
(k) CASH EQUIVALENTS
The Company considers as cash equivalents all securities whose
duration does not exceed ninety days at the date of acquisition.
These securities are reflected as short-term investments in the
accompanying consolidated financial statements.
57
58
(l) 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.
(m) USE OF ESTIMATES
The preparation of financial statements in conformity with
generally accepted accounting principles 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.
(n) RECLASSIFICATIONS
Certain reclassifications have been made to the 1996 and 1995
amounts to conform with the 1997 presentation.
(2) INVESTMENTS
A decline in the fair value of any available-for-sale or
held-to-maturity security below cost that is deemed other than
temporary is charged to earnings resulting in the establishment of
a new cost basis for the security.
Premiums and discounts are amortized or accreted over the life of
the related security as an adjustment to yield using the effective
interest method. Dividend and interest income are recognized when
earned. Realized gains and losses for securities classified as
available-for-sale and held-to-maturity are included in earnings
and are derived using the specific identification method for
determining the cost of securities sold.
58
59
The amortized cost and estimated fair values of investments in
debt securities as of December 31, 1997 and 1996 respectively, are
as follows:
1997
---------------------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
---- ----- ------ -----
Fixed maturities held-to-maturity:
US Treasury securities $ 5,617,131 $ 86,869 $ -- $ 5,704,000
============ ============ ============ ============
Total
Fixed maturities available for sale:
US Treasury securities and
obligations of US government
corporations and agencies 65,413,351 961,435 398,435 65,976,351
Public Utilities 5,227,886 42,574 67,761 5,202,699
Debt securities issued by States
of the United States and political
subdivisions of the States 1,192,979 75,127 -- 1,268,106
Debt securities issued by
foreign governments 207,807 7,373 -- 215,180
Corporate securities 12,140,899 463,698 19,474 12,585,123
Mortgage-backed securities 46,438,498 1,477,627 141,903 47,774,222
------------ ------------ ------------ ------------
Total $130,621,420 $ 3,027,834 $ 627,573 $133,021,681
============ ============ ============ ============
59
60
1996
----------------------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
---- ----- ------ -----
Fixed maturities held-to-maturity:
US Treasury securities $ 5,627,256 $ -- $ 410,256 $ 5,217,000
------------ ------------ ------------ ------------
Total 5,627,256 -- $ 410,256 5,217,000
============ ============ ============ ============
Fixed maturities available-for-sale:
US Treasury securities and
obligations of US government
corporations and agencies 67,828,066 639,107 1,148,240 67,318,933
Public Utilities 4,691,540 19,497 237,212 4,473,825
Debt securities issued by States
of the United States and
political subdivisions of the
States 207,968 4,894 8,252 204,610
Debt securities issued by
foreign governments 291,219 11,807 466 302,560
Corporate securities 9,061,298 176,078 352,721 8,884,655
Mortgage-backed securities 28,679,543 233,705 374,781 28,538,467
------------ ------------ ------------ ------------
Total $110,759,634 $ 1,085,088 $ 2,121,672 $109,723,050
============ ============ ============ ============
The amortized cost and fair value of fixed maturities at December 31,
1997, 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.
60
61
FIXED MATURITIES HELD TO MATURITY
AMORTIZED ESTIMATED
COST MARKET VALUE
---- ------------
Due after ten years $ 5,617,131 $ 5,704,000
============ ============
FIXED MATURITIES AVAILABLE FOR SALE
AMORTIZED ESTIMATED
COST MARKET VALUE
---- ------------
Due in one year or less $ 3,311,677 $ 3,312,678
Due after one year through five years 21,183,723 21,222,067
Due after five years through ten years 42,752,450 43,206,991
Due after ten years 16,935,074 17,505,408
------------ ------------
Mortgage-backed securities 46,438,496 47,774,537
------------ ------------
Totals $130,621,420 $133,021,681
============ ============
The Company had no investments in any one entity which exceeded 10% of
stockholders' equity at December 31, 1997 other than investments
guaranteed by the U.S. Government.
The Company's investment in mortgage loans is concentrated 24% in
Colorado, 63% in Texas and 13% in other states as of December 31, 1997.
At December 31, 1997 and 1996, unrealized depreciation of equity
securities of $5,122 and $39,425, respectively, consisting of gross
unrealized gains of $49,226 and $0, respectively and gross unrealized
losses of $54,348 and $39,425, respectively.
61
62
Major categories of investment income are summarized as follows:
YEAR ENDED DECEMBER 31
------------------------------------------------
1997 1996 1995
---- ---- ----
Investment income on:
Fixed maturities $ 8,086,920 $ 6,999,425 $ 5,208,785
Equity securities 37,042 -- 15,823
Mortgage loans on real estate 140,629 178,330 195,321
Policy loans 1,425,301 1,442,423 1,478,333
Short-term investments 197,912 526,910 106,872
Other 1,156,090 910,223 900,341
------------ ------------ ------------
11,043,894 10,057,311 7,905,475
Investment expenses (1,005,158) (871,805) (878,566)
------------ ------------ ------------
Net investment income $ 10,038,736 $ 9,185,506 $ 7,026,909
============ ============ ============
Equity securities of $23,328 and other long-term assets of $257,492 held by the
Company as of December 31, 1997, did not produce income during the preceding 12
months.
Proceeds from available-for-sale securities in 1997, 1996 and 1995 were
$23,563,883, $22,215,108 and $29,132,810, respectively. Gross realized gains and
losses on such sales were $375,530 and $661,088, respectively, for the year
ended December 31, 1997, and $175,125 and $199,890 respectively, for the year
ended December 31, 1996, and $346,370 and $426,841, respectively, for the year
ended December 31, 1995. Realized gains (losses) on investments are as follows:
YEAR ENDED DECEMBER 31,
----------------------------------------
1997 1996 1995
---- ---- -----
Realized gains (losses):
Fixed maturities $ 195,261 $ (24,765) $ (80,471)
Equity securities (480,819) -- --
Other (34,567) 250,977 (28,625)
--------- --------- ---------
Net realized gains (losses) on
investments (320,125) 226,212 (109,096)
========= ========= =========
(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,
------------------------------------------------
1997 1996 1995
---- ---- ----
Balance at beginning of period $ 7,219,594 $ 7,522,827 $ 2,271,866
Increase related to acquisitions 4,253,354 121,000 5,562,574
Interest 541,470 564,212 171,541
Amortization (1,374,751) (988,445) (483,154)
------------ ------------ ------------
Balance at end of period $ 10,639,667 $ 7,219,594 $ 7,522,827
============ ============ ============
62
63
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 greater than the carrying value due to interest
accretion. Actual future amortization will differ from these estimates
due to variances from estimated future withdrawal assumptions.
1998 $ 1,047,421
1999 881,991
2000 839,514
2001 791,557
2002 753,392
Thereafter 8,015,718
Excess of cost over net assets acquired is summarized as follows:
YEAR ENDED DECEMBER 31,
-------------------------------------------------
1997 1996 1995
---- ---- ----
Balance at beginning of period, net of
accumulated amortization of $1,483,072,
$695,145 and $374,436 in 1997, 1996 and 1995,
respectively $ 16,756,433 $ 17,124,481 $ 3,344,844
Increase related to acquisitions 1,939,837 419,879 14,100,346
Amortization (1,230,147) (787,927) (320,709)
------------ ------------ ------------
Balance at end of period $ 17,466,123 $ 16,756,433 $ 17,124,481
============ ============ ============
(4) POLICY LIABILITIES
In applying purchase accounting to the future policy benefit reserves
acquired through mergers, the Company revalued policy benefit reserves to
reflect the Company's reserve assumptions with regard to interest rates,
lapse rates and surrenders. The percentage of the Company's future policy
benefits as of December 31, 1997 and 1996 under these assumptions are as
follows:
1997 1996
---- ----
Pre-American Liberty
Life Insurance Company acquisitions 14.80% 16.50%
American Liberty Life Insurance Company 8.80% 9.00%
United Security Life Insurance Company 1.70% --
National Security Life Insurance Company 2.50% --
Central Investors Life Insurance Company of Illinois 1.00% 1.00%
63
64
Various assumptions used to determine the future policy benefit reserves
include the following: a) valuation interest rates from 4 - 9%, b)
mortality assumptions are from the 1955-60, 1965-70, and 1975-80 Select
and Ultimate mortality tables, and c) withdrawals are based primarily on
actual historical termination rates.
The following table presents information on changes in the liability for
accident and health policy and contract claims for the years ended
December 31,1997 and 1996.
1997 1996
---- ----
Policy and contract claims payable at January 1 1,238,729 917,714
Policy and contract claims payable, acquired through
acquisition 686,903 --
Add claims incurred, related to:
Current year 3,388,328 1,658,966
Prior years (424,692) 60,279
---------- ----------
2,963,636 1,719,245
Deduct claims paid, related to:
Current year 2,190,820 614,115
Prior years 614,857 784,125
---------- ----------
2,805,677 1,398,240
Policy and contract claims payable, December 31 2,083,591 1,238,729
========== ==========
In 1997, as a result of changes in estimates of insured events in prior
years, the liability for policy and contract claims decreased.
(5) REINSURANCE
In the normal course of business, the Company reinsures portions of
certain policies that it underwrites to limit disproportionate risks. The
Company retains varying amounts of individual insurance up to a maximum
retention of $75,000 on any life and $35,000 on health policies. Amounts
not retained are ceded to other insurance enterprises or reinsurers,
through yearly renewable term insurance or coinsurance contracts. Risks
are reinsured with other companies to permit the recovery of a portion of
any direct losses. The Company remains contingently liable to the extent
that the reinsuring companies cannot meet their obligations under these
reinsurance treaties.
At December 31, 1997 and 1996, life insurance in-force aggregating
approximately $224,953,000 and $304,380,000, respectively, was assumed
and $318,630,000 and $296,378,000, respectively, was ceded to other
insurance companies out of a total in-force of approximately
$2,250,197,000 and $2,231,017,000, respectively. Premiums assumed were
approximately $284,632, $310,000, and $306,000 in the years ended
December 31, 1997, 1996 and 1995, respectively. Premiums ceded were
approximately $3,115,000, $2,583,000, and $2,214,000 in the years ended
December 31, 1997, 1996 and 1995, respectively. Claims and surrenders
assumed were approximately $269,000, $314,000 and
64
65
$286,000 and claims and surrenders ceded were approximately $976,000,
$264,000 and $377,000 in the years ended December 31, 1997, 1996 and
1995, respectively. Amounts paid or deemed to have been paid for
reinsurance contracts are recorded as reinsurance receivables. The cost
of reinsurance related to long duration contracts is accounted for over
the life of the underlying reinsured policies using assumptions
consistent with those used to account for the underlying policies.
(6) NOTES PAYABLE
Notes payable as of December 31, 1997 and 1996 consist of:
1997 1996
---- ----
Note A; payable to bank, 7%, dated June 20, 1988, payable in nine annual
installments of $66,667 beginning June 30, 1989, with remainder
due June 30, 1998 $400,000 $466,666
Note B; payable to bank, prime (8.25% at December 31, 1996) dated May 24,
1995, payable in monthly installments of $3,000 plus interest
beginning June 30, 1995 -- 22,500
Note C; payable to bank, prime plus 1.5%, payable in monthly installments
of $5,751 including interest, with a balloon payment due
on December 19, 1999 537,430 --
-------- --------
$937,430 $489,166
======== ========
Note A is secured by two life insurance policies and proceeds from the
surplus debenture between CICA and the Company.
Note B was secured by computer equipment.
Note C is collateralized by property.
(7) STOCKHOLDERS' EQUITY AND RESTRICTIONS
The two classes of stock of Citizens are equal in all respects, except
(a) the Class B common stock elects a simple majority of the Board of
Directors of Citizens and the Class A common stock elects the remaining
directors; and (b) each Class A share receives twice the cash dividends
paid on a per share basis to the Class B common stock.
Generally, the net assets of the insurance subsidiaries available for
transfer to the Company are limited to the greater of the subsidiary net
gain from operations during the preceding year or 10% of the subsidiary
net statutory surplus as of the end of the preceding year as determined
in accordance with accounting practices prescribed or permitted by
insurance regulatory authorities. Payments of dividends in excess of such
amounts would generally
65
66
require approval by the regulatory authorities. Based upon statutory net
gain from operation and surplus of the individual insurance companies as
of and for the year ended December 31, 1997, approximately $4,635,000 of
dividends could be paid to the Company without prior regulatory approval.
CICA, USLIC, NSLIC, and CILIC have calculated their risk based capital
(RBC) in accordance with the National Association of Insurance
Commissioners' Model Rule and the RBC rules as adopted by their
respective state of domicile. The RBC as calculated exceeded levels
requiring company or regulatory action.
(8) STOCK OPTIONS
During 1989, the Company entered into an agreement granting Stephen B.
Booke, a financial public relations consultant providing services to the
Company, the right and option to purchase 100,000 shares of Class A no
par common stock of the Company at $2.50 per share, the fair market value
of the common stock at the date of the agreement. Such option is for
authorized but unissued shares at the date of the agreement. The option
which would have expired on February 8, 1994 was extended for an
additional 36 months during 1993. Transfer of this option is limited by
the agreement. During 1997, 52,200 shares were issued in conjunction with
the exercise of this option. The remaining options expired in 1997. The
outstanding options had no impact on diluted earnings per share for the
years ended December 31, 1996 and 1995.
(9) MERGER AND ACQUISITIONS
During March 1997, the Company acquired the 5.52% minority interest in
First American Investment Corporation, 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.
On October 28, 1996, CICA announced that it had signed definitive written
agreements for the acquisition of American Investment Network, Inc.
(AIN), a Jackson, Mississippi, based life insurance holding company and
its wholly-owned subsidiary United Security Life Insurance Company
(USLIC) with $7.5 million in assets, $3.4 million of stockholders'
equity, revenues of $3.2 million and $67 million of life insurance
in-force.
The AIN agreement provided that following the acquisition by CICA,
American Investment shareholders will receive 1 share of Citizens, Inc.
Class A Common Stock for each 7.2 shares of AIN Common Stock owned. The
Company issued approximately 700,000 Class A shares in connection with
the transaction, which was accounted for as a purchase. The companies
will continue to operate in their respective locations under a combined
management team with consolidation of computer data processing on the
Company's system. The transaction was consummated on June 19, 1997.
66
67
On August 13, 1997, Citizens signed a definitive agreement to acquire
100% of the outstanding shares of National Security Life and Accident
Insurance Company (NSLIC) of Arlington, Texas for $1.7 million in cash
and restricted stock. The transaction, which was accounted for as a
purchase, was consummated on November 20, 1997.
In conjunction with the acquisition the Company and two executives of
NSLIC executed employment agreements which require the executives to
provide services to the Company for 42 months. The employees will be
compensated $8,333 a month for the first twelve months escalating to
$12,500 a month for the remaining thirty months.
The pro-forma unaudited results of operations for the years ended
December 31, 1997 and 1996, assuming the purchase of AIN, NSLIC and the
minority ownership in FAIC, had been consummated at the beginning of
fiscal 1996, are presented below. Adjustments have been made for
amortization of amounts assigned to the fair value of historical assets.
It is assumed in the pro-forma basic earnings per share calculations that
the shares issued in connection with the acquisitions were outstanding
from the beginning of the period presented (stated in thousands other
than per share amounts).
1997 1996
---- ----
Revenue $ 70,931 $ 72,903
Net income 3,037 2,872
Basic earnings per share $ .14 $ .13
The IIH agreement closed on March 12, 1996 and provided that Investors'
shareholders would receive one share of Citizens' Class A Common Stock
for each eight shares of Investors Common Stock owned. Additionally,
Citizens acquired all shares of Central Investors Life Insurance Company
(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.
On December 9, 1994, Citizens announced that it had signed definitive
written agreements for the acquisition of (i) American Liberty Financial
Corporation, a Baton Rouge, Louisiana based life insurance holding
company and (ii) Insurance Investors & Holding Co., a Peoria, Illinois
based life insurance holding company.
The ALFC agreement provided that following the acquisition by Citizens,
ALFC shareholders would receive 1.10 shares of Citizens' Class A for each
share of ALFC Common Stock owned and 2.926 shares of Citizens' Class A
Common Stock for each one share of ALFC Preferred Stock owned. Citizens
issued approximately 2.3 million Class A shares in connection with the
transaction, which was accounted for as a purchase. The companies will
continue to operate in their respective locations under a combined
management team with consolidation of computer data processing on the
Citizens' system. The transaction was consummated on September 14, 1995.
67
68
(10) CONTINGENCIES
The Company is a party to various legal proceedings incidental to its
business. Contingent liabilities that might arise from litigation are not
considered material in relation to the financial position of the Company.
Reserves for claims payable are based on the expected claim amount to be
paid after a case by case review of the facts and circumstances relating
to each claim. A contingency exists with regard to these reserves until
such time as the claims are adjudicated and paid.
(11) INTERNATIONAL SALES
A significant portion of the Company's business is derived through sales
in Latin America. Approximately 69%, 74% and 64% of premiums recorded in
the 1997, 1996, and 1995 consolidated statements of operations,
respectively, represent policies sold to residents of Central and South
America. Sales in Argentina and Columbia represented approximately 31%
and 15% of reported premiums in 1997, 38% and 18% in 1996, and 40% and
19% in 1995, respectively. 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.
(12) INCOME TAXES
A reconciliation of Federal income tax expense computed by applying the
Federal income tax rate of 34% to income before Federal income tax
expense for the years ended December 31, 1997, 1996 and 1995 follows:
1997 1996 1995
---- ---- ----
Computed normal tax expense $ 1,370,113 $ 1,230,470 $ 1,275,533
Small life insurance company deduction (762,889) (472,541) (423,084)
Change in valuation allowance (575,147) (10,097) (62,355)
Small life deduction rate change -- 218,438 --
Amortization of excess of costs over
net assets acquired 481,728 331,373
109,041
Other 90,416 107,662 102,221
----------- ----------- -----------
Federal income tax expense $ 604,221 $ 1,405,305 $ 1,001,356
=========== =========== ===========
Income tax expense for the years ended December 31, 1997, 1996 and 1995
consists of:
1997 1996 1995
---- ---- ----
Current $ 1,613,128 $ 1,812,531 $ 1,982,424
Deferred (1,008,907) (407,226) (981,068)
----------- ----------- -----------
$ 604,221 $ 1,405,305 $ 1,001,356
=========== =========== ===========
68
69
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at
December 31, 1997 and 1996 are presented below.
1997 1996
---- ----
Deferred tax assets:
Future policy benefit reserves $13,431,989 $12,613,081
Net operating loss carryforwards
and alternative minimum tax credits 614,598 989,925
Investments, available for sale -- 365,843
Other 1,078,423 836,098
----------- -----------
Total gross deferred tax assets 15,125,010 14,804,947
Less valuation allowance 197,829 772,976
----------- -----------
Net deferred tax assets $14,927,181 $14,031,971
----------- -----------
Deferred tax liabilities:
Deferred policy acquisition costs 9,181,507 9,257,148
Cost of insurance acquired 2,132,016 2,454,662
Investments available for sale 814,347 --
Other 2,226,881 1,576,449
----------- -----------
Total gross deferred tax liabilities 14,354,751 13,288,259
----------- -----------
Net deferred tax asset $ 572,430 $ 743,712
=========== ===========
During 1997 the Company released the valuation allowance associated with
ALFC net operating losses as these losses can be utilized by Citizens,
Inc. as a result of the merger of these two entities.
The Company has established a valuation allowance for net operating
losses of IIH and other entities which may not be used prior to their
expiration. The Company and its subsidiaries have net operating losses at
December 31, 1997 available to offset future taxable income of
approximately $1,139,600 for Federal income tax and $227,000 for Federal
alternative minimum tax purposes which expire through 2008. The net
operating loss carryforward is subject to limitations under Section 382
of the Internal Revenue Code.
At December 31, 1997, the Company had accumulated approximately
$3,291,143 in its "policyholders' surplus account." This is a special
memorandum tax account into which certain amounts not previously taxed,
under prior tax laws, were accumulated. No new additions will be made to
this account. Federal income taxes will become payable thereon at the
then current tax rate (a) when and if distributions to the shareholder,
other than stock dividends and other limited exceptions, are made in
excess of the accumulated previously taxed income; or (b) when a company
ceases to be a life insurance company as defined by the Internal Revenue
Code and such termination is not due to another life insurance company
acquiring its assets in a nontaxable transaction. The Company does not
anticipate any transactions that would cause any part of this amount to
become taxable. However, should the balance at December 31, 1997 become
taxable, the tax computed at present rates would be approximately
$1,119,000.
69
70
(13) FAIR VALUE OF FINANCIAL INSTRUMENTS
Estimates of fair values are made at a specific point in time, based on
relevant market prices and information about the financial instrument.
The estimated fair values of financial instruments presented below are
not necessarily indicative of the amounts the Company might realize in
actual market transactions. The carrying amount and fair value for the
financial assets and liabilities on the consolidated balance sheets at
each year-end were:
1997 1996
----------------------------- ------------------------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
------ ----- ------ -----
Financial assets:
Fixed maturities $138,638,812 $138,725,681 $115,350,306 114,940,050
Equity securities 978,391 978,391 50,155 50,155
Cash and
short-term 6,754,956 6,754,956 6,285,383 6,285,383
investments
Mortgage Loans 1,287,295 1,287,295 1,672,522 1,672,522
Student Loans 81,681 81,681 298,683 298,683
Financial Liabilities:
Note Payable 937,430 937,430 489,166 489,166
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, 1997,
was approximately 9.4% with maturities ranging from one to fifteen years.
Management believes that reported amounts approximate fair value.
Student loans are guaranteed by the government. Weighted average interest
rate for these loans as of December 31, 1997, was approximately 7.7%.
Management believes that the reported amounts approximate fair value as
these loans are sold as soon as possible.
The carrying value of the note payable approximates fair value as the
interest rate charged on the note payable is indexed with the prime rate.
Policy loans have a weighted average interest rate of 7.1% as of December
31, 1997 and 1996 and have no specified maturity dates. The aggregate
market value of policy loans approximates the carrying value reflected on
the consolidated balance sheet. These loans
70
71
typically carry an interest rate that is tied to the crediting rate
applied to the related policy and contract reserves. Policy loans are an
integral part of the life insurance policies which the Company has in
force and cannot be valued separately.
For cash, and short-term investments, accrued investment income, amounts
recoverable from reinsurers, other assets, federal income tax payable and
receivable, dividend accumulations, commissions payable, amounts held on
deposit, and other liabilities, the carrying amounts approximate fair
value because of the short maturity of such financial instruments.
(14) QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
The following table contains selected unaudited consolidated financial
data for each quarter.
1997
------------------------------------------------------------------
FOURTH THIRD SECOND FIRST
QUARTER QUARTER QUARTER QUARTER
------- ------- ------- -------
Revenues $ 16,795,936 $ 18,172,671 $ 15,918,698 $ 14,139,993
Expenses 15,309,437 16,267,692 15,089,776 14,330,649
Other 178,033 (543,363) (307,863) 68,972
Net income 1,664,532 1,361,616 521,059 (121,684)
Basic and diluted earnings .08 .06 .03 (.01)
per share
1996
------------------------------------------------------------------
FOURTH THIRD SECOND FIRST
QUARTER QUARTER QUARTER QUARTER
------- ------- ------- -------
Revenues $ 17,666,077 $ 16,976,294 $ 15,484,789 $ 13,695,000
Expenses 16,221,781 16,093,457 14,936,524 12,951,367
Other (542,568) (237,302) (366,799) (258,636)
Net income 901,728 645,535 181,466 484,997
Basic and diluted earnings .04 .03 .01 .03
per share
1995
------------------------------------------------------------------
FOURTH THIRD SECOND FIRST
QUARTER QUARTER QUARTER QUARTER
------- ------- ------- -------
Revenues $ 16,115,722 $ 13,420,798 $ 12,872,679 $ 10,862,138
Expenses 15,659,326 11,727,114 11,488,128 10,497,876
Other (61,739) (31,757) (19,262) (28,407)
Net income 558,290 901,266 1,017,773 272,883
Basic and diluted earnings .03 .05 .06 .02
per share
71
72
SCHEDULE II
CITIZENS, INC. AND SUBSIDIARIES
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
CITIZENS, INC. (PARENT COMPANY)
BALANCE SHEETS
DECEMBER 31, 1997 AND 1996
1997 1996
---- ----
Assets
Investment in subsidiaries 76,379,058 64,241,647
Accrued investment income 17,254 20,089
Real estate 436,287 356,339
Cash 752,907 1,318,221
Notes receivable (1) 452,488 521,686
Other assets 2,020,263 1,073,825
------------ ------------
$ 80,058,257 $ 67,531,807
============ ============
Liabilities and Stockholders' Equity
Liabilities:
Notes payable $ 400,000 $ 466,667
Accrued expense and other 76,559 182,124
------------ ------------
$ 476,559 $ 648,791
Stockholders' equity:
Common stock:
Class A $ 52,790,643 $ 45,941,552
Class B 283,262 283,262
Retained earnings 26,856,157 23,430,634
Unrealized investment gain (loss) of securities held by
subsidiaries, net 1,580,790 (710,166)
Treasury stock (1,929,154) (2,062,266)
------------ ------------
79,581,698 66,883,016
------------ ------------
$ 80,058,257 $ 67,531,807
============ ============
(1) Eliminated in consolidation.
See accompanying independent auditor's report.
72
73
SCHEDULE II, CONTINUED
CITIZENS, INC. AND SUBSIDIARIES
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
CITIZENS, INC. (PARENT COMPANY)
STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1997 AND 1996 AND 1995
1997 1996 1995
---- ---- ----
Revenues:
Management service fees (1) $10,462,052 $10,428,468 $ 8,068,030
Investment income (1) 125,746 83,957 118,103
Other 82,668 2,357 11,551
Realized (gain) loss -- 151,334 (1,573)
----------- ----------- -----------
10,670,466 10,666,116 8,196,111
----------- ----------- -----------
Expenses:
General 9,516,881 9,374,706 7,710,834
Interest 30,186 34,853 42,113
Taxes 323,635 447,450 327,815
----------- ----------- -----------
$ 9,870,702 $ 9,857,009 $ 8,080,762
----------- ----------- -----------
Income (loss) before equity in income of
unconsolidated subsidiaries 799,764 809,107 115,349
Equity in income of unconsolidated subsidiaries
2,625,759 1,404,619 2,634,863
----------- ----------- -----------
Net income $ 3,425,523 $ 2,213,726 $ 2,750,212
=========== =========== ===========
(1) Eliminated in consolidation.
See accompanying independent auditor's report.
73
74
SCHEDULE II, CONTINUED
CITIZENS, INC. AND SUBSIDIARIES
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
CITIZENS, INC. (PARENT COMPANY)
STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
1997 1996 1995
---- ---- ----
Cash flows from operating activities:
Net income $ 3,425,523 $ 2,213,726 $ 2,750,212
Adjustments to reconcile net loss to net
cash used by operating activities:
Realized (gains) loss on sales of
investments -- (151,334) --
Equity in net income of unconsolidated
subsidiaries (2,625,759) (795,318) (3,871,812)
Accrued expenses and other liabilities (105,565) (604,315) 514,447
Accrued investment income 2,835 4,257 2,243
Other assets (246,993) (393,323) 2,951
----------- ----------- -----------
Net cash provided (used) by
operating activities 450,041 273,693 (601,959)
----------- ----------- -----------
Cash flows from investing activities:
Acquisition of NSLIC (1,000,000) -- --
Capital contribution to subsidiary (374,000) (400,000) --
Cash provided by merger 540,450 -- --
Payments on notes receivable 69,198 152,267 52,075
Investment in real estate (79,948) -- --
Sale of real estate -- 82,974 154,169
----------- ----------- -----------
Net cash provided (used) by
investing activities (844,300) (164,759) 206,244
----------- -----------
Cash flows from financing activities:
Sale of common stock, net (104,388) 391,712 381,485
Payment on notes payable (66,667) (66,666) (73,849)
----------- ----------- -----------
Net cash provided by financing
activities (171,055) 325,046 307,636
----------- ----------- -----------
Net increase (decrease) in cash (565,314) 433,980 (88,079)
Cash at beginning of year 1,318,221 884,241 972,320
----------- ----------- -----------
Cash at end of year $ 752,907 $ 1,318,221 $ 884,241
=========== =========== ===========
See accompanying independent auditor's report.
74
75
SCHEDULE IV
CITIZENS, INC. AND SUBSIDIARIES
REINSURANCE
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
CEDED ASSUMED PERCENTAGE
GROSS TO OTHER FROM OTHER NET OF AMOUNT
AMOUNT COMPANIES COMPANIES AMOUNT ASSUMED TO NET
------ --------- --------- ------ --------------
Year ended December 31, 1997:
Life insurance in-force $2,250,197,000 $ 318,630,000 $ 224,953,000 $2,156,520,000 10.4%
============== ============== ============== ==============
Premiums:
Life insurance 51,364,382 1,952,316 284,632 49,696,698 .6%
Accident and health insurance 5,605,023 305,240 0 5,299,783 --
-------------- -------------- -------------- -------------
Total premiums $ 56,969,405 2,257,556 284,632 54,996,481 .5%
============== ============== ============== =============
Year ended December 31, 1996:
Life insurance in-force $2,231,017,000 $ 296,378,000 $ 304,380,000 $2,239,019,000 13.7%
============== ============== ============== =============
Premiums:
Life insurance 52,075,038 2,511,318 309,953 49,873,673 0.6%
Accident and health insurance 4,111,969 71,281 0 4,040,688 --%
-------------- -------------- -------------- -------------
Total premiums $ 56,187,007 2,582,599 309,953 53,914,361 0.6%
============== ============== ============== =============
Year ended December 31, 1995:
Life insurance in-force $1,866,954,000 $ 290,677,000 $ 285,001,000 $1,861,278,000 15.3%
============== ============== ============== =============
Premiums:
Life insurance 47,361,742 2,241,111 306,256 45,426,887 0.7%
Accident and health insurance 698,206 0 0 698,206 --
-------------- -------------- -------------- -------------
Total premiums $ 48,059,948 2,241,111 306,256 46,125,093 0.7%
============== ============== ============== =============
See accompanying independent auditor's report.
75
76
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, hereunto duly authorized.
CITIZENS, INC.
Date: March 26, 1998 By: /s/ MARK A. OLIVER
-------------------------------------
Mark A. Oliver, President
By: /s/ WILLIAM P. BARNHILL
-------------------------------------
William P. Barnhill, Treasurer and
Principal Accounting Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
Each individual whose signature appears below hereby designates and appoints
Harold E. Riley and Mark A. Oliver, and each of them, as such person's true and
lawful attorney's-in-fact and agents (the "Attorneys-in-Fact") with full power
of substitution and resubstitution, for each person and in such person's name,
place, and stead, in any and all capacities, to sign any and all amendments
(including post-effective amendments) to this Annual Report on Form 10-K, which
amendments may make such changes in this Annual Report on Form 10-K as either
Attorney-in-Fact deems appropriate and to file therewith, with the Securities
and Exchange Commission, granting unto such Attorneys-in-Fact and each of them,
full power and authority to do and perform each and every act and think
requisite and necessary to be done in and about the premises, as fully to all
intents and purposes as such person might or could do in person, hereby
ratifying and confirming all that such Attorneys-in-Fact or either of them, in
their substitute or substitutes, may lawfully do or cause to be done by virtue
hereof.
/s/ MARK A. OLIVER /s/ HAROLD E. RILEY
- ---------------------------- -----------------------------------
Mark A. Oliver, Director Harold E. Riley, Chairman of the
Board and Director
/s/ RALPH M. SMITH /s/ JOE R. RENEAU
- ---------------------------- -----------------------------------
Ralph M. Smith, Director Joe R. Reneau, Director
/s/ TIMOTHY T. TIMMERMAN
- ---------------------------- -----------------------------------
Flay F. Baugh, Director Timothy T. Timmerman, Director
/s/ STEVE SHELTON
- ---------------------------- -----------------------------------
Rick D. Riley, Director Steve Shelton, Director
/s/ T. ROBY DOLLAR
- ----------------------------
T. Roby Dollar, Director
76
77
EXHIBIT INDEX
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 (b)
(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)
78
10.3 Plan and Agreement of Merger and Exchange
by and among Insurance Investors &
Holding Co., Central Investors Life
Insurance Company of Illinois, Citizens,
Inc. and Citizens Acquisition, Inc. (g)
10.4 Self-Administered Automatic Reinsurance
Agreement - Citizens Insurance Company of
America and Riunione Adriatica di
Sicurta, S.p.A. (h)
10.5 Plan and Agreement of Exchange dated
October 28, 1996 between Citizens, Inc.
and American Investment Network, Inc. (h)
10.6 Agreement and Plan of Merger dated
October 31, 1996 between Citizens
Insurance Company of America, CICA
Acquisition, Inc., and First American
Investment Corporation (h)
10.7 Plan and Agreement of Merger dated
November 22, 1996 between Citizens, Inc.
and American Liberty Financial
Corporation, as amended (i)
10.8 Plan and Agreement of Merger dated
November 22, 1996 between Citizens
Insurance Company of America and American
Liberty Life Insurance Company, as
amended (i)
10.9 Bulk Accidental Death Benefit Reinsurance
Agreement between Connecticut General
Life Insurance Company and Citizens
Insurance Company of America, as amended
Plan and Agreement of Exchange dated
October 28, 1996 (i)
10.10 Plan and Agreement of Exchange between
American Investment Network, Inc., and
Citizens Insurance Company of America filed
dated October 28, 1996 herewith
10.11 Stock Purchase Agreement dated August
13, 1997 between Jansen Enterprises, Inc.,
Joe T. Bailey D. Steven Hansen, filed
and Citizens Inc. herewith
(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
79
(21) Subsidiaries of the registrant Filed
herewith
(22) Published report regarding matters submitted to a vote of security
holders N/A
(23) Independent Auditor's consent Filed
herewith
(24) Power of Attorney See
signature
page
(25) Statement of eligibility of trustee N/A
(26) Invitations for competitive bids N/A
(27) Financial Data Schedule Filed
herewith
(28) (Removed and Reserved) N/A
(99) Additional Exhibits N/A
- ----------------
(a) Filed as a part of the Amendment No. 1 to Registration Statement on Form
S-4, SEC File No. 33--4753, filed on or about June 19, 1992.
(b) Filed with or referenced in the Registrant's Annual Report on Form 10-K
for the year ended December 31, 1991 and incorporated herein by
reference.
(c) Filed with or referenced in the Registrant's Annual Report on Form 10-K
for the year ended December 31, 1992 and incorporated herein by
reference.
(d) Filed with or referenced in the Registrant's Annual Report on Form 10-K
for the year ended December 31, 1993 and incorporated herein by
reference.
(e) Filed with or referenced in the Registrant's Current Report on Form 8-K
dated December 9, 1994 and incorporated herein by reference.
(f) Filed as a part of the Registration Statement on Form S-4, SEC File No.
33--59039, filed on or about May 2, 1995.
(g) Filed as a part of the Registration Statement on Form S-4, SEC File No.
33--63275, filed on or about October 6, 1995.
(h) Filed as a part of the Registration Statement on Form S-4, SEC File No.
333--16163, filed on or about November 14, 1996.
(i) Filed with or referenced in the Registrant's Annual Report on Form 10-K
for the year ended December 31, 1996 and incorporated herein by
reference.