UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
AMENDMENT NO. 1
[X]Quarterly Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the period ended June 30, 1995
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: 0-16509
CITIZENS, INC.
(Exact name of registrant as specified in its charter)
Colorado 84-0755371
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
400 East Anderson Lane, Austin, Texas 78752
(Address of principal executive offices) (Zip Code)
(512) 837-7100
(Registrant's telephone number, including area code)
(Former name, former address and former fiscal year, if changed
since last report.)
Indicate by check mark whether the registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the registrant was required to
file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
[X] Yes [ ] No
As of June 30, 1995, Registrant had 16,980,340 shares of
Class A common stock, No Par Value, outstanding.
CITIZENS, INC. AND SUBSIDIARIES
INDEX
Page
Number
Part I. Financial Information
Item 1. Financial Statements
Balance sheets, June 30,1995 (Unaudited) 3
and December 31, 1994
Statements of Operations, Six-Months
Ended June 30, 1995 and 1994 (Unaudited) 5
Statements of Operations, Three-Months
Ended June 30, 1995 and 1994 (Unaudited) 6
Statements of Cash Flows, Six-Months
Ended June 30, 1995 and 1994 (Unaudited) 7
Statements of Cash Flows, Three-Months
Ended June 30, 1995 and 1994 (Unaudited) 9
Notes to Financial Statements 11
Item 2. Management's Discussion and Analysis
of Financial Conditions and Results
of Operations 19
Part II. Other Information 27
CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
June 30, 1995 and December 31, 1994
(Unaudited)
June 30, December 31,
1995 1994
Assets
Investments:
Fixed maturities held for investment,
at amortized cost (market $18,399,421 $18,415,026
$17,192,928 in 1995 and $14,846,900
in 1994)
Fixed maturities available for sale,
at lower of cost or market (cost 53,630,141 56,573,764
$54,757,525 in 1995 and
$61,049,170 in 1994
Equity securities, at market (cost
$23,329 in 1995 and 1994) 5,461 1,892
Mortgage loans on real estate (net of
reserve of $145,080 in 1995 and 1994) 2,014,401 2,623,531
Policy loans 16,331,032 15,220,005
Guaranteed student loans (net of
reserve of $10,000 in 1995 and 1994) 201,229 240,243
Other long-term investments 439,701 754,189
Short-term investments 9,494,874 0
Total investments 100,606,260 93,828,650
Cash 3,274,095 4,259,887
Prepaid reinsurance 1,208,853 0
Reinsurance recoverable 1,691,860 1,680,287
Other receivables 1,415,406 1,592,607
Accrued investment income 1,267,752 1,569,945
Deferred policy acquisition costs 36,164,638 34,537,464
Deferred Federal income taxes 393,237 1,521,296
Cost of insurance acquired 2,188,285 2,271,866
Excess of cost over net assets 3,251,874 3,344,844
acquired
Property, plant and equipment 5,340,392 4,694,022
Other assets 545,918 496,736
Total assets $157,348,570 $149,797,604
(Continued)
CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
June 30, 1995 and December 31, 1994
(Unaudited)
June 30, December 31,
1995 1994
Liabilities and Stockholders' Equity
Liabilities:
Future policy benefit reserves $106,714,678 $101,754,835
Dividend accumulations 2,871,728 2,899,573
Premium deposits 1,599,676 1,648,697
Policy claims payable 2,252,771 2,149,631
Other policyholders' funds 1,758,341 1,611,908
Total policy liabilities 115,197,194 110,064,644
Other liabilities 1,523,474 1,671,892
Commissions payable 777,884 916,886
Notes payable 793,833 712,373
Federal income tax payable 213,673 1,066,004
Amounts held on deposit 270,270 310,432
Total liabilities 118,776,328 114,742,231
Stockholders' Equity:
Common stock:
Class A, no par value, 50,000,000
shares authorized, 19,178,515 shares
issued in 1995 and 1994, including
shares in treasury of 2,198,175 in 21,457,303 21,457,303
1995 and 1994
Class B, no par value, 1,000,000
shares authorized, 621,049 shares 283,262 283,262
issued and outstanding in 1995 and 1994
Unrealized loss on investments (744,384) (2,970,597)
Retained earnings 19,757,352 18,466,696
40,753,533 37,236,664
Treasury stock, at cost (2,181,291) (2,181,291)
Total stockholders' equity 38,572,242 35,055,373
Commitments and contingencies
Total liabilities and stockholders' $157,348,570 $149,797,604
equity
CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Six-Months Ended June 30, 1995 and 1994
(Unaudited)
Six-months ended June 30,
1995 1994
Revenues:
Premiums $20,505,653 $19,298,329
Annuity and Universal Life 104,910 40,552
considerations
Net investment income 3,124,254 2,539,178
23,734,817 21,878,059
Other income and expenses:
Other income 10,141 38,500
Realized gains (losses) on (30,342) 135,796
investments
Interest expense (27,468) (33,479)
(47,669) 140,817
Benefits and expenses:
Insurance benefits paid or provided:
Increase in future policy benefit 4,959,843 4,722,137
reserves
Policyholders' dividends 1,113,407 1,062,998
Claims and surrenders 8,993,814 8,371,610
Annuity expenses 219,077 255,864
15,286,141 14,412,609
Commissions 5,251,001 5,075,785
Underwriting, acquisition and 2,899,485 2,098,286
insurance expenses
Capitalization of deferred policy (5,497,977) (5,424,782)
acquisition costs
Amortization of deferred policy 3,870,803 3,280,744
acquisition costs
Amortization of cost of insurance
acquired and excess of cost over net 176,551 209,935
assets acquired
21,986,004 19,652,577
Income before federal income tax $1,701,144 $2,366,299
Federal income tax:
Federal income tax expense 410,488 518,058
Net Income $1,290,256 $1,848,241
Per Share Amounts:
Net income per share of common stock $0.06 $0.11
CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Three-Months Ended June 30, 1995 and 1994
(Unaudited)
Three-months ended June
30,
1995 1994
Revenues:
Premiums $11,232,524 $10,855,840
Annuity and Universal Life 19,838 19,374
considerations
Net investment income 1,620,317 1,238,842
12,872,679 12,114,056
Other income and expenses:
Other income (9,621) 10,344
Realized gains (losses) on 675 (351,554)
investments
Interest expense (10,316) (17,053)
(19,262) (358,273)
Benefits and expenses:
Insurance benefits paid or provided:
Increase in future policy benefit 2,561,199 3,169,574
reserves
Policyholders' dividends 657,842 534,338
Claims and surrenders 4,679,258 4,098,964
Annuity expenses 136,127 51,986
8,034,426 7,854,862
Commissions 2,786,833 2,983,741
Underwriting, acquisition and 1,556,499 1,030,663
insurance expenses
Capitalization of deferred policy (2,954,508) (3,842,166)
acquisition costs
Amortization of deferred policy 1,980,806 2,322,962
acquisition costs
Amortization of cost of insurance
acquired and excess of cost over net 84,072 111,589
assets acquired
11,488,128 10,461,651
Income before federal income tax $1,365,289 $1,294,132
Federal income tax:
Federal income tax expense 347,516 364,771
Net Income $1,017,373 $929,361
Per Share Amounts:
Net income per share of common stock $0.06 $0.06
CONSOLIDATED STATEMENTS OF CASH FLOWS
Six-Months Ended June 30, 1995 and 1994
(Unaudited)
Six-months ended June 30,
1995 1994
Cash flows from operating
activities:
Net gain $1,290,256 $1,848,241
Adjustments to reconcile net gain to
net cash provided by operating
activities:
Accrued investment income (302,193) (258,961)
Deferred policy acquisition costs (1,627,174) (2,144,038)
Amortization of cost of insurance
acquired and excess cost over
net assets acquired 176,551 209,935
Prepaid reinsurance (1,208,853) (995,705)
Reinsurance recoverable (11,573) (296,030)
Other receivables 177,201 (409,391)
Property, plant and equipment (646,370) (425,427)
Future policy benefit reserves 4,959,843 4,722,137
Other policy liabilities 172,707 619,425
Commissions payable and other (287,420) 146,389
liabilities
Amounts paid out as trustee (40,162) (148,246)
Deferred Federal income tax 1,128,059 (1,007,978)
Federal income tax payable (852,331) 915,477
Other, net (242,526) (416,231)
Net cash provided (used) by operating
activities 2,686,015 2,359,597
Cash flows from investing
activities:
Maturity of fixed maturities 5,961,546 10,916,357
Sale of fixed maturities available for 22,718,636 13,152,225
sale
Purchase of fixed maturities available (22,565,386) (40,894,410)
for sale
Principal payments on mortgage loans 384,336 472,405
Net change in guaranteed student loans 39,014 146,629
Change in other long-term investments 314,488 (9,050)
Increase in policy loans (net) (1,111,027) (682,516)
Net cash provided (used)
by investing activities 5,741,607 (16,898,360)
(Continued)
CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Six-Months Ended June 30, 1995 and 1994
(Unaudited)
Six-months ended June 30,
1995 1994
Cash flows from financing
activities:
Borrowed funds 175,000 0
Repayment of note payable (93,540) (172,880)
Net cash provided (used) by financing
activities 81,460 (172,880)
Net increase (decrease) in cash and
short- 8,509,082 (14,711,643)
term investments
Cash and short term investments at
beginning 4,259,887 18,754,060
of period
Cash and short term investments at end $12,768,969 $4,042,417
of period
CONSOLIDATED STATEMENTS OF CASH FLOWS
Three-Months Ended June 30, 1995 and 1994
(Unaudited)
Three-months ended June
30,
1995 1994
Cash flows from operating
activities:
Net gain $1,017,373 $929,361
Adjustments to reconcile net gain to
net cash provided by operating
activities:
Accrued investment income (596,926) (269,687)
Deferred policy acquisition costs (973,702) (1,519,204)
Amortization of cost of insurance
acquired and excess cost over 84,072 111,589
net assets acquired
Prepaid reinsurance 529,066 530,196
Reinsurance recoverable 20,062 169,984
Other receivables 15,048 (179,879)
Property, plant and equipment (748,394) (117,068)
Future policy benefit reserves 2,561,199 3,169,574
Other policy liabilities (107,751) (929,812)
Commissions payable and other (308,170) 618,791
liabilities
Amounts paid out as trustee 33,143 (93,473)
Federal income tax payable 213,673 1,552,190
Deferred Federal income tax 496,068 (1,007,978)
Other, net (2,282,320) 381,997
Net cash provided (used) by operating
activities 4,517,081 3,346,581
Cash flows from investing
activities:
Maturity of fixed maturities 2,062,013 10,833,625
Sale of fixed maturities available for 15,274,596 3,268,438
sale
Purchase of fixed maturities available (13,260,177) (15,574,320)
for sale
Principal payments on mortgage loans 327,349 37,892
Net change in guaranteed student loans 78,066 230,021
Change in other long-term investments 365,259 (6,519)
Increase in policy loans (net) (647,122) (539,916)
Net cash provided (used)
by investing activities 4,199,984 (1,751,139)
(Continued)
CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Three-Months Ended June 30, 1995 and 1994
(Unaudited)
Three-months ended June
30,
1995 1994
Cash flows from financing
activities:
Borrowed funds 175,000 0
Repayment of note payable (75,839) (104,716)
Net cash provided (used) by financing
activities 99,161 (104,716)
Net increase (decrease) in cash and
short- 8,816,226 1,490,726
term investments
Cash and short term investments at
beginning 3,952,743 2,551,691
of period
Cash and short term investments at end $12,768,969 $4,042,417
of period
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1995
(Unaudited)
(1) Financial Statements
The balance sheet for June 30, 1995, the statements of
operations for the three- and six-month periods ended June
30, 1995 and 1994, and the statements of cash flows for the
three- and six-month periods then ended have been prepared
by the Company without audit. In the opinion of management,
all adjustments (which include only normal recurring
adjustments) necessary to present fairly the financial
position, results of operations and changes in cash flows at
June 30, 1995, and for comparative periods presented have
been made.
Certain information and footnote disclosures normally
included in financial statements prepared in accordance with
generally accepted accounting principles have been omitted.
It is suggested that these financial statements be read in
conjunction with the financial statements and notes thereto
included in the Company's December 31, 1994 annual 10-K
report filed with the Securities and Exchange Commission.
The results of operations for the period ended June 30, 1995
are not necessarily indicative of the operating results for
the full year.
(2) Proposed Acquisition and Merger
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 American Liberty agreement provides that following the
acquisition by Citizens, American Liberty shareholders
will receive 1.10 shares of Citizens' Class A Common Stock
for each share of American Liberty Common Stock owned and
2.926 shares of Citizens' Class A Common Stock for each
one share of American Liberty Preferred Stock owned.
Citizens expects to issue approximately 2.3 million Class
A shares in connection with the transaction, which will be
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 agreement is
subject to approval by American Liberty's shareholders and
regulatory authorities and may be terminated by either
party if the transaction is not effected by October 31,
1995.The Louisiana Department of Insurance approved the
transaction on July 15, 1995. A meeting of shareholders
of American Liberty has been scheduled for September 14,
1995 to consider the transaction.
The Insurance Investors agreement provides that following
the acquisition by Citizens, Investors' shareholders will
receive one share of Citizens' Class A Common Stock for
each eight shares of Investors Common Stock owned.
Additionally, Citizens will acquire all shares of Central
Investors Life Insurance Company, a subsidiary of
Insurance Investors & Holding, not wholly-owned by
Insurance Investors, based upon an exchange ratio of one
share of Citizens' Class A common stock for each four
shares of Central Investors owned. The transaction will
involve issuance of approximately 170,000 of Citizens'
Class A shares and will also be accounted for as a
purchase. The agreement is subject to approval by
Investors' shareholders. The Illinois Department of
Insurance approved the transaction on March 10, 1995.
The following unaudited pro forma condensed balance sheet
as of June 30, 1995 reflects the purchase of ALFC and II
by Citizens as if they occurred on June 30, 1995. The
unaudited pro forma condensed consolidated income
statement for the six months ended June 30, 1995 reflects
the purchase of ALFC and II as if they had occurred on
January 1, 1995.
Management's estimate of the impact of applying purchase
accounting, as if the two acquisitions had occurred as
described above, is presented below. The unaudited pro
forma financial information is not necessarily indicative
either of the results of operations that would have
occurred had the acquisition been consummated at the
beginning of 1995 or of future results of operations of
the consolidated entities.
Pro-Forma Condensed Consolidated Financial Information
(Amounts in thousands)
Pro-Forma Consolidated Balance Sheet
June 30, 1995
(Unaudited)
Historic Purchase
al Historic Histori Adjustmen
Assets Citizens al cal ts and Pro-forma
Inc and ALFC and Insuran Eliminati Consolida
Subsidia Subsidia ce ons ted
ries ries Investo
rs
Long term $91,111 $15,018 $2,193 $13 a $108,335
Investments
Short term 9,495 942 0 0 10,437
Investments
Total 100,606 15,960 2,193 13 118,772
Investments
Cash 3,274 709 132 4,115
Other 3,107 438 0 3,545
receivables
Accrued
investment 1,268 316 33 1,617
income
Deferred policy
acquisition 36,165 6,831 49 (6,880) b 36,165
costs
Cost of
insurance 2,188 0 0 5,828 e 8,016
acquired
Excess of cost
over net 3,252 0 0 8,128 c 11,380
assets
acquired
Other intangible 0 0 0 1,816 d 1,816
assets
Deferred taxes 393 1,839 0 (980) g 1,252
Other assets 7,096 786 2 0 7,884
Total Assets $157,349 $26,879 $2,409 $7,925 $194,562
Pro-Forma Consolidated Balance Sheet (continued)
June 30, 1995
(Unaudited)
Historic Purchase
Liabilities and al Historic Histori Adjustmen
Stockholders' Citizens al cal ts and Pro-forma
Equity Inc and ALFC and Insuran Eliminati Consolida
Subsidia Subsidia ce ons ted
ries ries Investo
rs
Future policy
benefit $106,715 $14,621 $718 $560 f $122,614
reserves
Other
policyholder 8,483 1,772 363 10,618
liabilities
Other 2,785 359 32 3,176
liabilities
Notes payable 794 0 296 1,090
Deferred tax 0 1,825 0 (1,825) h 0
liability
Minority 0 16 93 (109) h 0
interest
Total 118,777 18,593 1,502 (1,374) 137,498
liabilities
Class A common 21,457 250 819 17,423 h 39,949
stock
Class B common 283 0 47 (47) h 283
stock
Preferred stock 0 263 0 (263) h 0
Additional paid-
in 0 6,030 576 (6,606) h 0
capital
Unrealized loss
on (744) 0 (18) 18 h (744)
investments
Retained 19,757 1,743 (508) (1,235) h 19,757
earnings
40,753 8,286 916 9,290 59,245
Treasury stock (2,181) 0 (9) 9 (2,181)
Total
stockholders' 38,572 8,286 907 9,299 57,064
equity
Total
liabilities and $157,349 $26,879 $2,409 $7,925 $194,562
stockholders'
equity
Explanation of Pro-Forma Adjustments as of June 30, 1995:
(a) Adjustment necessary to record acquired fixed
maturities at market value.
(b) Deferred policy acquisition costs are reflected in the
accompanying pro-forma financial statements as follows:
Historical Citizens $36,165
Historical ALFC and II 6,880
Historical DAC 43,045
Reverse historical ALFC (6,880)
and II
Net DAC $36,165
(c) Reverse ALFC and II policy acquisition costs at March
31, 1995 and eEstablish cost of insurance acquired.
Cost of insurance acquired represents the estimated
present value of future profits in the acquired
business This amount was calculated as the difference
between ALFC's and II's historical future policy
benefit reserves and the estimated gross premium
reserve at March 31, 1995. The gross premium reserve
was estimated assuming a level interest yield of 7%.
Life mortality was based on appropriate multiples of
the 1965-70 Select and Ultimate and the Ultimate
Intercompany Table and withdrawals based on Linton B
and BB tables as deemed appropriate based on individual
life plan experience. Accident and health morbidity
was based on multiples of 1974 Cancer tables,
Stroke/Heart Attack Indemnity Table, 1985 NAIC Cancer
Tables and published claim costs and withdrawals based
on Linton C and CC Tables as deemed appropriate based
on individual health plan experience. Cost of
insurance acquired is being amortized in proportion to
the profit over the lives of the respective policies.
Cost of insurance acquired is presented in the
accompanying pro-forma financial statements as follows:
Historical Citizens $2,188
ALFC and II cost of
insurance capitalized 5,828
Pro-forma cost of
insurance acquired $8,016
(d) Allocation of purchase price to identifiable intangible
assets. Identifiable intangible assets include state
licenses and agency force and are being amortized over
10 years.
(e) Excess of cost over net assets acquired was calculated
as follows: (in thousands)
ALFC II TOTAL
Acquisition of
common stock $17,575 929 18,504
Estimated fair
value of net assets (9,436) (940) (10,376)
acquired
Excess of cost
(purchase price)
over net assets $8,139 (11) 8,128
acquired
(f) Revaluation of policy benefit reserves to reflect
Company reserve assumption with regard to interest rates, lapse
rates and surrenders.
(g) Establish deferred taxes for basis differences between
book and tax value of assets and liabilities at June 30, 1995.
(h) Eliminate ALFC and II capital, minority interest, and
retained earnings and record the cost of net assets acquired
as increased capital of the Company due to the issuance of
additional Class A common shares.
Pro-Forma Consolidated Statement of Operations
For the Six Months Ended June 30, 1995
(Unaudited)
Historica Purchase
l Historica Histori Adjustment
Citizens l cal s and Pro-forma
Inc and ALFC and Insuran Eliminatio Consolidat
Subsidiar Subsidiar ce ns ed
ies ies Investo
rs
Revenues:
Premiums $20,611 $3,782 $14 $24,407
Net investment 3,124 580 23 3,727
income
Other (48) 128 0 0 80
Total revenues 23,687 4,490 37 0 28,214
Benefits and
Expenses
Policy benefits 15,286 1,990 32 17,308
Commissions 5,251 0 0 5,251
Capitalization (5,498) 0 0 (250) a (5,748)
of DAC
Amortization of 3,871 666 3 (500) a 4,040
DAC
Amortization of
cost 177 0 0 278 b 455
of insurance
acquired
Amortization of
other 0 0 0 94 c 94
intangibles
Amortization of
excess of cost over 93 0 0 220 d 313
net assets
acquired
Other expenses 2,806 1,668 34 0 4,508
Total benefits
and 21,986 4,324 69 (158) 26,221
expenses
Income before $1,701 $166 $(32) $158) $1,993
taxes
Net income per $0.10
share (e)
Explanation of Pro-Forma statement of Operations for the Six-
Month Period Ended June 30, 1995:
(a) Amortization and capitalization of deferred policy
acquisition costs are reflected in the accompanying pro-
forma statement of operations as follows: (in
thousands)
Capitalizat Amortizati
ion on
Historical Citizens (5,498) 3,871
Historical ALFC and II 0 669
Total Historical (5,498) 4,540
Reverse Historical ALFC and 0 (669)
II
Capitalization of Post- (250) 169
Purchase
Net Pro-Forma adjustment (250) (500)
Net (5,748) 4,040
(b) Amortization of cost of insurance acquired is presented
in the accompanying pro-forma statement of operations
as follows: (in thousands)
Historical Citizens $177
Interest accrued @ 7% (205)
Amortization of ALFC and
II cost of insurance 483
Net Pro-Forma 278
adjustment
Pro-forma amortization $455
Estimated amortization of cost of insurance acquired
assuming a purchase date of January 1, 1995 is
$482,000, $433,000, $390,000, $360,000 and $336,000 for
each year, respectively, in the five year period ending
December 31, 1999.
(c) Identifiable intangible assets include state licenses
and agency force and are being amortized over 10 years.
Such amortization amounted to $94,000 for the six
months ended June 30, 1995.
(d) Excess of cost over net assets acquired is being
amortized over a 20-year period. Such amortization,
reflected in the accompanying pro-forma statement of
operations is $220,000.
(e) Calculated using estimated common shares outstanding of
19,433,080.
ITEM 2
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITIONS AND
RESULTS OF OPERATIONS
Six-months ended June 30, 1995 and 1994
Net income for the six-months ended June 30, 1995 was $1,290,256
or $.08 per share, compared to $1,848,241 or $.11 per share for
the same period in 1994. Revenues increased to
$23,734,8179,763,884, an increase of 8.5% over the first six
months of 1994 when revenues were $21,878,059. The primary
reasons for the lower earnings in 1995 were reduced levels of
capital gains increases in operating expenses as a result of
recent growth in the Company. Operating income (income before
capital gains and federal income taxes) was $1,731,486 for the
first half of 1995, compared to $2,230,503 for the same period in
1994.
Premium income for the first six months of 1995 was $20,505,653
compared to $19,298,329 for the same period in 1994. This 6.3
percent increase is the result of the continuing volume of new
business being written by the Company. During 1994,
approximately $11.8 million of new premium was written and during
1995, management had expected this production to reach $12.5
million. Recent downturns in the economies of several Latin
American countries where the Company had generated a large amount
of new production, principally in Argentina, have slowed the rate
of growth in those countries. However, production has begun to
appear from the Pacific Rim countries and Management believes
that production for the year will be at or near levels produced
in 1994. Management does not believe the slowing down of new
business from some of the Latin markets is long term in nature,
but rather a cyclical occurrence that will run its course in the
near term.
Net investment income increased 23.1% in the first six months of
1995 compared to the same period in 1994. Net investment income
for the six months ended June 30, 1995 was $3,124,254 compared to
$2,539,178 in 1994. This increase reflects the earnings on the
growth in the Company's asset base that is occurring, as well as
the higher yields that have been available in the bond market
during the past year. Additionally, the $5.4 million of new
capital raised in the latter half of 1994 via a Reg S. offering
is generating additional earnings. Overall investment return has
been hampered because the growth in the Company's asset base has
occurred during a period of relatively low investment returns.
Future policy benefit reserves increased by $4,959,843 in 1995,
compared to $4,722,137 in the first quarter of 1994. Improved
persistency on the Company's oldest blocks of business as well as
the size of the new business writings in recent years contributed
to the increase in 1995.
Claims and surrenders expense increased from $8,371,610 at June
30, 1994 to $8,993,814 for the same period in 1995. Death claims
decreased from $1,979,625 in 1994 to $1,500,715 in 1995. The
decrease is primarily attributable to lower levels of claims on
the block of Servicemen's Group Life Insurance business that the
Company participates in; however, Management is pleased with the
lack of increase in this area since the Company's block of
business has grown dramatically in recent years without
corresponding increases in claims. Surrender expense increased
from $4,037,784 to $4,970,851. Management constantly monitors
this activity to insure that the Company's persistency is holding
at levels equal to or above assumptions. Thus far, the Company's
persistency has exceeded the assumed levels. To illustrate the
Company's persistency, when creating its products Citizens
generally uses Linton Table B, an actuarial table that is
considered to be the industry standard for persistency. Through
1994, the Company's first year persistency was at 99.4%, compared
to 79.9% for Linton. Second year persistency was 88.8% for
Citizens compared to 70.1% for Linton; third year was 81.1%
compared to 62.9%; fourth year was 70.9% compared to 57.2%; and
fifth year was 60.9% compared to 52.4% for Linton. Coupons and
endowments increased to $2,144,205 in 1995 from $1,911,691 in
1994. Although this item increased 12.2% in 1995, Management is
not concerned by the increase. The endowment benefits are
factored into the premium much like dividends and therefor, the
increase does not pose a threat to future profitability.
Management expects to see further increases in this category in
the future. The remaining components of claims and expenses,
consisting of supplemental contracts and payments of dividends
and endowments previously earned and held at interest, amounted
to $378,043 in 1995, compared to $442,510 in 1994.
Commission expense increased to $5,251,001 from $5,075,785. This
increase relates to the larger block of premium income. Deferred
policy acquisition costs capitalized in 1995 were $5,497,977
compared to $5,424,782 in the prior year. The increase is
related to the increases in commission and other acquisition
expenses. Amortization of these costs was $3,280,744 for the
first half of 1994 compared to $3,870,803 for 1995. The increase
in amortization relates to the larger block of capitalized costs
being written off.
Underwriting, acquisition and insurance expenses increased 38.2%
for the first half of 1995 compared to the same period in 1994,
reaching $2,899,485 from $2,098,286. The increase is primarily
attributable to the absorption of the marketing management
function previously performed by Savoy, part of which is offset
by a reduced level of commission expense on first year business,
as well as costs associated with expanding the Company's
management group.
Realized gains on investments for the first six months of 1994
were $135,796, compared to losses of $30,342 in the current year.
The gains realized in the first half of 1994 occurred because
management felt that yields on the long Treasury bonds were going
into an interim period of growth. As a result, Management
decided to liquidate a portion of the Company's long-term
Treasury holdings in an attempt to reinvest at higher rates, as
well as to convert a portion of the interest earnings on such
instruments to immediate cash in the form of capital gains which
could be reinvested along with the principal to further enhance
return. During the first quarter of 1995, Management opted to
maintain the level of return available rather than to effect
capital gains that became available as the yield on long term
bonds fell more than 1/2%.
Three-months ended June 30, 1995 and 1994
Net income for the three-months ended June 30, 1995 was
$1,017,373 compared to $929,361 for the same period in 1994.
Revenues increased to $12,872,6799,763,884, an increase of 6.3%
over the same three months of 1994 when revenues were
$12,114,056. The primary reasons for the improved quarterly
earnings were increases in premium and investment income and
lower increases in reserves for future policy benefits.
Premium income for the second quarter of 1995 was $11,232,524
compared to $10,855,840 for the same period in 1994. This 3.5
percent increase is the result of the continuing volume of new
business being written by the Company. The rate of increase
slowed in the second quarter of 1995 as the amount of new
business produced by the Company slowed. Uncertainties about the
economies in certain Latin American countries, principally
Argentina, contributed to the lower rate of increase.
Net investment income increased 30.7% in the second quarter of
1995 compared to the same period in 1994. Net investment income
for the three months ended June 30, 1995 was $1,620,317 compared
to $1,238,842 in 1994. This increase reflects the earnings on
the growth in the Company's asset base that is occurring, as well
as the higher yields that have been available in the bond market
during the past year
Future policy benefit reserves increased by $2,530,800 in 1995,
compared to $3,169,574 in the second quarter of 1994. The amount
of increase in the second quarter of 1995 was offset by a higher
than expected increase in the first quarter of the year.
Claims and surrenders expense increased from $4,098,964 at June
30, 1994 to $4,709,657 for the same period in 1995. Decreases in
death claims were the primary reason for the decline during the
quarter.
Commission expense decreased to $2,786,833 from $2,983,741. The
slower increases in the production of new policies as well as
modifications in who bears the expenses for marketing made in
recent years are the reasons for the decline. Deferred policy
acquisition costs capitalized in 1995 were $2,954,500 compared to
$3,842,166 in the prior year. Amortization of these costs was
$2,322,962 for the second quarter of 1994 compared to $1,980,806
for 1995.
Underwriting, acquisition and insurance expenses increased 51.9%
for the second quarter of 1995 compared to the same period in
1994, reaching $1,566,499 from $1,030,663. The increase is
primarily attributable to the absorption of the marketing
management function previously performed by Savoy, part of which
is offset by a reduced level of commission expense on first year
business, as well as costs associated with expanding the
Company's management group.
Liquidity and Capital Resources
Stockholders' equity increased 10% during 1995 to $38,572,242
from $35,055,373 at December 31, 1994. The earnings achieved in
1995, as well as an improvement in the market value of the
Company's available for sale fixed maturity portfolio contributed
to the increase.
On October 27, 1994, Citizens completed the offering of 916,375
shares of its Class A Common Stock under an exemption from
registration under the Securities Act of 1933. The offering was
made under Regulation S, which provides that shares which are
offered outside of the United States to non-United Stated persons
pursuant to certain specific guidelines may be resold in the
United States by persons who are not an issuer, underwriter or
dealer following a certain period after the close of the offering
period. The offering price was $7.00 per share. The closing
market price of the Class A common shares on the date of the
offering commencement was $7.75 per share (as reported by the
American Stock Exchange. The Company had succeeded in placing
916,375 shares, generating gross proceeds of more than $6.4
million, and net proceeds of approximately $5.4 million.
Management was pleased with the amount of capital generated
through the offering; however, it believes that the offering
period was too short in light of the manner in which business is
typically transacted overseas. Because of the success of the
offering in the limited time period, Management initiated a
second such offering which commenced on May 1, 1995.
The new offering comprises up to 3,500,000 Class A shares and
will run over a period of 30 months, ending October 31, 1997, or
when 3,500,000 shares have been purchased. The initial offering
price is $7.50 per share, with the shares being offered in units
of 50 shares each. Each overseas policyowner of Citizens
Insurance Company of America is being offered the opportunity to
purchase up to 100 units. The price of the shares escalates
every six months during the offering period, reaching $8.50 per
share during the final period. As of June 30, 1995, only a
negligible amount of shares had been placed. Management does not
expect to see significant activity in conjunction with this
offering until late in the third quarter of 1995..
Invested assets grew to $100,606,260 at June 30, 1995 from
$93,828,650 at December 31, 1994, an increase of 7.2%. At June
30, 1995 and December 31, 1994, 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 1995; however, because of continued
uncertainty regarding long-term interest rates, management cannot
rule out additional sales during 1995. Fixed maturities held to
maturity, amounting to $18,399,421 at June 30, 1995 and
$18,415,026 at December 31, 1994 consist primarily of U.S.
Treasury securities. Management has the intent and believes the
Company has the ability to hold the securities to maturity.
The Company's mortgage loan portfolio, which constitutes 2.1% of
invested assets at June 30, 1995, has historically been composed
of small residential loans in Texas. The 1992 acquisition of FCC
added a block of mortgages to the portfolio. During 1994, in
conjunction with the sale of certain parcels of real estate owned
by the Company approximately $340,000 in new mortgage loans were
made. At December 31, 1994, approximately 38.9% of the Company's
mortgage portfolio (1 % of invested assets) consisted of
commercial mortgages with an average balance of $66,381. The
remaining residential mortgages have an average balance of
$27,839. At June 30, 1995, one mortgage, in the principal amount
of $30,665 was in default. Management believes that in the event
of foreclosure there is more than adequate collateralization on
the loan, to avoid exposure to loss. One mortgage with a balance
of approximately $106,000 was foreclosed during the second
quarter of 1995. Management does not expect to incur a
significant loss on the disposal of the real estate. Management
has established a reserve of $145,080 (approximately 5% of the
mortgage portfolio's balance) to cover potential unforeseen
losses in the Company's mortgage portfolio.
Policy loans comprise 16.2% of invested assets at June 30, 1995
and at December 31, 1994. 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 depositories, Texas
Commerce Bank Austin, Texas and Frost Bank, N.A., Austin, Texas,
were significantly in excess of Federal Deposit Insurance
Corporation (FDIC) coverage at December 31, 1994 and June 30,
1995. 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 1995, the Company has utilized short-term
Treasury Bills as a cash management tool to minimize excess cash
balances and enhance return.
Investments in real estate comprise a very small portion of the
Company's invested assets (0.4%). The properties owned by the
Company were predominantly acquired in the acquisition of
HERMAR's assets and consist of small tracts used for light retail
or light industrial purposes. No single tract accounts for as
much as 0.5% of the Company's invested assets and virtually all
are revenue-producing holdings. The Company has not established
loss reserves on real estate because management believes the
Company has no significant exposure to loss on its holdings.
During 1994, the bulk of the real estate acquired from HERMAR was
sold to the parties leasing the properties. As part of the
transaction, CICA provided mortgage financing on the transactions
totaling approximately $340,000; however, down payments of 15-20%
were made in each case.
One parcel of real estate acquired from HERMAR and still owned at
June 30, 1995, was the site of a previous underground fuel line
leak. HERMAR, having previously initiated action to abate the
leak, had contracted with an environmental consulting firm to
supervise and coordinate the remediation of any contamination at
the site. Following the acquisition of HERMAR's assets, the
Company continued the remediation efforts. During 1994, all
remediation efforts at the site were discontinued with the
permission of the Texas Natural Resource Conservation Commission
(TNRCC). Management believes it probable that any remaining
costs of remediation will be paid by the TNRCC through a
reimbursement program administered by that agency for such sites.
In the event the TNRCC limits the amount of such reimbursement
due to a charge being "unreasonable," the Company's contracts
with its environmental consultants provide for a like reduction
in amounts due said contractor. Additionally, these contracts
require the consultants to bear the financial burden of any
expenditures for remediation until such items are reimbursed by
the TNRCC. Management is not aware of any remaining costs
related to the remediation. There is no pending or threatened
legal action by state agencies, area governments or citizenry
relating to the leak; therefore, the Company has not established
reserves for the leak. In the event the TNRCC program may not
cover the remediation costs, appropriate reserves will be
established.
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 27,000
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 $158,000, was listed for sale
during 1994 for $1.5 million. In February, 1995, a lease-
purchase agreement was reached with a third party on the former
office property. The lease, a three year agreement on a triple-
net basis, provides that the party can 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 phrase
"triple net" means that the lessee is responsible for the payment
of maintenance, taxes and insurance on the property. As of
August 14, 1995, the lessee had not notified the Company of its
intentions with regard to the purchase option. Management does
not expect the lease to have a material effect on the Company's
earnings or financial position. The Company intends to account
for the lease as an operating lease. Should the lessee exercise
the purchase option, which is a cash purchase option, the Company
would record a gain of approximately $650,000.
CICA owned 2,075,685 shares of Citizens Class A common stock at
June 30, 1995 and December 31, 1994. For statutory accounting
purposes, CICA received written approval from the Colorado
Insurance Department to carry its investment in Citizens at 50%
of the fair market value limited to 8% of admitted assets,
($9,989,000 at June 30, 1995) 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
the Parent by CICA, limited to 2% of admitted assets. As of
December 31, 1994, that permitted transaction increased statutory
surplus by $4,711,023 over what it would have been had prescribed
accounting practice been followed. In the Citizens' consolidated
financial statements, this stock is shown as treasury stock.
CICA had outstanding at December 31, 1994, a $600,000 surplus
debenture ($533,333 at June 30, 1995) 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 National Association of Insurance Commissioners ("NAIC")
established new 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 insurance
regulators begins. At December 31, 1994 and 1993, CICA's ratios
were 560.6% and 421.5%, respectively, well above minimum levels.
Financial Accounting Standards
In February 1992, the Financial Accounting Standards Board
("FASB") issued Statement of Financial Accounting Standards No.
109, "Accounting for Income Taxes." Statement 109 requires a
change from the deferred method of accounting for income taxes of
APB Opinion 11 to the asset and liability method of accounting
for income taxes. Under the asset and liability method of
Statement 109, 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. Under
Statement 109, 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. The Company adopted Statement
109 in 1993 and applied the provisions of Statement 109
retroactively to January 1, 1991
In December 1990, the FASB issued Statement 106, "Employers'
Accounting for Post Retirement Benefits Other than Pensions."
Statement 106 establishes accounting standards for employers'
accounting for, primarily, post retirement health care benefits.
The statement was effective for fiscal years beginning after
December 15, 1992. Since the Company currently pays no such
benefits, implementation had no impact on the results of
operations of the Company.
In December 1992, the FASB issued Statement 113 "Accounting and
Reporting for Reinsurance of Short-Duration and Long-Duration
Contracts" (Statement 113). Statement 113 eliminated the net
reporting of reinsurance amounts in the balance sheet previously
required by Statement 60 "Accounting by Insurance Enterprises."
Statement 113 also provides accounting guidance for ceding
enterprises as well as disclosure requirements and guidance on
assessing transfer of risk in reinsurance contracts.
Furthermore, it precludes immediate recognition of gains related
to reinsurance contracts unless the ceding enterprises liability
to its policyholders is extinguished.
The Company adopted Statement 113 in the first quarter of 1993.
There was no impact on the consolidated financial statements due
to implementation of the risk transfer provisions.
In May 1993, the FASB issued Statement 114 "Accounting by
Creditors for Impairment of a Loan" ("Statement 114"). Statement
114 requires impaired loans be measured based on the present
value of expected future cash flows discounted at the loan's
effective interest rate or at the loan's observable market price
or the fair value of the collateral if the loan is collateral
dependent. Statement 114 is effective for years beginning after
December 15, 1994. The Company does not expect Statement 114 to
have a material impact on its financial statements.
Also in 1993, the FASB issued Statement 115 "Accounting for
Certain Investments in Debt and Equity Securities" ("Statement
115"). Statement 115 requires the classification of debt and
equity securities as held to maturity, trading or available for
sale based on established criteria. Trading securities are
bought and held principally for the purpose of selling them in
the near term. The Company had no investment securities
classified as trading at January 1, 1994, December 31, 1994 or
June 30, 1995. Held-to-maturity securities are those in which
the Company has the ability and intent to hold the security until
maturity. All other securities not included in trading or held-
to-maturity are classified as available-for-sale.
Trading and available-for-sale securities are recorded at fair
value. Held-to-maturity securities are recorded at amortized
cost, adjusted for the amortization or accretion of premiums or
discounts. Unrealized holding gains and losses on trading
securities are included in earnings. Unrealized holding gains
and losses, net of the related tax effect, on available-for-sale
securities are excluded from earnings and are reported as a
separate component of stockholders' equity until realized.
Transfers of securities between categories are recorded at fair
value at the date of transfer. Unrealized holding gains and
losses are recognized in earnings for transfers into trading
securities. Unrealized holding gains or losses associated with
transfers of securities from held-to-maturity to available-for-
sale are recorded as a separate component of stockholders'
equity. 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.
A decline in the market 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. The Company adopted Statement 115 at January 1, 1994. The
impact on the consolidated stockholders' equity due to the
implementation was $690,388 relating to the unrealized gains on
the available-for-sale portfolio, net of deferred tax.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
None.
Item 2 Changes in Securities
None, other than disclosed in the Notes to the Financial
Statements or Management's Discussion and Analysis of
Financial Condition and Results of Operations.
Item 3. Defaults upon Senior Securities
None.
Item 4. Submission of Matters to a Vote of Security Holders
See Item 5, below.
Item 5. Other Information
The Annual meeting of stockholders was held on Tuesday,
June 6, 1995, at 10:00 a.m. at the Company's executive
offices. The record date for the meeting was April 18,
1995. At the meeting, the following individuals were
elected to serve as directors for the following year:
Harold E. Riley Randall H.
Riley
Rick D. Riley Flay F.
Baugh
Timothy T. Timmerman Ralph M.
Smith
T. Roby Dollar Joe R.
Reneau
Steve Shelton
At a subsequent meeting of the Board of Directors, Harold
E. Riley was re-elected Chairman. Additionally, Rick
Perry was named as an advisory director.
Steve Curtis was named Vice President and Controller of
Citizens and its subsidiaries, replacing John Templeton,
who had served in the same capacity for the preceding two
years. Mr. Curtis was previously Vice President and
Controller of Jackson National Life Insurance Company.
The Company filed a Registration statement on Form S-4
with the Securities and Exchange Commission in
conjunction with the acquisition of American Liberty.
The Statement became effective on July 28, 1995. The
Louisiana Department of Insurance approved the
transaction on July 14, 1995. American Liberty has
scheduled a meeting of Stockholders for September 14,
1995 to consider the transaction.
Management expects to file a Registration Statement on
Form S-4 with the Securities and Exchange Commission in
connection with the Insurance Investors transaction in
mid-August.
Item 6. Exhibits and Reports on Form 8-K
None.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
CITIZENS, INC.
By: /s/ Mark A. Oliver
Mark A. Oliver, FLMI
Executive Vice President
Secretary / Treasurer
Chief Financial Officer
Date: May 15, 1995August 14, 1995
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