UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X]Quarterly Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the period ended September 30, 1996
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, 1996, Registrant had 19,572,614 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, 1996
(unaudited) 3
and December 30, 1995
Statements of Operations, Three-Months
Ended September 30, 1996
and 1995 (Unaudited) 5
Statements of Operations, Nine-Months
Ended September 30, 1996
and 1995 (Unaudited) 6
Statements of Cash Flows, Three-Months
Ended September 30, 1996
and 1995 (Unaudited) 7
Statements of Cash Flows, Nine-Months
Ended September 30, 1996
and 1995 (Unaudited) 9
Notes to Financial Statements 11
Item 2. Management's Discussion and Analysis
of Financial Conditions and Results
of Operations 13
Part Other Information 19
II.
CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
September 30, 1996 and December 31, 1995
(Unaudited)
September December 31,
30, 1995
1996
Assets
Investments:
Fixed maturities held for investment,
at
amortized cost (market
$5,038,500 in 1996 and
$5,700,000 in 1995) $5,629,637 $ 5,636,785
Fixed maturities available for sale,
at lower
of cost or market (cost
$103,896,968 in 1996 and
$97,515,359 in 1995) 104,372,404 99,464,551
Equity securities, at market (cost
$89,580 in 1996 and $23,329 in 1995)
66,252 -
Mortgage loans on real estate (net of
reserve 1,777,175 1,910,608
of $145,080 in 1996 and 1995)
Policy loans 20,085,373 18,911,275
Guaranteed student loans (net of
reserve of $10,000 in 1996 and 1995) 290,519 333,387
Other long-term investments 535,084 679,436
Short-term investments 1,475,000 3,088,697
Total investments 134,231,444 130,024,739
Cash 7,869,692 4,160,156
Prepaid reinsurance 582,915 -
Reinsurance recoverable 2,039,732 1,857,900
Other receivables 573,018 1,219,107
Accrued investment income 1,404,529 2,022,809
Deferred policy acquisition costs 36,624,955 36,624,448
Cost of insurance acquired 7,245,448 7,522,827
Other intangible assets 1,680,300 1,820,325
Excess of cost over net assets acquired
15,147,044 14,045,848
Property, plant and equipment 5,618,141 5,546,075
Other assets 1,174,880 642,013
Total assets $214,192,098 $205,486,247
(Continued)
CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
September 30, 1996 and December 31, 1995
(Unaudited)
September December 31,
30,1996 1995
Liabilities and Stockholders' Equity
Liabilities:
Future policy benefit reserves $130,873,733 $123,327,377
Dividend accumulations 3,931,803 3,602,706
Premium deposits 2,628,928 1,553,414
Policy claims payable 3,534,764 3,197,291
Other policyholders' funds 2,023,573 1,945,332
Total policy liabilities 142,992,801 133,626,120
Other liabilities 1,625,387 2,001,320
Commissions payable 742,292 692,578
Notes payable 499,667 772,834
Federal income tax payable 0 1,025,106
Deferred Federal income taxes 1,351,079 2,372,742
Minority interest 14,954 14,954
Amounts held on deposit 205,686 267,603
Total liabilities 147,431,866 140,773,257
Stockholders' Equity:
Common stock:
Class A, no par value, 50,000,000
shares authorized, 21,651,161 shares
issued in 1996 and 19,178,515 in
1995, including shares in treasury
of 2,078,547 in 1996 and 2,198,175
in 1995 45,713,495 44,007,339
Class B, no par value, 1,000,000
shares authorized, 621,049 shares
issued and outstanding in 1996 and 1995 283,262 283,262
Unrealized gain (loss) on investments 296,835 1,267,747
Retained earnings 22,528,906 21,216,908
68,822,498 66,775,256
Treasury stock, at cost (2,062,266) (2,062,266)
Total stockholders' equity 66,760,232 64,712,990
Commitments and contingencies
Total liabilities and stockholders' $214,192,098 $205,486,247
CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Three-Months Ended September 30, 1996 and 1995
(Unaudited)
Three-months ended
September 30,
1996 1995
Revenues:
Premiums $14,619,278 $11,661,236
Annuity and Universal Life 179,468 (14,681)
considerations
Net investment income 2,177,548 1,774,243
16,976,294 13,420,798
Other income and expenses:
Other income 53,495 43,120
Realized gains (losses) on
investments 80,667 (63,851)
Interest expense (14,100) (11,026)
120,062 (31,757)
Benefits and expenses:
Insurance benefits paid or provided:
Increase in future policy benefit
reserves 2,541,236 2,395,711
Policyholders' dividends 629,079 667,099
Claims and surrenders 7,319,704 4,797,568
Annuity expenses 168,791 275,813
10,658,810 8,136,191
Commissions 3,182,045 2,307,494
Underwriting, acquisition and
insurance expenses 1,973,659 1,514,144
Capitalization of deferred policy
acquisition costs (2,558,902) (2,421,047)
Amortization of deferred policy
acquisition costs 2,784,806 2,112,115
Amortization of cost of insurance
acquired, excess of cost over net
assets acquired and other
intangibles 92,434 78,217
16,132,852 11,727,114
Income before federal income tax $963,504 $1,661,927
Federal income tax:
Federal income tax expense 317,969 760,661
Net Income $645,535 $901,266
Per Share Amounts:
Net income per share of common stock $0.03 $0.05
CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Nine-Months Ended September 30, 1996 and 1995
(Unaudited)
Nine-months ended
September 30,
1996 1995
Revenues:
Premiums $39,301,429 $32,166,889
Annuity and Universal Life
considerations 272,703 90,229
Net investment income 6,582,091 4,898,497
46,156,223 37,155,615
Other income and expenses:
Other income 89,573 53,261
Realized gains (losses) on 93,376 (94,193)
investments
Interest expense (43,004) (38,494)
139,945 (79,426)
Benefits and expenses:
Insurance benefits paid or provided:
Increase in future policy benefit
reserves 6,549,858 7,355,554
Policyholders' dividends 1,733,240 1,780,506
Claims and surrenders 19,283,265 13,791,382
Annuity expenses 597,466 494,890
28,163,829 23,422,332
Commissions 8,630,952 7,558,495
Underwriting, acquisition and
insurance expenses 6,374,934 4,413,629
Capitalization of deferred policy (7,526,271) (7,919,024)
Amortization of deferred policy
acquisition costs 7,525,764 5,982,918
Amortization of cost of insurance
acquired, excess of cost over net 858,709 254,768
assets acquired and other
intangibles
44,027,917 33,713,118
Income before federal income tax $2,268,251 $3,363,071
Federal income tax:
Federal income tax expense 956,253 1,171,149
Net Income $1,311,998 $2,191,922
Per Share Amounts:
Net income per share of common stock $0.07 $0.12
CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Three-Months Ended September 30, 1996 and 1995
(Unaudited)
Three-months ended
September 30,
1996 1995
Cash flows from operating
activities:
Net gain $645,535 $901,266
Adjustments to reconcile net gain to
net cash provided by operating
activities:
Accrued investment income 514,659 462,836
Deferred policy acquisition costs 225,904 (308,932)
Amortization of cost of insurance
acquired, excess cost over net
assets acquired and other intangible
assets
92,434 78,217
Prepaid reinsurance 582,211 565,099
Reinsurance recoverable (100,152) (603,398)
Other receivables 162,012 413,952
Property, plant and equipment 78,028 448,926
Future policy benefit reserves 2,541,236 2,395,711
Other policy liabilities 244,704 396,080
Commissions payable and other
liabilities 415,767 274,066
Amounts paid out as trustee (38,234) (76,140)
Federal income tax payable 0 (1,161,858)
Deferred Federal income tax payable 904,605 510,804
Other, net (615,095) 368,283
Net cash provided (used) by operating
activities 5,653,614 4,664,912
Cash flows from investing
activities:
Maturity of fixed maturities 1,672,058 20,871
Sale of fixed maturities available for
sale 3,042,929 -
Purchase of fixed maturities available
for sale (8,507,482) (12,499,332)
Net change in mortgage loans (31,036) 316,660
Net change in guaranteed student loans (42,640) (66,187)
Change in other long-term investments 106,861 (313,943)
Cash from merger - 1,178,600
Increase in policy loans (net) (226,748) (1,120,804)
Net cash provided (used) by operating
activities (3,986,058) (12,484,135)
CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Three-Months Ended September 30, 1996 and 1995
(Unaudited)
Three-months ended
September 30,
1996 1995
Cash flows from financing
activities:
Sale of stock 81,047 -
Repayment of note payable (49,433) (7,000)
Net cash provided (used) by financing
activities 31,614 (7,000)
Net increase (decrease) in cash and
short-term investments 1,699,170 (7,826,223)
Cash and short term investments at
beginning of period 7,645,522 12,768,969
Cash and short term investments at end $9,344,692 $4,942,746
of period
CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Nine-Months Ended September 30, 1996 and 1995
(Unaudited)
Nine-months ended
September 30,
1996 1995
Cash flows from operating
activities:
Net gain $1,311,998 $2,191,922
Adjustments to reconcile net gain to
net cash provided by operating
activities:
Accrued investment income 618,280 160,643
Deferred policy acquisition costs (507) (1,936,106)
Amortization of cost of insurance
acquired, excess cost over net
assets acquired and other
intangibles 858,709 254,768
Prepaid reinsurance (582,915) (643,754)
Reinsurance recoverable (181,832) (614,971)
Other receivables 646,089 591,153
Property, plant and equipment (72,066) (197,444)
Future policy benefit reserves 6,549,858 7,355,554
Other policy liabilities 1,820,325 568,787
Commissions payable and other (326,219) (13,354)
liabilities
Amounts paid out as trustee (61,917) (116,302)
Deferred Federal income tax (1,021,663) (33,799)
Federal income tax payable (1,025,106) (341,527)
Other, net (919,761) 125,357
Net cash provided (used) by operating
activities 7,613,273 7,350,927
Cash flows from investing
activities:
Maturity of fixed maturities 4,985,682 5,982,417
Sale of fixed maturities available for
sale 15,214,840 22,718,636
Purchase of fixed maturities available
for sale (24,896,186) (35,064,718)
Net change in mortgage loans 133,433 700,996
Net change in guaranteed student loans 42,868 (27,173)
Cash from merger 78,436 1,178,600
Change in other long-term investments 144,352 545
Increase in policy loans (net) (1,174,098) (2,231,831)
Net cash provided (used)
by investing activities (5,470,673) (6,742,528)
CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Nine-Months Ended September 30, 1996 and 1995
(Unaudited)
Nine-months ended
September 30,
1996 1995
Cash flows from financing
activities:
Borrowed funds 0 175,000
Repayment of note payable (273,167) (100,540)
Sale of stock 226,406 0
Net cash provided (used) by financing (46,761) 74,460
activities
Net increase in cash and short-
term investments 2,095,839 682,859
Cash and short term investments at
beginning 7,248,853 4,259,887
of period
Cash and short term investments at end $9,344,692 $4,942,746
of period
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1996
(1) Financial Statements
The balance sheet for September 30, 1996, the statements of
operations for the three- and nine-month periods ended
September 30, 1996 and 1995, 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, 1996, 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, 1995 annual 10-K
report filed with the Securities and Exchange Commission.
The results of operations for the period ended September 30,
1996 are not necessarily indicative of the operating results
for the full year.
(2) Merger and Exchange
On December 9, 1995, Citizens announced that it had signed
definitive written agreements for the acquisition of
Insurance Investors & Holding Co., a Peoria, Illinois based
life insurance holding company. The agreement provided 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. Following approval by the Illinois
Department of Insurance and the stockholders of Investors
and Central, closing occurred on March 12, 1996. The
transaction involved issuance of approximately 171,000 of
Citizens' Class A shares and was accounted for as a
purchase.
(3) Proposed Merger and Exchange
On October 28, 1996, the Company announced that it had
signed definitive written agreements for the acquisition of
American Investment Network, Inc. (American Investment), a
Jackson, Mississippi, based life insurance holding company
with $7.5 million in assets, $3.4 million of stockholders'
equity, revenues of $3.2 million and $67 million of life
insurance in force.
The American Investment agreement provides that following
the acquisition by the Company, American Investment
shareholders will receive 1 share of Citizens' Class A
Common Stock for each 7.2 shares of American Investment
Common Stock owned. The Company expects to issue
approximately 700,000 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 Citizens'
system. The agreement is subject to approval by American
Investment's shareholders and regulatory authorities.
ITEM 2
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITIONS AND
RESULTS OF OPERATIONS
Nine-months ended September 30, 1996 and 1995
Net income for the nine-months ended September 30, 1996 was
$1,311,998 or $.07 per share, compared to $2,191,922 or $.12 per
share for the same period in 1995. Revenues increased to
$46,156,2239,763,884, an increase of 24.2% over the first nine
months of 1995 when revenues were $37,155,615. The primary
reasons for the lower earnings in 1996 were increases in
operating expenses as a result of recent acquisition of American
Liberty Financial Corporation as well as increases in claims and
surrenders
Premium income for the first nine months of 1996 was $39,301,429
compared to $32,166,889 for the same period in 1995. This 22.2%
increase is the result of the acquisition of American Liberty as
well as the volume of new business written by the Company over
the past eight years. 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 exceed
levels produced in 1995, but be below that seen in 1994. Several
new products were introduced into the international market during
the second quarter of 1996 which management believes will
continue to give the Company an advantage over its competition;
however, when such products have been introduced in the past,
there has typically been a three to six month period before
significant volumes of business are written. 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. Submitted annualized
premium in September and October reflected significant increases
over the prior year. Additionally, management has taken steps to
increase the volume of new business produced by American
Liberty's marketing representatives. Management is of the
opinion that it will be sometime during the fourth quarter of
1996 before these steps, which include increased recruiting of
new representatives, will have an effect on the Company's
production.
Net investment income increased 34.4% in the first nine months of
1996 compared to the same period in 1995. Net investment income
for the nine months ended September 30, 1996 was $6,582,091
compared to $4,898,497 in 1995. 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. Management is working
with a new investment management firm to further improve yields
on the Company's bond portfolio while maintaining the overall
credit quality.
Future policy benefit reserves increased by $6,549,858 in 1996,
compared to $7,355,554 in 1995. Increased lapsation of business
in the international market influenced by the economic conditions
described above affected the increase in 1996.
Claims and surrenders expense increased to $19,283,265 at
September 30, 1996 from $13,791,382 for the same period in 1995.
Death claims increased to $3,312,101 in 1996 from $2,252,068 in
1995. The addition of American Liberty, which contributed
$1,077,234 to death claim expense and was not included in the
1995 results, caused the increase over the prior years. Claims
on accident and health insurance increased substantially during
1996 to $1,294,922 from $50,213. This increase is the result of
the American Liberty acquisition. American Liberty markets an
individual accident and health indemnity policy which comprises
approximately 50% of its premium income. Surrender expense
increased to $10,291,360 from $7,571,262. 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. The
surrender activity in 1996 has been influenced by two factors--
the downturn in the economy of several Latin countries and the
acquisition of American Liberty. Coupons and endowments
increased to $3,698,624 in 1996 from $3,332,423 in 1995. 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. 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 $686,258 in 1996,
compared to $585,416 in 1995.
Commission expense increased to $8,630,952 from $7,558,495 in
1995. This increase relates to the larger block of premium
income. Deferred policy acquisition costs capitalized in 1996
were $7,526,271 compared to $7,919,024 in 1995. The decrease is
related to the decreases in new business production.
Amortization of these costs was $7,525,764 for the first nine
months of 1996 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 increased surrender activity.
Underwriting, acquisition and insurance expenses increased 44.4%
for the first nine months of 1996 compared to the same period in
1995, reaching $6,374,934 from $4,413,629. The increase is
primarily attributable to the absorption of American Liberty and
the conversion of its books and records to the systems utilized
by the Company as well as costs associated with expanding the
Company's management group. Management believes that reductions
will begin to be achieved in the fourth quarter of 1996 as
American Liberty's overhead is pared. Management is
contemplating the merger of American Liberty into Citizens
Insurance Company Of America as a means to further achieve
reductions in overhead. The consolidation is expected to occur
in early 1997.
Three-months ended September 30, 1996 and 1995
Net income for the three-months ended September 30, 1996 was
$645,535, or $.03 per share compared to $901,266, or $.05 per
share for the same period in 1995. Revenues increased to
$16,976,294, an increase of 26.5% over the same three months of
1995 when revenues were $13,420,798. The primary reasons for the
lower quarterly earnings were increases in operating expenses and
claim and surrender activity.
Premium income for the third quarter of 1996 was $14,619,278
compared to $11,661,236 over the same period in 1995. This 25.4%
increase is the result of the acquisition of American Liberty.
The rate of increase on the Citizens block of business slowed in
1996 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 22.7% in the third quarter of
1996 compared to the same period in 1995. Net investment income
for the three months ended September 30, 1996 was $2,177,548
compared to $1,774,243 in 1995. 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 $2,541,236 in 1996,
compared to $2,395,711 in 1995. The amount of increase in the
third quarter of 1996 reflects the increased surrender activity
as well as the lower levels of production during the year.
Claims and surrenders expense increased to $7,319,704 at
September 30, 1996 from $4,797,568 for the same period in 1995.
The additional accident and health claims of American Liberty as
well as increased surrender activity were the reasons for the
increase.
Underwriting, acquisition and insurance expenses increased 30.3%
for the third quarter 1996 compared to the same period in 1995,
reaching $1,973,659 from $1,514,144. The increase is primarily
attributable to the absorption of American Liberty's overhead and
the conversion of its records, which was achieved late in the
second quarter of 1996. Management expects to see expense
reductions beginning late in 1996 as a result of the economies of
scale that will be achieved through the conversion.
Liquidity and Capital Resources
Stockholders' equity increased during 1996 to $66,760,232 from
$64,712,990 at December 31, 1995. The acquisition of Insurance
Investors & Holding Co., the earnings achieved in 1996, 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 28, 1996, the Company announced that it had signed
definitive written agreements for the acquisition of American
Investment Network, Inc. (American Investment), a Jackson,
Mississippi, based life insurance holding company with $7.5
million in assets, $3.4 million of stockholders' equity, revenues
of $3.2 million and $67 million of life insurance in force. The
American Investment agreement provides that following the
acquisition by the Company, American Investment shareholders will
receive 1 share of Citizens' Class A Common Stock for each 7.2
shares of American Investment Common Stock owned. The Company
expects to issue approximately 700,000 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 Citizens' system.
The agreement is subject to approval by American Investment's
shareholders and regulatory authorities.
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
runs 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 and purchases can be made 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. As of September 30, 1996, approximately 130,000
shares had been sold.
Invested assets grew to $134,231,444 at September 30, 1996 from
$130,024,739 at December 31, 1995. At September 30, 1996 and
December 31, 1995, 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. Virtually all of the Company's
bonds are classified as "available for sale." The Company does
not have a plan to make material dispositions of fixed maturities
during 1996; however, because of continued uncertainty regarding
long-term interest rates, management cannot rule out additional
sales during 1996.
The Company's mortgage loan portfolio, which constitutes 1.3% of
invested assets at September 30, 1996, has historically been
composed of small residential loans in Texas. Management does
not expect to incur a significant loss on any loans and has
established a reserve of $145,080 (approximately 8% of the
mortgage portfolio's balance) to cover potential unforeseen
losses in the Company's mortgage portfolio.
Policy loans comprise 15.0% of invested assets at September 30,
1996 compared to 14.5% at December 31, 1995. These loans, which
are secured by the underlying policy values, have yields ranging
from 5% to 10% percent and maturities that are related to the
maturity or termination of the applicable policies. Management
believes that the Company maintains more than adequate liquidity
despite the uncertain maturities of these loans.
Cash balances of the Company in its primary depository, Texas
Commerce Bank Austin, Texas, were significantly in excess of
Federal Deposit Insurance Corporation (FDIC) coverage at December
31, 1995 and September 30, 1996. Management monitors the
solvency of all financial institutions in which it has funds to
minimize the exposure for loss. Management does not believe the
Company is at risk for such a loss. During 1996, the Company has
high grade commercial paper as cash management tools to minimize
excess cash balances and enhance return.
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 30,000
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 leased to a
third party on a triple-net basis for three years during 1995.
CICA owned 1,955,457 shares of Citizens Class A common stock at
September 30, 1996 and December 31, 1995. 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
($6,300,000), which differs from prescribed statutory accounting
practices. Statutory accounting practices prescribed by Colorado
require that the Company carry its investment at market value
reduced by the percentage ownership of Citizens by CICA, limited
to 2% of admitted assets. As of September 30, 1996, that
permitted transaction increased statutory surplus by $6,000,000
over what it would have been had prescribed accounting practices
been followed. In the Citizens' consolidated financial
statements, this stock is shown as treasury stock.
CICA had outstanding at September 30, 1996 and December 30, 1995,
a $466,000 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") has
established minimum capital requirements in the form of Risk
Based Capital ("RBC"). Risk-based capital factors the type of
business written by a company, the quality of its assets, and
various other factors into account to develop a minimum level of
capital called "authorized control level risk-based capital" and
compares this level to an adjusted statutory capital that
includes capital and surplus as reported under Statutory
Accounting Principles, plus certain investment reserves. Should
the ratio of adjusted statutory capital to control level risk-
based capital fall below 200%, a series of actions by insurance
regulators begins. At December 31, 1996 and 1995 CICA's ratios
were 700.6% and 560.6%, respectively, well above minimum levels.
ALLIC's ratios were 939.6% and 1,000.8% respectively, also well
above minimum levels.
Financial Accounting Standards
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 enterprise's 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 to 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. Implementation did not have a material impact
on the Company's 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 resale in the near
term. The Company had no investment securities classified as
trading at January 1, 1994, December 31, 1995, or June 30, 1996.
Held-to-maturity security 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, not 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 associated with transfers of securities from held-to-
maturity to available-for-sale are recorded as a separate
component of equity for securities transferred from available-for-
sale to held-to-maturity 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. Realize 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 on 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
James I. Dunham resigned as President and a member of the
Board of Directors on November 11, 1996. There were no
disagreements between Mr. Dunham and the Company.
Item 6. Exhibits and Reports on Form 8-K
Current report on Form 8-K dated October 18, 1996
regarding the execution of a definitive agreement to
acquire American Investment Network, Inc.
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: November 13, 1996
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