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 September 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)
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 September 30, 1995, Registrant had 19,322,743 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, September 30, 1995
(Unaudited) 3
and December 31, 1994
Statements of Operations, Nine-Months
Ended September 30, 1995
and 1994 (Unaudited) 5
Statements of Operations, Three-Months
Ended September 30, 1995
and 1994 (Unaudited) 6
Statements of Cash Flows, Nine-Months
Ended September 30, 1995
and 1994 (Unaudited) 7
Statements of Cash Flows, Three-Months
Ended September 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 Other Information 27
II.
CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
September 30, 1995 and December 31, 1994
(Unaudited)
September December
30, 31,
1995 1994
Assets
Investments:
Fixed maturities held for investment,
at amortized cost (market $18,391,619 $18,415,026
$17,289,075in 1995 and
$14,846,900 in 1994)
Fixed maturities available for sale,
at lower of cost or market (cost 83,260,348 56,573,764
$83,363,440 in 1995 and
$61,049,170 in 1994
Equity securities, at market (cost
$23,329 in 1995 and 1994) 14,702 1,892
Mortgage loans on real estate (net of
reserve 1,922,535 2,623,531
of $145,080 in 1995 and 1994)
Policy loans 17,651,346 15,220,005
Guaranteed student loans (net of
reserve of $10,000 in 1995 and 1994) 267,416 240,243
Other long-term investments 753,644 754,189
Short-term investments 1,903,702 0
Total investments 124,165,312 93,828,650
Cash 3,039,044 4,259,887
Prepaid reinsurance 643,754 0
Reinsurance recoverable 2,295,258 1,680,287
Other receivables 1,224,316 1,592,607
Accrued investment income 1,696,532 1,569,945
Deferred policy acquisition costs 36,473,570 34,537,464
Deferred Federal income taxes 0 1,521,296
Cost of insurance acquired 7,719,145 2,271,866
Excess of cost over net assets 13,984,985 3,344,844
acquired
Property, plant and equipment 5,438,712 4,694,022
Other assets 2,622,511 496,736
Total assets $199,336,938 $149,797,604
(Continued)
CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
September 30, 1995 and December 31, 1994
(Unaudited)
September December
30, 31,
1995 1994
Liabilities and Stockholders' Equity
Liabilities:
Future policy benefit reserves $119,716,568 $101,754,835
Dividend accumulations 3,336,776 2,899,573
Premium deposits 1,592,337 1,648,697
Policy claims payable 3,542,753 2,149,631
Other policyholders' funds 1,905,827 1,611,908
Total policy liabilities 130,094,261 110,064,644
Other liabilities 2,386,485 1,671,892
Commissions payable 458,894 916,886
Notes payable 786,833 712,373
Federal income tax payable 724,477 1,066,004
Deferred Federal income taxes 2,283,891 0
Amounts held on deposit 194,130 310,432
Total liabilities 136,928,971 114,742,231
Stockholders' Equity:
Common stock:
Class A, no par value, 50,000,000
shares authorized, 21,521,918 shares
issued in 1995 and 1994, including
shares in treasury of 2,198,175 in 43,703,466 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
Minority interest 14,202 0
Unrealized loss on investments (70,290) (2,970,597)
Retained earnings 20,658,618 18,466,696
64,589,258 37,236,664
Treasury stock, at cost (2,181,291) (2,181,291)
Total stockholders' equity 62,407,967 35,055,373
Commitments and contingencies
Total liabilities and stockholders'
equity $199,336,938 $149,797,604
CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Nine-Months Ended September 30, 1995 and 1994
(Unaudited)
Nine-months ended
September 30,
1995 1994
Revenues:
Premiums $32,166,089 $31,417,440
Annuity and Universal Life 90,229 57,459
considerations
Net investment income 4,898,497 3,929,841
37,155,615 35,404,740
Other income and expenses:
Other income 53,261 80,252
Realized gains (losses) on (94,193) 171,887
investments
Interest expense (38,494) (36,323)
(79,426) 215,816
Benefits and expenses:
Insurance benefits paid or provided:
Increase in future policy benefit 7,355,554 8,253,690
reserves
Policyholders' dividends 1,780,506 1,704,301
Claims and surrenders 13,791,382 12,710,675
Annuity expenses 494,890 318,178
23,422,332 22,986,844
Commissions 7,558,495 8,598,620
Underwriting, acquisition and 4,413,629 3,593,696
insurance expenses
Capitalization of deferred policy (7,919,024) (9,169,198)
acquisition costs
Amortization of deferred policy 5,982,918 5,143,963
acquisition costs
Amortization of cost of insurance
acquired and excess of cost over net 254,768 308,766
assets acquired
33,713,118 31,462,691
Income before federal income tax $3,363,071 $4,157,865
Federal income tax:
Federal income tax expense 1,171,149 861,929
Net Income $2,191,922 $3,295,936
Per Share Amounts:
Net income per share of common stock $0.12 $0.20
CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Three-Months Ended September 30, 1995 and 1994
(Unaudited)
Three-months ended
September 30,
1995 1994
Revenues:
Premiums $11,660,436 $12,119,111
Annuity and Universal Life (14,681) 16,907
considerations
Net investment income 1,774,243 1,390,663
13,420,798 13,526,681
Other income and expenses:
Other income 43,120 41,752
Realized gains (losses) on (63,851) 36,091
investments
Interest expense (11,026) (2,844)
(31,757) 74,999
Benefits and expenses:
Insurance benefits paid or provided:
Increase in future policy benefit 2,395,711 3,531,553
reserves
Policyholders' dividends 667,099 641,303
Claims and surrenders 4,797,568 4,339,065
Annuity expenses 275,813 62,314
8,136,191 8,574,235
Commissions 2,307,494 3,522,835
Underwriting, acquisition and 1,514,144 1,495,410
insurance expenses
Capitalization of deferred policy (2,421,047) (3,744,416)
acquisition costs
Amortization of deferred policy 2,112,115 1,863,219
acquisition costs
Amortization of cost of insurance
acquired and excess of cost over net 78,217 98,831
assets acquired
11,727,114 11,810,114
Income before federal income tax $1,661,927 $1,791,566
Federal income tax:
Federal income tax expense 760,661 343,871
Net Income $901,666 $1,447,695
Per Share Amounts:
Net income per share of common stock $0.05 $0.09
CONSOLIDATED STATEMENTS OF CASH FLOWS
Nine-Months Ended September 30, 1995 and 1994
(Unaudited)
Nine-months ended
September 30,
1995 1994
Cash flows from operating
activities:
Net gain $2,191,922 $3,295,936
Adjustments to reconcile net gain to
net cash provided by operating
activities:
Accrued investment income 160,643 46,071
Deferred policy acquisition costs (1,936,106) (4,025,235)
Amortization of cost of insurance
acquired and excess cost over 254,768 308,766
net assets acquired
Prepaid reinsurance (643,754) (700,653)
Reinsurance recoverable (614,971) 767,841
Other receivables 591,153 0
Property, plant and equipment (197,444) (458,372)
Future policy benefit reserves 7,355,554 8,253,690
Other policy liabilities 568,787 (454,039)
Commissions payable and other (13,354) 6,683
liabilities
Amounts paid out as trustee (116,302) (198,433)
Deferred Federal income tax (33,799) 0
Federal income tax payable (341,527) 593,325
Other, net 125,357 (805,023)
Net cash provided (used) by operating
activities 7,350,927 5,191,515
Cash flows from investing
activities:
Maturity of fixed maturities 5,982,417 11,002,250
Sale of fixed maturities available for 22,718,636 13,152,225
sale
Purchase of fixed maturities available (35,064,718) (43,695,188)
for sale
Sale of equity securities 0 174,759
Principal payments on mortgage loans 700,996 845,100
Purchase of mortgage loans 0 (196,300)
Net change in guaranteed student loans (27,173) 341,590
Change in other long-term investments 545 67,671
Cash from merger 1,178,600 0
Increase in policy loans (net) (2,231,831) (1,077,704)
Net cash provided (used)
by
investing activities (6,742,528) (19,385,597)
(Continued)
CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Nine-Months Ended September 30, 1995 and 1994
(Unaudited)
Nine-months ended
September 30,
1995 1994
Cash flows from financing
activities:
Sale of stock $0 $3,226,444
Borrowed funds 175,000 0
Repayment of note payable (100,540) (319,062)
Net cash provided (used) by financing
activities 74,460 2,907,382
Net increase (decrease) in cash and
short- 682,859 (11,286,700)
term investments
Cash and short term investments at
beginning 4,259,887 18,754,060
of period
Cash and short term investments at
end $4,942,746 $7,467,360
of period
CONSOLIDATED STATEMENTS OF CASH FLOWS
Three-Months Ended September 30, 1995 and 1994
(Unaudited)
Three-months ended
September 30,
1995 1994
Cash flows from operating
activities:
Net gain $901,666 $1,447,695
Adjustments to reconcile net gain to
net cash provided by operating
activities:
Accrued investment income 462,836 305,032
Deferred policy acquisition costs (308,932) (1,881,197)
Amortization of cost of insurance
acquired and excess cost
over 78,217 98,831
net assets acquired
Prepaid reinsurance 565,099 295,052
Reinsurance recoverable (603,398) 1,473,262
Other receivables 413,952 0
Property, plant and equipment 448,926 (32,945)
Future policy benefit reserves 2,395,711 3,531,553
Other policy liabilities 396,080 (1,073,464)
Commissions payable and other 274,066 (139,706)
liabilities
Amounts paid out as trustee (76,140) (50,187)
Federal income tax payable (1,161,858) (322,152)
Deferred Federal income tax 510,804 (431,064)
Other, net 367,883 (388,792)
Net cash provided (used) by operating
activities 4,664,912 2,831,918
Cash flows from investing
activities:
Maturity of fixed maturities 20,871 85,893
Sale of fixed maturities available for 0 0
sale
Purchase of fixed maturities available (12,499,332) (2,800,778)
for sale
Sale of equity securities 0 174,759
Principal payments on mortgage loans 316,660 372,695
Purchase of mortgage loans 0 (196,300)
Net change in guaranteed student loans (66,187) 194,961
Change in other long-term investments (313,943) 76,721
Cash from merger 1,178,600 0
Increase in policy loans (net) (1,120,804) (395,188)
Net cash provided (used)
by
investing activities (12,484,135) (2,487,237)
(Continued)
CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Three-Months Ended September 30, 1995 and 1994
(Unaudited)
Three-months ended
September 30,
1995 1994
Cash flows from financing
activities:
Sale of stock 0 3,226,444
Borrowed funds 0 0
Repayment of note payable (7,000) (146,182)
Net cash provided (used) by financing
activities (7,000) 3,080,262
Net increase (decrease) in cash and
short- (7,826,223) 3,424,943
term investments
Cash and short term investments at
beginning 12,768,969 4,042,417
of period
Cash and short term investments
at end $4,942,746 $7,467,360
of period
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1995
(Unaudited)
(1) Financial Statements
The balance sheet for September 30, 1995, the statements of
operations for the three- and nine-month periods ended
September 30, 1995 and 1994, and the statements of cash
flows for the three- and nine-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 September 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 September 30,
1995 are not necessarily indicative of the operating results
for the full year.
(2) Merger and 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 provided 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 issued
approximately 2.4 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 Louisiana Department of Insurance approved the
transaction on July 15, 1995. A meeting of shareholders of
American Liberty was held on September 14, 1995 to consider
the transaction, with more than 90% of the American Liberty
shareholders approving the merger. The transaction was
consummated on September 14, 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.
The following unaudited pro forma condensed balance sheet as
of September 30, 1995 reflects the purchase of II by
Citizens as if it occurred on September 30, 1995. The
unaudited pro forma condensed consolidated income statement
for the nine months ended September 30, 1995 reflects the
purchase of II as if it had occurred on January 1, 1995.
Management's estimate of the impact of applying purchase
accounting, as if the acquisition 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
September 30, 1995
(Unaudited)
Historica Purchase
l Historic Adjustmen
Assets Citizens al ts and Pro-forma
Inc. and Insuranc Eliminati Consolidate
Subsidiar e ons d
ies Investor
s
Long term $122,261 $1,992 $(9) (a $124,244
Investments )
Short term 1,904 0 0 1,904
Investments
Total 124,165 1,992 (9) 126,148
Investments
Cash 3,039 356 3,395
Other 4,163 0 4,163
receivables
Accrued
investment 1,696 32 1,728
income
Deferred policy
acquisition 36,473 48 (48) (b 36,473191
costs )
Cost of
insurance 7,719 0 120 584 (c 7,8397,810
acquired )
Excess of cost
over net 13,985 0 59011,081 (d 14,57514,37
assets ) 9
acquired
Other assets 8,097 1 0 8,098
Total Assets $199,337 $2,429 $ 653 $202,419
Pro-Forma Consolidated Balance Sheet (continued)
September 30, 1995
(Unaudited)
Historic Purchase
Liabilities and al Histori Adjustment
Stockholders' Citizens cal s and Pro-forma
Equity Inc. and Insuran Eliminatio Consolida
Subsidia ce ns ted
ries Investo
rs
Future policy
benefit $119,717 $717 $146 (e $120,580
reserves )
Other
policyholder 10,377 358 10,735
liabilities
Other 3,764 52 3,816
liabilities
Notes payable 787 319 1,106
Deferred tax 2,284 0 2,284
liability
Total 136,929 1,446 146 138,521
liabilities
Class A common 43,703 819 1,201 (f 45,725
stock )
Class B common 283 47 (47) (f 283
stock )
Minority 14 94 (94) (f 14
interest )
Additional paid-
in 0 576 (576) (f 0
capital )
Unrealized loss
on (70) (14) 14 (f (70)
investments )
Retained 20,659 (530) 20,129
earnings
64,589 992 498 66,079
Treasury stock (2,181) (9) 9 (2,181)
Total
stockholders' 62,408 983 50793 63,898
equity
Total
liabilities and $199,337 $2,429 $65312 $202,419
stockholders'
equity
Explanation of Pro-Forma Adjustments as of September 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 $36,473
Historical II 48
Historical DAC 36,521
Reverse historical II (48)
Net DAC $36,473
(cb) 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 II's historical future policy benefit reserves
and the estimated gross premium reserve at September
30, 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 $7,719
II cost of insurance 120
capitalized
Pro-forma cost of
insurance $7,839
acquired
(dc) Excess of cost over net assets acquired was calculated
as follows: (in thousands)
II
Acquisition of common
stock 1,530
Estimated fair value
of net assets (940)
acquired
Excess of cost
(purchase price) over 590
net assets acquired
(ed) Revaluation of policy benefit reserves to reflect
Company reserve assumption
with regard to interest rates, lapse rates and
surrenders.
(fe) Eliminate 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 Nine Months Ended September 30, 1995
(Unaudited)
Historica Purchase
l Historical Adjustment
Citizens Insurance s and Pro-forma
Inc. and Investors Eliminatio Consolidate
Subsidiar ns d
ies
Revenues:
Premiums $32,166 $46 $32,212
Net investment 4,898 91 4,989
income
Other 91 5 0 96
Total revenues 37,155 142 0 37,217
Benefits and
Expenses
Policy benefits 23,422 69 23,491
Commissions 7,559 0 7,559
Capitalization (7,919) 0 (7,919)
of DAC
Amortization of 5,983 4 (4) (a 5,983
DAC )
Amortization of
cost 255 0 1 (b 254
of insurance b)
acquired
Amortization of
excess
of cost over 93 0 22 ( 115
net assets c)
acquired
Other expenses 4,320 121 0 4,441
Total benefits
and 33,713 194 18 33,925
expenses
Income before $3,363 $(52) $(18) $3,292
taxes
Net income per $0.17
share (d)
Explanation of Pro-Forma statement of Operations for the Nine-
Month Period Ended September 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 (7,919) 5,983
Historical II 0 4
Total Historical (7,919) 5,987
Reverse Historical II 0 (4)
Capitalization of Post- (0) 0
Purchase
Net Pro-Forma adjustment (0) (4)
Net (7,919) 5,983
(bb) Amortization of cost of insurance acquired is presented
in the accompanying pro-forma statement of operations
as follows:
Historical Citizens $78,00
0
Interest accrued @ 7%
(8)
Amortization of II cost 51
of insurance 1
Net Pro-Forma 50
adjustment 3
Pro-forma amortization $78,503
Estimated amortization of cost of insurance acquired
assuming a purchase date of January 1, 1995 is $503,
$560, $621, $686, and $159 for each year, respectively,
in the five year period ending December 31, 1999.
(c) 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 $22,000.
(d) Calculated using estimated common shares
outstanding of 19,433,080.
ITEM 2
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITIONS AND
RESULTS OF OPERATIONS
On September 14, 1995, the Company consummated the acquisition of
American Liberty Financial Corporation that had been pending
since December, 1994. Citizens issued approximately 2.4 million
Class A shares for all of the shares of American Liberty. The
transaction had a significant effect on assets, liabilities and
capital as is discussed below, however, since it was accounted
for as a purchase, had no material effect on operating results or
income since the transaction was consummated so near the end of
the quarter.
Nine-months ended September 30, 1995 and 1994
Net income for the nine-months ended September 30, 1995 was
$1,290,256 or $.12 per share, compared to $3,295,936 or $.20 per
share for the same period in 1994. Revenues increased to
$37,155,6159,763,884, an increase of 4.9% over the first nine
months of 1994 when revenues were $35,404,740. The primary
reasons for the lower earnings in 1995 were reduced levels of
capital gains coupled with increases in operating expenses as a
result of recent growth in the Company, along with higher death
benefits during the period. Operating income (income before
capital gains and federal income taxes) was $3,457,264 for the
first nine months of 1995, compared to $3,985,978 for the same
period in 1994.
Premium income for the first nine months of 1995 was $32,166,089
compared to $31,417,440 for the same period in 1994. This 2.4
percent increase is substantially less than the Company has
experienced in recent years, however, Management believes two
factors contributed to the slowdown in growth: 1) a sales
convention for top producers was held in August, pulling the top
150 producers out of their respective countries for several weeks
during one of the historically busiest periods of the year, and
2) economic disruptions in Argentina during 1995, one of the
largest producing countries. Management expects to see a
stronger increase in the production of new premium during the
fourth quarter, however expects production for the year to be
less than that produced in 1994. During 1994, approximately
$11.8 million of new premium was written and during 1995,
Management had expected this production to reach $12.5 million.
Currently, Management expects 1995 production to be $10.5 to
$11.5 million. 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 24.7% in the first nine months of
1995 compared to the same period in 1994. Net investment income
for the nine months ended September 30, 1995 was $4,898,497
compared to $3,929,841 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 in recent years 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 $7,355,554 in 1995,
compared to $8,253,690 in the first nine months of 1994.
Increased surrender activity during the year has slowed the rate
at which reserves have increased, however Management does not
believe this increase poses any long term problems for the
Company..
Claims and surrenders expense increased from $12,710,675 at
September 30, 1994 to $13,791,382 for the same period in 1995.
Death claims declined from $2,705,717 in 1994 to $2,252,068 in
1995. The claims level experienced in 1994 was substantially
higher than the previous year. Experience during 1995 more
closely matches the historical levels of claims seen by the
Company. Management expects some increase in this category as a
result of the growing block of business in force. Surrender
expense increased from $6,266,254 to $7,571,262, as increases in
the older, domestic block of business owned by the Company
contributed to the rise in expense. 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. Annuity
benefits grew to $494,890 in 1995 from $318,178 in 1994,
primarily as the result of reductions made by the Company in the
interest rate credited to such products. Coupons and endowments
increased to $3,332,423 in 1995 from $3,144,406 in 1994.
Although this item increased 5.9% in 1995, Management is not
concerned by the increase. The endowment benefits are factored
into the premium much like dividends and therefore, the increase
does not pose a threat to future profitability. Management
expects to see further increases in this category in the future.
Commission expense decreased to $7,558,495 from $8,598,620. This
decrease relates to the lower levels of production described
above. Deferred policy acquisition costs capitalized in 1995
were $7,919,024 compared to $9,169,198 in the prior year. The
lower levels of capitalization relate to the slowdown in
production and commission expense described above as well as the
lower levels of interest that are currently prevalent..
Amortization of these costs was $5,143,963 for the first nine
months of 1994 compared to $5,982,918 for 1995. The increase in
amortization relates to the larger block of capitalized costs
being written off, as well as the higher level of surrender
activity incurred during 1995.
Underwriting, acquisition and insurance expenses increased 22.8%
for the first nine months of 1995 compared to the same period in
1994, reaching $4,413,629 from $3,593,696. 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 nine months of 1994
were $171,887, compared to losses of $94,193 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 September 30, 1995 and 1994
Net income for the three-months ended September 30, 1995 was
$901,666 compared to $929,361 for the same period in 1994.
Revenues increased to $13,420,7989,763,884, an decrease of 1%
over the same three months of 1994 when revenues were
$13,526,681. The primary reasons for the lower quarterly
earnings were decreases in premium income and lower levels of
capital gains.
Premium income for the third quarter of 1995 was $11,660,436
compared to $12,119,111 for the same period in 1994. This 3.8
percent decrease is the result of the slowdown in the volume of
new business written by the Company during the quarter due to
uncertainties about the economies in certain Latin American
countries, principally Argentina, as well as the Company's annual
sales convention which brought 150 of the top agents from Latin
America to the U.S. in August since that month is one of the
Company's largest production months.
Net investment income increased 27.6% in the third quarter of
1995 compared to the same period in 1994. Net investment income
for the three months ended September 30, 1995 was $1,774,243
compared to $1,390,663 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 $2,395,711 in 1995,
compared to $3,531,553 in the third quarter of 1994 primarily as
the result of the slowdown in production described above.
Claims and surrenders expense increased from $4,339,065 at
September 30, 1994 to $4,797,568 for the same period in 1995.
Increases in surrender and annuity benefits were the primary
reason for the increase during the quarter.
Commission expense decreased to $2,307,494 from $3,522,835. 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 $2,421,047 compared to
$3,744,416 in the prior year. Amortization of these costs was
$2,112,115 for the second quarter of 1994 compared to $1,863,219
for 1995.
Underwriting, acquisition and insurance expenses increased
slightly for the third quarter of 1995 compared to the same
period in 1994, reaching $1,514,144 from $1,495,410. 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 78.1% during 1995 to $62,407,967
from $35,055,373 at December 31, 1994. The consummation of the
American Liberty merger for shares of the Company's Class A
Common Stock, as well as an improvement in the market value of
the Company's available for sale fixed maturity portfolio
contributed to the increase. The American Liberty transaction
boosted capital by $22.2 million.
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 States 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 September 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 the fourth quarter of 1995..
Invested assets grew to $124,165,312 at September 30, 1995 from
$93,828,650 at December 31, 1994, an increase of 32.3% The
American Liberty transaction boosted such assets by approximately
$17 million. At September 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 $18,391,619 at
September 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 1.5% of
invested assets at September 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 September 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 14.2% of invested assets at September 30,
1995 and 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 September
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 (0.1%). 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 0.1% 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 in 1991 and still owned at
September 30, 1995, was the site of a previous underground fuel
line leak. The previous owner, 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 in
1991, 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 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
November 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
September 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 September 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 September 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"). 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
September 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
None.
Item 5. Other Information
Effective November 15, 1995, the Company entered into an
agreement with Asset Allocation and Management of
Chicago, Illinois to act as an Investment Advisor to the
Company and its subsidiaries on a non-discretionary
basis. The agreement is terminable upon thirty days
written notice.
The pending acquisition of Insurance Investors and
Holding Co. is awaiting clearance of a Registration
Statement on Form S-4 prior to conducting a stockholders'
meeting to consider the transaction. Management expects
to obtain such clearance during November and hopes to
consummate the transaction during 1995.
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, 1995December 5, 1995
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