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 March 31, 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)
7801 North Interstate 35, Austin, Texas 78753
(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 March 31, 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, March 31, 1995
(Unaudited) 3
and December 31, 1994
Statements of Operations, Three-Months
Ended March 31, 1995
and 1994 (Unaudited) 5
Statements of Cash Flows, Three-Months
Ended March 31, 1995
and 1994 (Unaudited) 6
Notes to Financial Statements 8
Item 2. Management's Discussion and Analysis
of Financial Conditions and Results
of Operations 10
Part Other Information 17
II.
CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
March 31, 1995 and December 31, 1994
(Unaudited)
March 31, December
1995 31,
1994
Assets
Investments:
Fixed maturities held for investment,
at
amortized cost (market $18,407,225 $18,415,026
$15,593,494
in 1995 and $14,846,900 in
1994)
Fixed maturities available for sale,
at lower
of cost or market (cost 57,856,473 56,573,764
$60,373,145 in
1995 and $61,049,170 in 1994
Equity securities, at market (cost
$23,329 in 1995 and 1994) 1,891 1,892
Mortgage loans on real estate (net of
reserve 2,566,544 2,623,531
of $145,080 in 1995 and 1994)
Policy loans 15,683,910 15,220,005
Guaranteed student loans (net of
reserve of $10,000 in 1995 and 1994) 279,295 240,243
Other long-term investments 804,960 754,189
Short-term investments 0 0
Total investments 95,600,298 93,828,650
Cash 3,952,743 4,259,887
Prepaid reinsurance 1,737,919 0
Reinsurance recoverable 1,711,922 1,680,287
Other receivables 1,430,454 1,592,607
Accrued investment income 1,275,212 1,569,945
Deferred policy acquisition costs 35,190,936 34,537,464
Deferred Federal income taxes 889,305 1,521,296
Cost of insurance acquired 2,225,877 2,271,866
Excess of cost over net assets 3,298,354 3,344,844
acquired
Property, plant and equipment 4,591,998 4,694,022
Other assets 572,342 496,736
Total assets $152,477,360 $149,797,604
(Continued)
CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
March 31, 1995 and December 31, 1994
(Unaudited)
March 31, December
1995 31,
1994
Liabilities and Stockholders' Equity
Liabilities:
Future policy benefit reserves $104,153,479 $101,754,835
Dividend accumulations 2,892,800 2,899,573
Premium deposits 1,612,280 1,648,697
Policy claims payable 2,425,107 2,149,631
Other policyholders' funds 1,659,480 1,611,908
Total policy liabilities 112,743,146 110,064,644
Other liabilities 1,560,539 1,671,892
Commissions payable 619,091 916,886
Notes payable 694,672 712,373
Federal income tax payable 0 1,066,004
Amounts held on deposit 237,127 310,432
Total liabilities 115,854,575 114,742,231
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 (1,676,064) (2,970,597)
Retained earnings 18,739,575 18,466,696
38,804,076 37,236,664
Treasury stock, at cost (2,181,291) (2,181,291)
Total stockholders' equity 36,622,785 35,055,373
Commitments and contingencies
Total liabilities and stockholders' $152,477,360 $149,797,604
equity
CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Three-Months Ended March 31, 1995 and 1994
(Unaudited)
Three-months ended March
31,
1995 1994
Revenues:
Premiums $9,273,129 $8,442,489
Annuity and Universal Life 85,072 21,178
considerations
Net investment income 1,503,937 1,300,217
10,862,138 9,763,884
Other income and expenses:
Other income 19,762 28,166
Realized gains (losses) on (31,017) 487,350
investments
Interest expense (17,152) (16,426)
(28,407) 499,090
Benefits and expenses:
Insurance benefits paid or provided:
Increase in future policy benefit 2,398,644 1,552,563
reserves
Policyholders' dividends 455,565 438,660
Claims and surrenders 4,314,556 4,362,646
Annuity expenses 82,950 203,878
7,251,715 6,557,747
Commissions 2,464,168 2,092,044
Underwriting, acquisition and 1,342,986 1,067,623
insurance expenses
Capitalization of deferred policy (2,543,469) (1,582,616)
acquisition costs
Amortization of deferred policy 1,889,997 957,782
acquisition costs
Amortization of cost of insurance
acquired and excess of cost over net 92,479 98,346
assets acquired
10,497,876 9,190,926
Income before federal income tax $335,855 1,072,048
Federal income tax:
Federal income tax expense 62,972 153,287
Net Income $272,883 $918,761
Per Share Amounts:
Net income per share of common stock $0.02 $0.06
CITIZENS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Three-Months Ended March 31, 1995 and 1994
(Unaudited)
Three-months ended March
31,
1995 1994
Cash flows from operating
activities:
Net gain $272,883 $918,761
Adjustments to reconcile net gain to
net cash provided by operating
activities:
Accrued investment income 294,733 10,726
Deferred policy acquisition costs (653,472) (624,834)
Amortization of cost of insurance acquired
and excess cost over 92,479 98,346
net assets acquired
Prepaid reinsurance (1,737,919) (1,525,901)
Reinsurance recoverable (31,635) (466,014)
Other receivables 162,153 (229,512)
Property, plant and equipment 102,024 (308,359)
Future policy benefit reserves 2,398,644 1,552,563
Other policy liabilities 279,858 1,549,237
Commissions payable and other (595,590) (472,402)
liabilities
Amounts paid out as trustee (73,305) (54,773)
Federal income tax payable (1,066,004) (636,713)
Other, net (1,275,915) (798,109)
Net cash provided (used) by operating
activities (1,831,066) (986,984)
Cash flows from investing
activities:
Maturity of fixed maturities 3,899,533 83,092
Sale of fixed maturities available for 7,444,040 9,883,787
sale
Purchase of fixed maturities available (9,305,209)(25,320,090)
for sale
Principal payments on mortgage loans 56,987 434,513
Net change in guaranteed student loans (39,052) (83,392)
Purchase of other long-term (50,771) (2,531)
investments
Increase in policy loans (net) (463,905) (142,600)
Net cash used by
investing activities 1,541,623 (15,147,221)
(Continued)
CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Three-Months Ended March 31, 1995 and 1994
(Unaudited)
Three-months ended March
31,
1995 1994
Cash flows from financing
activities:
Repayment of note payable (17,701) (68,164)
Net cash used by financing activities (17,701) (68,164)
Net decrease in cash and short-
term investments (307,144) (16,202,369)
Cash and short term investments at
beginning 4,259,887 18,754,060
of period
Cash and short term investments at end $3,952,743 $2,551,691
of period
CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 1995
(Unaudited)
(1) Financial Statements
The balance sheet for March 31, 1995, the statements of
operations for the three-month periods ended March 31, 1995
and 1994, and the statements of cash flows for the three-
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
March 31, 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 March 31,
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 August 9,
1995.
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.
Management's estimate of the impact of applying purchase
accounting, as if the two acquisitions had occurred as of
January 1, 1995, 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
March 31, 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 $95,600 $14,519 $2,193 $(1,060) a $111,252
Investments
Short Term Investments 0 1,021 0 0 1,021
Total 95,600 15,540 2,193 (1,060) 112,273
Investments
Cash 3,953 607 132 4,692
Other 1,430 683 0 2,113
receivables
Accrued
investment 1,275 295 33 1,603
income
Deferred policy
acquisition 35,191 6,840 49 (6,889) b 35,191
costs
Cost of
Insurance 2,226 0 0 5,584 b 7,810
acquired
Excess of cost
over net 3,298 0 0 11,081 c 14,379
assets acquired
Deferred taxes 889 1,752 0 (904) e 1,737
Other assets 8,616 757 2 0 9,375
Total Assets $152,478 $26,474 $2,409 $7,812 $189,173
Pro-Forma Consolidated Balance Sheet (continued)
March 31, 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 $104,153 $14,084 $717 $559 d $119,513
reserves
Other
policyholder 8,590 1,806 363 10,759
liabilities
Other 2,417 339 33 2,789
liabilities
Notes payable 695 0 296 991
Deferred tax 0 1,831 0 (1,831) f 0
liability
Minority 0 16 93 (109) f 0
interest
Total 115,855 18,076 1,502 (1,381) 134,052
liabilities
Class A common 21,457 256 819 17,423 f 39,955
stock
Class B common 283 0 47 (47) f 283
stock
Preferred stock 0 262 0 (262) f 0
Additional Paid-
in 0 6,024 576 (6,600) f 0
capital
Unrealized loss
on (1,676) 0 (18) 18 f (1,676)
investments
Retained 18,740 1,856 (508) (1,348) f 18,740
earnings
38,804 8,398 916 9,184 57,302
Treasury stock (2,181) 0 (9) 9 (2,181)
Total
stockholders' 36,623 8,398 907 9,193 55,121
equity
Total
liabilities and $152,478 $26,474 $2,409 $7,812 $189,173
stockholders'
equity
Pro-Forma Consolidated Statement of Operations
For the Quarter Ended March 31 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 $9,358 $1,867 $14 $11,239
Net investment 1,487 285 23 1,795
income
Other (11) 71 0 0 60
Total revenues 10,834 2,223 37 0 13,094
Benefits and
Expenses
Policy benefits 7,252 712 32 7,996
Commissions 2,464 0 0 2,464
Capitalization (2,543) 0 0 0 b (2,543)
of DAC
Amortization of 1,890 370 3 (368) b 1,895
DAC
Amortization of
cost 92 0 0 279 b 371
of insurance
acquired
Amortization of
excess
of cost over 0 0 0 501 c 501
net assets acquired
Other expenses 1,343 763 34 0 2,140
Total benefits
and 10,498 1,845 69 412 12,824
expenses
Income before $336 $378 $(32) $(412) $270
taxes
Net income per $0.01
share (g)
Explanation of pro-forma adjustments:
(a) Adjustment necessary to record acquired fixed
maturities at market value.
(b) Reverse ALFC and II policy acquisition costs at
March 31, 1995 and 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 acquired is being amortized in proportion to the
profit over the lives of the respective policies.
(c) Excess of cost over net assets acquired was calculated
as follows: (in thousands)
ALFC II
Acquisition of
common $17,575 929
stock
Estimated fair
value of net (6,483) (940)
assets acquired
Excess of cost
(purchase
price) over $11,092 (11)
net assets
acquired
The excess of cost over net assets acquired is being
amortized over a 20-year period.
(d) Revaluation of policy benefit reserves to reflect
Company reserve assumption with regard to interest rates, lapse rates
and surrenders.
(e) Establish deferred taxes for basis differences between book and
tax value of assets and liabilities at March 31, 1995.
(f) 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.
(g) Calculated using estimated common shares outstanding of
19,433,080.
ITEM 2
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITIONS AND
RESULTS OF OPERATIONS
Three-months ended March 31, 1995 and 1994
Net income for the three-months ended March 31, 1995 was $272,833
compared to $918,761 for the same period in 1994. Revenues
increased to $10,862,138, an increase of 11.2% over the first
three months of 1994 when revenues were $9,763,884. The primary
reasons for the lower earnings in 1995 were reduced levels of
capital gains and higher reserve increases due to improved
persistency on older blocks of business. Operating income
(income before capital gains and federal income taxes) was
$366,872 for the first quarter of 1995, compared to $582,698 for
the same period in 1994.
Premium income for the first three months of 1995 was $9,273,129
compared to $8,442,489 for the same period in 1994. This 9.8
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 expects this production to reach $12.5 million.
Management believes that the increases in premium income
experienced over the past sixty months will continue as the
result of the positive reception of the Ultra Expansion policies
by the Company's agents and the policyholders.
Net investment income increased 15.7% in the first three months
of 1995 compared to the same period in 1994. Net investment
income for the three months ended March 31, 1995 was $1,503,937
compared to $1,300,217 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. 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 $2,398,644 in 1995,
compared to $1,552,563 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 decreased slightly from $4,362,646
at March 31, 1994 to $4,314,556 for the same period in 1995.
Death claims decreased from $1,076,957 in 1994 to $852,512 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 $2,214,100 to $2,294,804. 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.
Commission expense increased to $2,464,168 from $2,092,044. This
increase relates to the higher level of new business written as
well as the larger block of premium income. Deferred policy
acquisition costs capitalized in 1995 were $2,543,469 compared to
$1,582,616 in the prior year. The increase is related to the
increases in. Amortization of these costs was $957,782 for the
first quarter of 1994 compared to $1,889,997 for 1995. The
increase in amortization relates to the larger block of
capitalized costs being written off.
Underwriting, acquisition and insurance expenses increased 25.8%
for the first quarter of 1995 compared to the same period in
1994, reaching $1,342,986 from $1,067,623. 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 three months of 1994
were $487,350, compared to losses of $31,017 in the current year.
The large gains realized in the first quarter 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%.
Liquidity and Capital Resources
Stockholders' equity increased 4.5% during 1995 to $36,622,785
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 is initiating a
second such offering to commence on May 1, 1995.
The new offering, which comprises up to 3,500,000 Class A shares,
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..
Invested assets grew to $95,600,298 at March 31, 1995 from
$93,828,650 at December 31, 1994, an increase of 1.9%. At March
31, 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 $18,407,225 at March 31, 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 2.7% of
invested assets at March 31, 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 March 31, 1995, two mortgage loans were in default;
one to an affiliate of the Company, Continental Investors Life
Insurance Company, in the amount of $112,794, and another in the
principal amount of $30,665. Management believes that in the
event of foreclosure there is more than adequate
collateralization on both loans, to avoid exposure to loss.
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 16.4% of invested assets at March 31, 1995
compared to 16.2% 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 March 31,
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 (0.8%). 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
March 31, 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. 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.
CICA owned 2,075,685 shares of Citizens Class A common stock at
March 31, 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,
($8,951,000 at March 31, 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 and March 31, 1995, a
$600,000 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 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 or December 31, 1994.
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. Investment securities at December 31, 1993 were primarily
designated and classified as being available-for-sale. 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
None.
Item 5. Other Information
The Annual meeting of stockholders will be 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.
Mr. John Boswell resigned from the Company's Board of
Directors. Mr. Boswell, a director since 1989, felt
family business commitments limited the amount of time he
had available to devote to the affairs of the Company.
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
Vice President
Secretary / Treasurer
Chief Financial Officer
Date: May 15, 1995
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